The average person is said to make up to 35, 000 daily. You’re probably making a lot more decisions than that, and some can make or break your small business. Financial literacy is essential for small business owners. This will help you to make better decisions and bring your company to greater success.
What is Financial Literacy?
Financial literacy is a continual learning and understanding of best money management practices including budgeting and investing. This is a process of self-education which will set you up for success and financial stability. It applies to business and personal finances.
The importance of financial literacy for business owners
For those who want to start their own company, financial literacy is crucial. You should arm yourself with knowledge about the market and risk management before you embark on the journey to becoming an entrepreneur.
Small business owners cannot afford to hire a full-time accounting staff right away, so it is important that they have a basic understanding of their financial situation. Financial literacy is essential to avoid the following problems:
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- Tax deadlines missed or incorrectly filed
- Implementing a weak strategy for growth that’s not sustainable
- Not recognizing potential (or weaknesses)
Don’t be intimidated if all of this seems overwhelming. You don’t have to be a full-time accountant in order to make the right financial decisions for your company. There are many resources and tools available.
Budgeting and Financial Planing
Budgeting is an important part of financial literacy. A realistic, detailed budget is the cornerstone of any financially sound business. There are entire books devoted to budgeting for businesses, but these tips are the most important:
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- Find out what industry standards are for each category of spending. You’ll be able to determine if your budget is in line with the norm or if it needs to increase.
- Don’t underestimate your costs. Allow yourself some wiggle room when it comes to budgeting.
- Create an emergency fund. We’ve recently learned that the world can be unpredictable. Experts recommend putting away between three and six months’ worth of operating expenses to prepare for the unexpected. However, any amount is helpful.
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- Determine where you can reduce costs. Having a plan in place will help make difficult decisions easier when the going gets tough. You might be able to reduce office rent or restructure your insurance.
- Compare prices and suppliers.
- Budgeting apps are a great way to stay organized.
Monitor Financial Results and Reinvest Profits
After carefully planning and budgeting it’s now time to focus on maintaining and growing your business.
Monitor 7 financial reports and forms
Keep track of your company’s financial health by using the following forms and reports:
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- Cash flow report: A high-level statement that shows the movement of “cash equivalents”, or cash, into and out of your company. Cash equivalents include, for example, government bonds, money-market notes, and certificates.
- Budget report vs. Actual Report: Do you remember the budget that you worked so hard on creating? This report will compare what you had planned to spend with what you actually spent. It can help you determine where you are staying within your budget and where you have overspent.
- Report on the balance sheet: The report will show all your company’s assets and liabilities, including cash, inventory and equipment.
- Report on net profit margin: This report will help you to understand your profitability by reporting your net profits, after subtracting all expenses, taxes and interest.
- Weekly Sales Report: This report is for companies that use software to track metrics such as leads and conversions.
- Accounts Receivable and Payable: These are usually two separate reports that cover the income you expect to get (receivable), and any money owed (payable).
- Annual Report: U.S. Secretary State requires that all businesses file a annual reports summarizing information about business activities and members.
Marketing metrics such as customer engagement and loyalty are important to monitor. These numbers, while not directly related to finances as the above reports are, will help you better understand your customer base. Monitor the following:
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- Social Media Campaigns, Followers, and Engagement
- Google Analytics and website data such as traffic and rankings
- Email Marketing Performance like Open Rates and Click-Through Rates
How to Reinvest Your Small Business Profits
You may wonder how to invest in your company to ensure its continued success. Here are a few ideas to help you get started.
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- Events and bonuses boost employee morale
- Productivity Software saves time and works more efficiently
- Marketing Campaignsthat fall out of your normal budget
- Personal Growth Initiatives such as conferences, books and training
- Upgraded equipment and can help you save money on repairs in the long run
- Emergency Fundfor a cushion in times of difficulty
- Research & Development to ensure you are on top of the areas that need improvement
Personal Finances: They are important for entrepreneurs too
Everyone can benefit from the fundamentals of a healthy personal finance, regardless of whether they run a business. There are some best practices that entrepreneurs should follow:
Reduce Personal Debt
Stress can be a major problem if you have accumulated a large amount of personal debt. It can make it difficult to run a business. Try to minimize your debt before starting a business.
Create a Large Emergency Fund
If you’ve already set up a fund to cover your business, do the same for yourself. You’ll have peace of mind knowing that you are covered, no matter what happens to your business.
Form a Retirement Plan
Most entrepreneurs decide to become their own bosses in order retire earlier and enjoy their retirement years in peace. As an entrepreneur, this is a vital part of your financial journey. Start contributing to tax-advantaged options for retirement, such as IRAs or 401(k), whether you are 30 years from retirement or three years.
Do not forget to lean on financial professionals
You don’t need to do it alone. While improving your financial knowledge is a wise decision for any business owner, you shouldn’t feel like you have to. There are many tools and resources available to help your business reach its goals.
Small Business Accounting Software: Free for Small Businesses
Small business owners have many options for free accounting software. The following are some of the most popular:
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- Akaunting
- CloudBooks
- GnuCash
- Mint
- NCH Express Accounts
- Odoo
- Sunrise
- Wave
- ZipBooks
- Zoho Books
We are here to help
Even the most financial literate entrepreneurs require help at times. Speak to your financial advisor or accountant if you are ever uncertain about the best decision for your company. Your local SBDC offers free training and advice for your specific business needs. Find an SBDC near you.