Financial Literacy Importance for Business Owners

Whenever people talk about the importance of financial literacy, there are various pictures conjured up in one’s mind.

• The 18 year old teenager who can’t pay his smartphone bill on time.
• The young couple who may have maxed-out their credit card buying consumer goods.
• Or the home loan being denied because a person’s credit score isn’t high enough.

All these examples are valid and yet there’s one category that people don’t necessarily associated with the need for financial literacy.

And that category is business owners. Sure, you could argue that every individual needs a certain level of financial literacy. But why particularly so for business owners?

Why Financial Literacy is Important for Business Owners

When you think about it, a business owner has to cover a wide range of financial matters in his/her business.

• How much cash do I need to keep on hand for daily operations?
• How can I invest any spare funds to achieve a good return on them?
• Can I use debt financing prudently to expand my business?
• Are my margins sufficient to make an adequate profit?

A private business is the perfect vehicle for encountering every aspect of financial literacy.

Savings, investment, debt management … it’s all included. And getting it right can benefit the business owner in so many ways. You find your profits increasing. Which also increases the capital value of your business. Other business opportunities start coming your way. And you start to build a legacy. But not having a certain level of business financial literacy can have disastrous implications. It’s not only the potential to lose your business or having to close it down. You could lose your house in extreme cases.

~Novel Serialisation: Heavens Fire~

Your business going under also impacts employees, suppliers and customers. Not to mention the massive strain it can place on relationships. Many business owners commence their business because they’re experts in the technical areas of their vocation. But running a business demands a completely different set of skills. Of which business financial literacy is arguably the most important.

Why do you think directors of publicly-listed companies undertake business financial literacy courses before they become directors?

What Can Help You With Business Financial Literacy?

The good thing is that you don’t have to reinvent the wheel. In business, there are generally three areas that can greatly increase your level of business financial literacy.

Financial Systems

Much of learning about business financial literacy is ensuring you have the correct financial systems in place to obtain financial information in real-time. It’s pointless learning you made a loss in one month if you don’t know about it until 6 months down the track. By that time, your cash reserves, credit worthiness and stock turnaround times may have all been negatively impacted. Online accounting systems exist today that enable you to know the state of your business at any given time.

• Why is my profit down this month? Oh, it’s because sales are lower because this month had a number of public holidays.
• Why does my business show a profit but there’s not much cash in the bank account? Hmmmm, because we’ve reinvested that cash into more stock and buying new equipment.
• I’ve got a lot of cash in the bank account; can I buy myself a new Lamborghini? No, because our budgets show we’ll need that cash to pay our quarterly tax obligations and pay-down a portion of our business loan.

Some online accounting systems also allow you undertake “what-if” scenarios. You can see what the financial impact on your business would be if, say, the level of sales for a month was not as high as originally expected.

By seeing how factors such as profit, debt, cash, and other key performance indicators are effected by a reduction in the level of sales, your understanding of how various financial impacts inter-relate with each other, increases.

People

It’s always interesting to see how others relate to money when it’s not theirs. For business owners, this means ensuring that strict processes are in place so any major financial decisions are ultimately made by you.

This may mean approving all expenses (depending on the size of your business) or allowing a certain level of autonomy to key employees. After all, you’re not aware of the level of their financial literacy so best to put protocols in place so you never have to question it.

And by doing so (and having the correct systems in place), this allows you to ensure all financial data is available to you, so you can make the ultimate decisions. It also pays to have external people you trust to talk about your business and its financial affairs.

Don’t be embarrassed; they’ve probably heard it all before. These people could be your accountant or even a mentor who’s been in business or still is. Your business financial literacy can improve a lot by simply being around them and talking to them.

Courses

“Financial literacy courses” is a search term that gets around 1,900 searches a month in the USA.

There’s a reason for that.

People are beginning to understand the importance of it, whether it simply be for implementing a Budget 50-30-20 type of arrangement or learning how to have money work for them. A number of financial literacy apps are also making their way onto the market.

Business owners have plenty of resources if they wish to expand their business financial literacy. Books, courses, podcasts … it’s all available.

At the end of the day, the importance of financial literacy for the business owner can be summed-up by asking yourself a simple question.

“What do I want to achieve financially with my business and am I currently on track to do so?”

By Craig Wood

Author Bio

Craig Wood is an accountant, investor and author, with over 30 year’s experience having helped many private business owners with business growth and financial education matters.

Through his business, Sculpt Accountants & Advisors, Craig is renowned for his ability to explain complex business concepts in easily understood language, which helps business owners understand their business numbers in a fresh light.

editor