Mastering Financial literacy: A guide to making sound financial choices as a business owner

The average person is said to make up to 35, 000 daily. You’re probably making many more decisions than that as a small-business owner. Some of these decisions could make or break your company. Financial literacy is essential for small business owners. This will help you to make better decisions and bring your company to greater success.

What is Financial Literacy?

Financial literacy is the continual learning and understanding of best money management practices, such as budgeting, saving, and investing. This is a process of self-education which will set you up for success and financial stability. It applies to business and personal finances.

The importance of financial literacy for business owners

For those who want to start a business, financial literacy is important. You should arm yourself with knowledge about the market and risk management before you embark on the journey to becoming an entrepreneur.

Small business owners cannot afford to hire a full-time accounting staff right away, so it is important that they have a basic understanding of their financial situation. Financial literacy is essential to avoid the following problems:

    • Tax deadlines missed or incorrect filing
    • Implementing a weak strategy for growth that’s not sustainable
    • Not recognizing potential (or weaknesses)

Don’t be intimidated if all of this seems overwhelming. You don’t have to be a full-time accountant in order to make the right financial decisions for your company. There are a number of tools and resources that can help.

A Guide for Making Sound Financial Decisions as a Small Business Owner 

Budgeting and Financial Planing

Budgeting is an important part of financial literacy. A realistic, detailed budget is the cornerstone of any financially sound business. There are entire books devoted to budgeting for businesses, but these tips are the most important:

    • Find out what industry standards are for each category of spending. You’ll be able to determine if your budget is in line with the norm or if it needs to increase.
    • Don’t underestimate your costs. Allow yourself some wiggle room when it comes to budgeting.
    • Create an emergency fund. We’ve recently learned that the world can be unpredictable. Experts recommend putting away between three and six months’ worth of operating expenses to prepare for the unexpected. However, any amount is helpful.
    • Determine where you can reduce costs. Having a plan in place will help make difficult decisions easier when the going gets tough. You might be able to reduce office rent or restructure your insurance.
    • Compare prices and suppliers.
    • Budgeting apps are a great way to stay organized.

Monitor Financial Results and Reinvest Profits

After carefully planning and budgeting it’s now time to focus on maintaining and growing your business.

7 Financial Reports & Forms To Monitor

Keep track of your company’s financial health by using the following forms and reports:

    1. Cash flow report: A high-level statement that shows the movement of “cash equivalents”, or cash, into and out of your company. Cash equivalents include, for example, government bonds, money-market notes, and certificates.
    2. Budget report vs. Actual Report: Do you remember the budget that you worked so hard on creating? This report will compare what you had planned to spend with what you actually spent. It can help you determine where you are staying within your budget and where you have overspent.
    3. Report on the balance sheet: The report will show all your company’s assets and liabilities, including cash, inventory and equipment.
    4. Report on net profit margin: This report will help you to understand your profitability by reporting your net profit after subtracting all expenses, taxes and interest.
    5. Weekly Sales Report: This report is for companies that use software to track metrics such as leads and conversions.
    6. Accounts Receivable and Payable: These are usually two separate reports that cover the income you expect to get (receivable), and any money owed (payable).
    7. Annual Report: U.S. Secretary State requires that all businesses file a annual reports summarizing information about business activities and members.

Marketing metrics such as customer engagement and loyalty are important to monitor. These numbers, while not directly related to finances as the above reports are, will help you better understand your customer base. Monitor the following:

    • Social Media Campaigns, Followers, and Engagement
    • Google Analytics and website data such as traffic and rankings
    • Email Marketing Performance like Open Rates and Click-Through Rates

How to Reinvest Your Small Business Profits

You may wonder how to invest in your business to ensure its continued success. Here are a few ideas to help you get started.

    1. Events and bonuses boost employee morale
    2. Productivity Software saves time and works more efficiently
    3. Marketing Campaigns that fall outside your normal budget
    4. Personal Growth Initiatives such as conferences, books and training
    5. can help you save money on long-term repairs by upgrading your equipment .
    6. Emergency Fundfor a cushion in times of difficulty
    7. Research & Developmentto make sure you are on top of the areas that need improvement

Personal Finances: They are important for entrepreneurs too

Everyone can benefit from the fundamentals of a healthy personal finance, regardless of whether they run a business. There are some best practices that entrepreneurs should follow:

Reduce Personal Debt

Stress can be a major problem if you have a large amount of personal debt. It can make it difficult to run a business. Try to minimize your debt before starting a business.

Create a Large Emergency Fund

If you’re building an Emergency Fund for business, do the same thing with your personal fund. You’ll have peace of mind knowing that you are covered, no matter what happens to your business.

Form a Retirement Plan

Most entrepreneurs decide to become their own bosses in order retire earlier and enjoy their retirement years in peace. As an entrepreneur, this is a vital part of your financial journey. Start contributing to tax-advantaged options for retirement, such as IRAs or 401(k), whether you are 30 years from retirement or three years.

Do not forget to lean on financial professionals

You don’t need to do it alone. While improving your financial knowledge is a wise decision for any business owner, you shouldn’t feel like you have to. There are many tools and resources available to help your business reach its goals.

Small Business Accounting Software: Free for Small Businesses

Small business owners have many options for free accounting software. The following are some of the most popular:

    • Akaunting
    • CloudBooks
    • GnuCash
    • Mint
    • NCH Express Accounts
    • Odoo
    • Sunrise
    • Wave
    • ZipBooks
    • Zoho Books

We are here to help

Even the most financial literate entrepreneurs require help at times. Speak to your financial advisor or accountant if you are ever uncertain about the best decision for your company. Your local SBDC offers free training and advice for your specific business needs. Find a SBDC near you.