Financial Literacy for Business Owners and Entrepreneurs
We hear much about financial literacy, but business owners and entrepreneurs need a solid understanding of business financial literacy.
There needs to be more information for businesses to understand their finances. Therefore, business financial literacy is just as critical and should be as accessible for business owners as financial literacy education is for personal finances.
While business financial literacy is not required for all business owners, it can be extremely helpful in running a successful business. Those who are financially literate can make informed decisions about where to allocate resources and how to grow their business. They are also better equipped to weather financial storms and keep their business on track.
Since 82% of businesses fail due to financial mismanagement, I want to help as many business owners reduce that risk by offering access to financial literacy information.
What is business financial literacy?
Understanding business accounting and financial terms are the beginning of business financial literacy. As business owners, you need to understand how to manage the money in your business so that your business will be in business for the long term.
Just because you have hired accountants, bookkeepers, and financial advisors means you should trust the professionals to manage your business. Nobody will ever understand your business and care about your business as much as you do. Never give your financial power away.
You don't need to be an accountant yourself, but you need a high-level understanding of the financial aspect of your business. Business finances keep your business going, so it's in your best interest to monitor your finances.
How business financial literacy will help you
Business financial literacy will help you in several ways. First, it will give you a better understanding of the financial side of running a business. This includes basic concepts such as revenues, expenses, profits, and loss. Second, business financial literacy will help you make sounder financial decisions for your business. This includes creating and sticking to a budget, choosing suitable suppliers, and investing in the right business opportunities. Finally, business financial literacy can also help you understand and manage your personal finances. This is important because your personal finances can significantly impact your business finances. By understanding and managing your money effectively, you can reduce the risk of financial problems for both yourself and your business.
Money mindset for business owners
In the past I may have underestimated the importance of money mindset for business owners. I knew it was necessary, but I did not realize how important it was until I went through my own money mindset issues as a business owner.
Having financial goals for your business is vital as it allows you to build lofty financial goals for your business.
Too often, business owners have a negative relationship with money. They see it as always tight, never quite enough, and always leading to stress. This thinking can actually hold you back in business and break you. Instead, you need to have a positive money mindset. A positive money mindset means understanding business financial literacy and learning how to use money as a tool to grow your business. When you have a positive relationship with money, you'll be able to make smart decisions about investments, purchases, and hiring. You'll also be more likely to take calculated risks that can lead to big rewards. So if you want to be successful in business, it's time to start seeing money in a new light.
Bank accounts for your business
You need to have a separate bank account for your business. Combining your personal finances with your business finances de-legitimizes your business. Traditional business owners keep separate financial records for their business, starting with your bank account.
Bookkeeping for your business
Bookkeeping is an integral part of any business and can equate to the success or failure of day-to-day operations. With proper bookkeeping, companies can catch essential tax deadlines, track expenses, and avoid penalties for inaccurate records. Keeping accurate and up-to-date records in your business is necessary for achieving financial goals. Regularly reviewing income statements, balance sheets, and other financial statements can help identify problems or areas that need improvement.
Having a sound bookkeeping system in place will also give you a clear understanding of how well your business is doing financially so you can make informed decisions about its future growth. Investing in professional bookkeeping services can be the best decision for your new business - allowing you to stay focused on the big picture while giving you essential data about your finances.
Financial statements
There are three basic financial statements that you need to understand for your business: the balance sheet, the income statement, and the statement of cash flow. These three statements are typically what lenders and investors want to see when you work with them.
But not only that, the income statement will be the financial statement that you will use the most as the income statement tells you how profitable your business is.
The balance sheet is the next commonly used financial statement for your business. The balance sheet tells you the equity you have in your business.
You will also use a cash management report that is a little different from the statement of cash flow. The cash management report will help you manage your cash balances to ensure you have money coming in and going out of the business. The cash management report will help you be proactive when there are timing differences for cash payments and you are short on cash.
Financial plan
Creating an effective business finance plan is essential for business success. It enables business owners to monitor their expenses, plan for future investments, and set achievable goals. Developing financial literacy is key to launching and managing a successful business. It involves understanding the budgeting process, applying for funding or loans, managing accounting practices and bookkeeping processes, and calculating ROI on business decisions. An effective business finance plan alleviates the stress of starting a business and helps ensure daily finances remain in order even as the business grows.
Monitoring
Business owners need to stay on top of their business finance plan. By monitoring your progress against it each month, you can ensure that you take all the necessary steps to achieve your business goals. Doing so also boosts business financial literacy, which in turn helps business owners make informed business decisions more confidently and efficiently. With strong business financial literacy and consistent progress monitoring against financial plans, business owners are sure to succeed in their business endeavours.
Cash management
Cash is the lifeline of your business, so be sure to have a cash management system in place. You don’t want to run out of cash because that will put your business at risk of bankruptcy. Cash management optimization is ideal for your business.
Being proactive with cash management will keep your business running smoothly and reduce the financial stress of figuring out at the last minute how to pay bills and where to find extra cash.
As a business owner, you can increase your net worth through your business. Owning a business is very rewarding and you have more control over your income and your ability to generate wealth.
Let’s talk now about how to get wealthy through your business. Good financial management in your business is an essential step towards wealth building, but profit optimization in your business will really increase your wealth.
It’s not the amount of income or revenue that you are bringing in through your business that makes you wealthy, it’s how you manage that money.
Other important business financial literacy items:
Profit
Knowing the difference between revenue and profit is important. You can’t have profit without having revenue in your business, but if you have little or no profit in your business that is a red flag.
Maintaining healthy profit margins for your business is important. What determines a good profit margin will depend on the industry that you operate in. Restaurants are known to have lower net profit margins at 8-10%, and coaches operate at a higher net profit margin of 50-60%. A good net profit margin for a product-based business is 30-40%.
Monitoring your income statement each month will help you to understand the profitability in your business. When you correctly interpret the feedback that your financial reports are telling you, you can make changes to increase profitability of your business.
Profit optimization
There are a few things that go into increasing the profit in your business.
- Pricing strategy
- Volume of sales
- Decreasing costs
- Combination of all
Your pricing strategy should price out what the market is willing to pay for your product or service and considers the gross margin of your product.
Building a sellable business
Why go through the trouble of building a business and not consider your exit strategy? Don't think of your business only to generate an income. You are creating an asset you can sell if you make it well. Many buyers out there are more interested in purchasing an established business than starting one from scratch. So, remember, there is value in what you are building that goes beyond providing you income.
Many business owners don't recognize the value that they have built. They believe that when they are ready to exit their business and retire or move on to another project they will close their doors and call it a day.
Working with a business finance coach can help you learn business financial literacy, but it can also help you create wealth through your business.
Running a successful business means building a solid financial foundation and making profitable decisions every day. Grab your FREE copy of the 5-Step Roadmap to a Profitable Biz to get your business on track to optimizing profit today!
