What is Financial Literacy For Small Business Owners?

April is National financial literacy month.  It aims to raise awareness of the importance of managing your money efficiently and maintaining good money habits.

As a business owner, you wear many hats that allow you to analyse past performance, manage current operations and plan ahead.  Every decision you take can make a huge impact on your business, so it’s important to make the right decisions.

Decisions are based on many factors such as market research, industry trends, customer feedback and financial resources.  In many cases, the key factor restricting or dictating decisions, is your financial situation.  This is why financial literacy is crucial.

Financial literacy is the practical knowledge of being able to earn enough, spend wisely, save your profits, and invest for the future, as well as knowing how to protect your wealth.  Getting these things right opens the door to financial freedom, so it is very important to know your numbers.

How do you ‘know your numbers’ and which numbers are important?

Key financial indicators give you a health check on your business.  The five most useful business reports are:

1. Profit and loss statement – also called as Income statement, shows your income and expenses and the resulting profit over a period of time.  It is good to look at this report every month and compare it to previous months to see if the business is improving and identify where there are problems. There are 5 main components of this report.

2. Balance sheet – this is a statement of assets and liabilities that gives you a snapshot of the value of your business, including money owed or owing, and assets in the company. Month on month comparison of balances sheet, throws quick light on business trend. Various balance sheet ratios such as Quick Ratio, Debt to Equity ratio gives precise direction in decision making. 

3. Cash flow statement – this shows you the financial health of your business in terms of cash available.  It outlines cash movement and can be a good way to forecast spending.  It will also highlight where a cash injection is necessary to keep the business moving and maintain a good level of working capital.

4. Accounts payable and accounts receivable – these two reports show you what you owe your suppliers and what your customers owe you.  Checking this information will remind you to chase your debts and pay any outstanding bills.

5. Marketing engagement and customer loyalty – checking the performance of advertising campaigns to see if they are successful in bringing in more business and assessing customer retention.  On average the cost of acquiring new customers is roughly five times the cost of retaining existing customers, so it is good to keep your clients happy.

There are many other reports that can be used to assess business performance and it’s important to choose the ones that best reflect your industry metrics.

If you don’t have time to run the numbers yourself, then consider outsourcing your bookkeeping and KPI reporting to ensure you have the numbers you need to succeed in your business.

This April, consider the steps you need to take to improve your financial literacy.