Why Financial Literacy Is So Important When Running a Small Business

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Why Financial Literacy Is So Important When Running a Small Business

While it could be argued that everyone should be financially literate in order to better manage their personal finances, being financially illiterate as a business owner is out of the question. Financial literacy allows us to understand the numbers as well as the flow of financial resources, therefore making small business owners better equipped to face the challenges of entrepreneurship. This is why financial literacy is so important when running a small business.

The ABCs of financial literacy

Without financial literacy, you essentially lack the knowledge necessary to understand how your business operates, how it makes money, what financial issues it is facing, and how to address them, which is why it’s paramount that small business owners understand financial statements such as the balance sheet, the income statement, and the cash flow statement.

  • The Balance Sheet: An organization’s assets, equity, liabilities, and other expenses and revenue that the P&L does not cover, such as cash from a loan or unpaid customer invoices, are all listed on a balance sheet. In essence, it informs you of your assets and liabilities.
  • Income Statement: This statement illustrates the conversion of revenue into income or profit. It displays the revenue and profits your business generated from such sales.
  • Cash Flow Statement: A cash flow statement paints a thorough picture of the money coming in and going out of a business over a certain time period (usually 12 months).

Financial literacy as a safeguard

If you’d like to know what is junk insurance and how to avoid it, the answer will invariably be financial literacy. Understanding their business financing can help entrepreneurs protect themselves from financially risky decisions and fraud, and see the bigger picture when it comes to the situation their business finds itself in. It can help as a safeguard against rash decisions. On the other hand, it is hard to dupe anyone who thoroughly understands the finances of their business into signing a contract that is not in their best interest or making a decision that will hurt their business in the long run. Planning your next steps.

Financial literacy can be incredibly beneficial for small business owners as it allows them to plan ahead and make informed decisions about the financial aspects of their business. By understanding basic financial concepts such as budgeting, cash flow management, and financial forecasting, small business owners can create financial plans and set realistic financial goals for their businesses. With financial literacy, small business owners can grasp the financial needs of their businesses and find ways to generate revenue, such as by selling products or services. Financial literacy also helps entrepreneurs predict possible issues their businesses might face in the long run and prepare for them.

Exploit invisible opportunities

As we’ve already mentioned, not everyone is financially literate, which gives those who are a massive advantage. Business owners who practice financial literacy and improve upon it regularly will find themselves able to identify and seize opportunities others might not. For example, investors are more likely to be willing to invest in a business if the business owner has demonstrated financial literacy. Financially literate business owners will also be aware of when debt can actually be beneficial, such as when moving into expansion, and when it could spell disaster for the business and act accordingly. Debt is usually associated with fear, an emotion that a financially literate business owner can eliminate by making a sound plan of paying back the loan.

Bird’s eye view

Following the progress of your business and adapting accordingly can be hard if you’re handling everything on a day-to-day basis. Financial literacy can help you distance yourself from the daily grind and see the way your business is developing and has developed over a certain time period. The numbers don’t lie and can be your best advisor if you know how to listen.

While there are many benefits to becoming exceptionally financially literate, some just aren’t cut out for that, and there’s no shame in that. If you think that’s the case with you, consider contacting a professional who might be better suited for the task at hand.

Featured photo by energepic.com by pexels
Judith Arevalo

I am a good Mom, have two active children. I am working in a beauty and spa company but now I also decided to make its own profession. So I am here to learn and teach.

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