The Benefits of Financial Literacy for Business Owners
Owning a small business can be rewarding–you set your working hours, pick employees you want to work with, control your own destiny, and feel proud of building something from the ground up.
But being a business owner carries many responsibilities. You must keep track of various facets of the enterprise, from hiring vendors and maintaining cash flow to sales and marketing. There’s a lot to know and much to do.
Are you familiar with the financial indicators in the business that you run? Do you understand the financial mechanisms that underpin your business? Are your decisions based on a full understanding of the vital metrics you should be tracking and reviewing?
If you’re financially illiterate, your business will ultimately run into problems.
How Financially Literate Are Small Business Owners?
Many entrepreneurs who become small business owners do so because they’re passionate about their craft.
While some set out with extensive business acumen, most must follow a sharp learning curve to become financially proficient.
If your financial knowledge is a bit shaky, you’re in good company. According to a recent survey conducted by Standard & Poor’s, examining the financial management habits of American small businesses found that a whopping 43 percent of small business owners consider themselves financially illiterate.
What Does Financial Literacy for Business Owners Entail?
While some basic financial education principles for individuals and small businesses are similar, programs that focus on businesses can give owners valuable insight into the specific challenges they might face.
From understanding invoicing and payroll concerns to manage taxes and loans, financial education programs can give small business owners the tools required to make informed decisions about their company’s finances.
Benefits of Being Financially Literate
- Better financial management: When business owners have financial literacy, they can better understand their cash flow, create budgets, monitor expenses, and make informed decisions about investments and loans.
- Hone your negotiation skills: Being financially literate can help you thrive at the negotiation table.
- More effective communication with stakeholders: Financial literacy allows business owners to communicate effectively with employees, lenders, and investors.
- Improved profitability: Business owners with financial literacy can analyze financial reports and make strategic decisions to improve profitability.
- Improved decision-making: Financial literacy enables business owners to make informed decisions based on financial data.
- Better risk management: Business owners with financial literacy can expect financial challenges and develop contingency plans to address them.
- Control: Financial literacy allows you to keep a grip on your business. If you’re good at finances, you’ll be better positioned to come up with the remedies before it’s too late.
5 Ways to Improve Your Business Financial Literacy
April is Financial Literacy Month, and while we typically associate this month with imparting money management skills to teens and young people, there’s a lot that business owners can learn too.
- Managing Cash Flow
Liquid assets (cash and cash equivalents) are pivotal for every company.
Liquidity ensures that a business has enough cash to cover its expenses, but it can also provide a competitive advantage when liquidity across the economy is short.
- Learn How to Budget Effectively
Budgeting is a critical skill for any person, but it’s essential for business owners.
A budget helps you to plan and prioritize spending. It enables you to set goals and objectives and allocate resources accordingly.
Also, a budget provides a benchmark for measuring the financial performance of a business. It provides you with financial data that you can use to make informed decisions.
Finally, a budget provides a clear and concise way to communicate financial information to stakeholders, including lenders and investors.
- Become Informed Before Borrowing
Becoming informed about the basics of borrowing is vital, and learning about things like hidden terms and fees and compounding interest can help you avoid making costly mistakes.
- Learn How to Handle Taxes
The four general types of business taxes are income tax, self-employment tax, employment tax, and excise tax.
Failure to keep accurate records or understand state and federal tax requirements can lead to trouble with the IRS.
Understanding these requirements and keeping proper records can lower your risk of being audited or penalized by the IRS.
- Understand Your Credit Score
If you’re looking to borrow additional money, you need to understand how credit rating works and how your credit score can impact your loan limit, tenure, and interest rate.
As a rule of thumb, aim at having a personal credit score of over 690 and a business credit score of over 75.
- Competitive Pricing
A clearly defined pricing strategy that takes your business’s finances into account is vital to ensure adequate cash flow and profitability.
Offering deep discounts may not always be the best strategy because a lower price can deteriorate your brand and make it hard to increase prices in the future.
How Can I Become More Financially Literate?
“Understanding how to manage the financial side of a business effectively is no small feat, which is why many business owners turn to financial education programs for assistance,” says Jack Lamont, Senior Vice President, Investments at David Lerner Associates.
“These programs address the specific issues that matter most too small business owners, providing them with the tools they need to make informed decisions and manage their finances well.”
There are plenty of free financial literacy resources business owners can take advantage of to up their game, including:
Small Business Development Centers Program – Administered by the US Small Business Administration (SBA) and with over 900 locations nationwide, Small Business Development Centers (SBDCs) offer business finance training, counseling, and workshops to aspiring entrepreneurs and small businesses.
FDIC Money Smart for Small Business – This is a complete financial education course created by the FDIC to help low- and moderate-income individuals improve their financial skills. The program comprises 13 training modules that cover nearly all facets of small business finance, including managing cash flow, business planning, credit reporting, insurance, business banking, and tax planning.
SCORE Association – This nonprofit organization counsels, trains, and provides mentors for future small business owners and entrepreneurs. Their website features online tools and info covering wide-ranging topics on starting and running a small business. Local mentors and workshops are available.
SME Toolkit – This free resource provided by the International Finance Corporation (IFC), a subsidiary of the World Bank and IBM, is geared toward small and medium enterprises (SMEs).
360 Degrees of Financial Literacy – This free resource provided by the American Institute of Certified Public Accountants (AICPA) aims at providing financial information to individuals. The site contains a section for small business owners covering business formation, budgeting, debt, and business valuation. Calculators and financial tools are also available.
Your Business’s Success Depends on Your Financial Literacy
No matter how you look at it, if you’re a business owner, you have nothing to lose and everything to gain by improving your financial literacy.
You have a responsibility to yourself, your customers, your team, and vendors to be educated in business financial literacy.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc.
This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances.
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