7 Benefits from Improving Your Small Business Financial Literacy
Your business can benefit from you putting time and effort into improving your financial literacy. Whether applying for a working capital loan, financing a piece of equipment finance, or just planning how to pay the bills, knowledge of finance and accounting helps entrepreneurs control their destinies. Many business owners rely on accountants to understand and report on their business finances, but financial literacy is an essential skill for small business owners. Here are seven benefits to improving your financial literacy to support sustainable business growth for your small business.
- Making Informed Decisions
As an entrepreneur, having a firm understanding of the financial implications of your decisions enables you to make informed decisions based on data and analysis rather than (or in addition to) gut instinct. Being financially literate means you know how to analyze and interpret financial statements, identify trends in your business, manage costs, and quickly take advantage of new opportunities. Sometimes, what looks like a good deal doesn’t turn out to be a good deal once you understand things like the tax implications or cash flow impact of a transaction.
- Mastering Cash Flow Management
According to a recent study, 82% of small businesses fail due to inadequate cash flow. By improving your financial literacy, you can better predict and assess your business cash flow by building simple tools like monthly expenditure schedules, daily balance forecasts, and other reports on your operational requirements. These tools will help you plan for the cash and credit you need on hand to operate and grow your business.
- Improving Access to Capital
Financial literacy is essential for small business owners to access capital. Lenders and investors will want to see income statements, balance sheets, and pro formas. Most also like to see a business that is managing its cash to support both current operations and future growth. Many business owners need to pay accountants or rely on bankers to prepare these reports, but nobody knows and cares about your business like you do. By putting in a little extra effort, you can learn how to build the reports lenders and investors want to see before funding your business.
- Effectively Managing Risk
Every business decision carries some form of risk. Understanding risk management is essential for making sound financial decisions for your business. Whether understanding the impact of variable payments, interest rate increases, or insurance requirements, mastering this critical component of financial literacy protects your business from financial pitfalls.
- Budgeting, Planning, and Forecasting
Knowing the difference between these things is a good test of your current level of financial literacy. Budgeting is allocating the money you expect to receive and spend, while planning involves identifying actions and resources to get things done. Forecasting is projecting performance into the future based on current results. Each one of these tools has a place in achieving your business results.
- Navigating Regulatory and Tax Compliance
Small business owners often struggle to keep up with and adhere to complex tax regulations. However, failing to do so can result in severe penalties for the owner and their business. Financial literacy is crucial for entrepreneurs to understand their tax responsibilities, prepare for their tax liabilities and comply with various financial regulations, which can significantly reduce the risk of legal problems.
- Boosting Confidence in Financial Discussions
Having a solid foundation in financial literacy is essential when negotiating with suppliers, discussing terms with investors or communicating with employees about compensation. Not only does it empower business owners to approach these discussions with confidence, but it also helps build trust among these critical stakeholders.
Financial literacy can be a game-changer for small business owners, not only for staying organized but also for strategic decisions that foster long-term growth. Improving financial literacy can transform business management, equipping owners with decision-making skills, planning abilities and better communication regarding their business’s financial health. By implementing the above key strategies, you can confidently establish a solid financial management foundation that will effectively support your business both now and in the future.
DISCLAIMER – This content is for informational purposes only and should not be relied on as advice of any kind. Enova and its affiliates do not provide financial, investment, legal or tax advice.