According to a study performed in 2018, over 60% of individuals in the United States cannot answer basic questions on the topic of finance. A large percentage of these individuals are unfamiliar with the very financial terms that apply to their businesses. When a startup or small business is created by uninformed and financially illiterate individuals, the fate of most of these companies is already sealed. However, with time spent on financial education and understanding of how finances directly impact a company, business owners can make effective financial decisions that directly improve future success. What is financial literacy and how can it help business owners plan for success?
Financial literacy is defined as the ability to understand basic principles of business and finance. Business owners who are financially literate are able to have better control over the debt to income ratio and gain a clear understanding of the financial condition of their companies. Take the time to understand and keep track of sales, marketing efforts, overhead, shipping, hiring, and software expenses. By tracking expenses, where they apply, if they are making an impact, and how they affect the bottom line, allows a company to better plan for future success.
Not tracking your income and expenses is better started sooner rather than later.. Understanding your income, debt, and especially taxes will help a company better manage them as your business grows. Doing weekly, monthly, quarterly, and yearly audits of the business sounds like a daunting task. However, while not every number will align perfectly, it is better to take the time to understand where the company is overspending than to never know. Even if an accountant is being utilized, acquiring a reliable accounting software that allows for easy tracking of a business’ expenditures is a must.. At the very least, business owners will be able to communicate effectively with their accountants and understand the information that is presented. Having a complete record of the business and understanding the tax requirements also minimizes the risk of being audited by the IRS. Being educated on the company’s finances allows business owners to make sound decisions when approaching matters of overhead costs, hiring employees, and business loans. If a business owner knows what can be borrowed, how much is in all of the business accounts, and how much is being projected in future profits, the business can then grow more confidently.
Financial literacy does not only apply to debt to income ratio. Being aware of what aspects of the business require more of the budget than others allows for an owner to more efficiently run the business. Determine how each of the areas of the business play into the bottom line. After doing so, make the decisions of which areas of your business need more of the overall budget. Are there any areas that can have the services condensed, such as payroll and taxes? Is the business being overcharged by merchant service providers? Should more of an investment be made in training employees or a more advanced CMS? With a full understanding of the finances, a business owner will not only be able to see which areas require more, but will also be able to calculate a projected return on investment. Thus allowing determinations to be made on which areas to focus on next.
Having invested in the future of the company, business owners are armed with the information they need to negotiate current and even future expenses. If a business wants to expand an area of the company, such as staffing more employees, better negotiation of salaries with hirees can be done. Is the company overspending on software monthly/yearly? After being educated on the expenses, research can then show better options or give a sound argument for negotiations with current vendors. Knowing when the company can be expected to turn a profit is tremendously beneficial when negotiating new business loans. Business owners will then be armed to confidently approach financial institutions with the exact amount of money needed to borrow, the rates at which are expected, and a projected timeline of payoff.
Kuran Malhotra has this to say, “While following your dreams and passions are what this country was built on, the truly successful companies are able to confidently navigate the complexities of business ownership. It is essential for business owners to prioritize financial literacy to understand and take control of the overall health of their company.” By building a solid knowledge base about business finances, business owners are able to greatly improve the future success of the company.