Financial literacy combines financial, credit, and debt management knowledge that is necessary to make financially responsible decisions; these are choices that are integral to our everyday lives. Financial literacy includes paying off debt, creating a budget, and understanding the difference between various financial instruments. Financial literacy has a material impact on families as they try to balance their budget, buy a home, fund their children’s education, or ensure an income for retirement.
It’s especially important for you to honestly assess your knowledge about money. Because managing a business's finances is far more complex than the three-question test, small business owners need to upgrade their skills so that they can make the most of their potential.
A small business owner who’s knowledgeable about finance will be prepared to take on challenges that come their way. They’re able to manage their cash efficiently, prepare for taxes and possible audits, balance their books, predict profits, and plan their future accordingly. It’s no surprise that financial literacy and positive business performance are associated with each other.
Managing cash flow
Liquid assets are pivotal for every company. Liquid assets are cash or belongings that can quickly and easily be turned into cash. Liquidity ensures that companies have enough money to cover their expenses, but it can also provide a competitive advantage when liquidity across the economy is short.
Ensure that you pay your vendors and take payments from your clients on time. This ensures that you have the right amount of cash on hand. You will have to turn toward high-interest loans if you cannot manage your cash flow. These high-interest loans will significantly impact your company’s finances and profitability, an impact that can be avoided with the right financial education.
Become financially efficient
Understanding how each of your team’s expenses plays into the liabilities on your organization’s balance sheet can allow you to assess how to be more financially efficient. Maybe there’s a service your team previously subscribed to and no longer uses, or perhaps you can find a free version of a tool your team has been paying for. When you’re aware of how each expense factors into the balance sheet, it can be easier to identify ways to be more cost-effective.
A financially literate business owner is more likely to be fully in control of their business. Gaining an understanding of what balance sheets and profit and loss statements mean provides a clear view of the financial state of your enterprise and subsequently facilitates smarter business decisions.
As a small business owner, you don’t have to run all aspects of the company's financial side, but gaining a degree of financial acumen means that you will be able to manage some of the business’s finances. In doing so, you will also give yourself the best chance of building a company that can thrive. Engaging with the basics of accountancy can prepare you for a number of the challenges you will inevitably encounter on your journey.