Are you an entrepreneur trying to grow your business venture into a multi-million dollar entity? If so, you must thoroughly understand all business concepts, especially financial management and literacy.
Being financially literate means having a thorough understanding of all financial matters, especially those about business growth. Being a business owner in 2024 entails a thorough understanding of the basics of financial literacy.
When you understand fundamental business concepts well, you get a competitive edge over other new businesses in the industry. It helps you make strategic decisions to achieve financial freedom and capitalize on growth opportunities.
Financial literacy helps entrepreneurs with everything from financial planning and budgeting to cash flows and revenue. In this blog, we will discuss the top five reasons entrepreneurs must have the basic financial literacy to succeed in today’s cutthroat business environment.
So, let’s dive in!
Establishing A Foundation
Every entrepreneur works hard daily to establish a sound foundation for their venture. This foundation determines the success or failure of any business. An entrepreneur must be laser-focused on attracting and keeping clients in the short and long run. You must be willing to pour every ounce of energy into customer care, sales, financial planning, and product development to capture the little market share you can.
As an entrepreneur, you’ll have to be the jack of all trades and juggle everything yourself, from product development to execution of marketing activities. In between all these functions, financial decisions might suffer. However, if you understand financial concepts and their practical application, making financial decisions should be relatively easier.
We recommend pursuing an online MBA in finance for better financial literacy. Moreover, this will help you reduce the cost of hiring a professional accountant in the early days when you have greater financial constraints.
You can hire an accountant as you grow your business and have a broader scope of operations to oversee daily. This accountant will help you with bookkeeping, financial analysis, and budgeting. They will help you keep track of the venture’s financial health. You can make sound decisions based on this input when you’re financially literate.
You Know Your Numbers
Understanding every aspect of your financial situation, from cash flow to taxes, is critical to survival. While it might seem difficult initially, a little effort will simplify financial concepts for you. Knowing your numbers entails keeping track of all business income and expenses. It also encompasses a basic understanding of the fundamentals of taxation.
You can use this data to build realistic budget projections and keep the business on track legally and financially. Understanding this data and information helps identify losses, unprofitable and lucrative investments that may benefit the company.
Credit Management
Most, if not all, businesses worldwide are running their operations on debt. Using debt to run a business is a good decision. However, managing that debt is extremely important to reduce the chances of accumulating it. As an entrepreneur, you can’t manage debt without being financially literate.
Here is a short list of debts businesses seek and manage to run their operations smoothly.
Capital Loans
Capital loans are typically taken to accumulate fixed assets like machinery, land, or building. This helps you increase the overall capital value of the business.
Working Capital Loans
These loans are acquired by businesses to keep their business operations running smoothly. These loans also help in bridging any gap between cash-on-hand and receivables.
Mortgage Loans
These loans are accrued by businesses to acquire a constructed building for commercial or personal use.
Credit Card Loans
These loans are very similar to the credit cards you use for personal use and can also be used for your venture. With these, you can pay for business expenditures now and pay the bank for them later.
Vehicle Loans
These loans are acquired to provide vehicles for commercial use as well as the personal use of the employees.
As an entrepreneur, you must be clear about which loans you need to acquire for your businesses and how you plan on paying them off. All of these have interests attached to them. Being financially literate will help you make sound financial decisions for acquiring debt.
Calculating Return on Investment (ROI)
Financial literacy helps you understand the concept of ROI and provides ways to maximize it. ROI helps measure the profitability of an investment relative to the cost incurred. Entrepreneurs can use it as a metric to determine efficiency and gather valuable insights into the business’s financial performance. Entrepreneurs can then make informed decisions and allocate resources accordingly.
Financial literacy helps entrepreneurs calculate as well as analyze ROI. They can evaluate the profitability of various initiatives, identify areas of improvement, and optimize their business strategies accordingly. It helps them allocate their limited resources wisely and avoid potential financial pitfalls.
Managing Risk
As an entrepreneur, every step you take for your business will have some risk attached. Risk, in simple terms, is any uncertainty about the future. As a business owner, you have a lot on the line and must protect yourself from this risk. The best way to manage this risk is to be very calculative and informed when making decisions about the future of your business.
As a small business, you might think greater risks offer greater returns. However, it can’t be farther from the truth. When it comes to risk management, you need to plan for the worst and hope for the best. We aren’t stopping you from taking risks; we are asking you to make sound decisions and aim for moderate risks to grow your business.
Some ways of managing risks and aiming for moderate risks are:
- You spend less than you earn and have a positive cash flow.
- Maintain a substantial cash cushion in case of need, ideally 6-12 months of your expenses from your cash flow spreadsheet.
- Consider suitable insurance types to protect against significant risks such as mortality, accident, disease, etc.
- Don’t put all of your eggs in one basket, and before you make any investment, ask yourself, “What happens if I lose all of it?” If you don’t agree with or cannot cope with the answer, it’s probably too risky for you.
Bottom Line
Financial literacy is not just a nice-to-have skill for entrepreneurs; it’s essential for their short-term and long-term success. From establishing a solid foundation to understanding their numbers, managing credit, calculating ROI, and mitigating risks, financial literacy equips entrepreneurs with the knowledge and tools to make informed decisions.
It empowers them to navigate the complex business landscape and seize growth opportunities as they come their way. Entrepreneurs can steer their businesses toward sustainable profitability and long-term success by mastering financial concepts and practices.
So, if you’re an entrepreneur looking to take your business to new heights, investing in financial literacy is an intelligent move that will pay off significant dividends in the future.
