Unless you took a degree in accounting or started a financial services company, accounting probably isn’t your biggest skill. And yet, understanding how finances work – profit and loss, budget projections, cash flow – is important to understanding and improving the health of your business.
For this reason, business owners should prioritize improving their financial literacy.
Owners can enhance their Masters in Business Administration online, or in-person, by sharpening their knowledge base in business finances. The best part is you don’t have to pass a CPA exam.
You just need to know the basics so you can easily communicate and understand your financial advisor and/or accountant.
The Importance of Financial Literacy for Business Owners
Very few Americans are considered “financially literate,” despite the abundance of books, courses, and seminars on the subject. This isn’t because business owners aren’t capable; on the contrary, many people have enough savvy to gain the knowledge needed to manage their business’s finances without having to buy the latest financial plan.
Financial literacy matters because it gives business owners the tools to manage their company better. Simply put, you have to know what you’re dealing with; otherwise, how will you know how to deal with finances in the future?
So how can you improve your financial literacy without enrolling in expensive seminars?
Consider the following strategies.
7 Ways to Sharpen Your Financial Literacy
Start by building your business library. Research and review the bestselling business books. Subscribe to finance magazines and newspapers. Follow financial blogs and newsletters and subscribe to business and finance-centric podcasts and YouTube channels.
Once you’ve strengthened your knowledge base, proceed to the next steps:
Budgeting is the next step toward financial literacy. It doesn’t have to be complex: you can simply make a spreadsheet. At the end of each month, compare the written budget and your actual spending. If some factors don’t align to the penny, don’t worry. Understand where your money went and adjust accordingly. So if renting out Disneyland for the team for a day was a plan and the budget doesn’t allow it, set it for next time.
2. Prioritize succession planning
A crucial aspect of running your business is having a contingency or succession plan in case something happens to you or your partners. Scheduling a consultation with a financial planner can help you create a succession plan. They can also address the gaps in your current business plan. At the same time, you can ask them questions and become more financially literate.
3. Perform due diligence before borrowing
If you need to borrow funds, refrain from jumping to the first lender who offers to write a check -no matter how “low” their offer is. Instead, do your research. Compare fees, terms and interests from different lenders. Also, don’t immediately assume you won’t qualify for the best rates. You’ll never know unless you try (or apply).
4. Create a financial advisory team
If you have the finances to expand your team, do so. It’s better to have more people behind your back. Build a team made up of a certified public accountant (CPA), an investment advisor, a life insurance advisor, and a P&C advisor. Once you have a team, meet with them at least once a year to make sure everyone’s goals are aligned, the team is coordinated and there is transparency with the group.
5. Understand your debt
Debt isn’t always a bad thing. If you understand debt, you can control it and use it for the right reasons. For example, are you still paying credit card debt for items you don’t use in the business? Study your bill; understand all the details. Remember what the items were for? How much of your credit card bill is interest? How much are you paying off for the principal? Knowing the answers to these questions can help you reduce your debt.
6. Focus on your cash flow statement
The cash flow statement pumps blood into your business. It shows you where your money comes from, where you spend it and how much of it you’ve been spending. Some of the best people in business, unfortunately, do not understand basic accounting, credits, and debits. Keep in mind: when you discuss your business’s performance, you discuss it using layman’s terms of cash flow statement terms.
7. Track your accounts in real-time
Many business owners are too focused on getting their books in order just in time for tax season. Fortunately, modern accounting software makes it easier to sync your transactions in real-time, taking out the stress of keeping accurate records. Use Quickbooks or other reporting options to gain accurate snapshots of your business’s finances.
There is more to financial literacy than complex terms you’re trying to understand. It is also being comfortable with the chaos that comes with money, learning more about it, and responding appropriately to unprecedented financial circumstances.