Financial Literacy is an essential skill that everyone should have. And small business owners need a particular skill set to run a profitable company. We’ll talk about the four pillars of small business financial literacy and how it’s not too late to learn. Then, I’ll share two strategies you can implement today to improve your company’s financial situation. Then, we’ll look closely at your relationship with money, spending habits, and how you can begin making smart money decisions.
Financial Literacy is an essential skill that everyone should have.
People tend not to feel confident when making money decisions because we weren’t taught proper financial Literacy growing up. This can lead to people making bad financial decisions that can harm their lives. Financial Literacy is critical because it teaches people how to manage their money in a way that will help them achieve their financial goals. When you understand financial concepts well, you can make informed decisions about your money and business.
small business owners need a particular skillset involved with running a profitable company
There are a few key financial concepts that small business owners should understand. These include budgeting, financial management, risk analysis, and cash flow vs. profit. By learning about these financial literacy concepts, business owners can use them to improve their financial situation and have a better chance of being financially successful.
Of course, there’s much more, but I like to center these as my core four priorities as a financial coach. When I ran my family’s company for seven years as the vice president, these were the four pillars I focused on the most.
Budgeting
Many small businesses make a typical financial mistake by not budgeting enough money to cover the cost of running it properly. This could result in debt or bankruptcy, damaging a company’s financial future. A financial coach can help business owners establish financial goals and create financial plans to achieve those goals.
Financial Management
Financial management can help business owners improve their financial situation by ensuring all of the financial aspects of the company are running smoothly and staying out of debt as they should be. Small businesses need to develop financial projections that include how much money will come into the company over time and how much money should go out.
Risk Analysis
Risk analysis is the financial analysis of assets used for a business. This economic assessment determines what financial risks a company may have associated with a particular financial asset and whether it’s necessary to take action to reduce the financial risk before things get out of hand. For example, financial risk can occur when you have too much debt on your financial statement.
Profit VS Cash Flow
Profit is a company’s earning power after all expenses have been paid before taxes are deducted. At the end of this financial period, you’ll have the final amount of money that your company earned during that financial period. Cash flow is the money that flows in and out of a company over time.
A small business prioritizes cash over profit is in trouble because they likely only have enough income to cover their expenses if they’re lucky. An example would be winning a contract where you bid lower than your cost. I’ve seen business owners do this to keep their employees happy and keep business going. However, this is a poor strategy because if you’re not earning a profit, you might as well not do the job and cut the prospective customer a bank check.
Is it too late?
Financial Literacy is critical when it comes to running a business. It would be best if you make informed financial decisions. Most of us were not taught financial literacy in school. However, if you’re willing to learn, you have a solid chance to turn your business around and make a profit.
Hire a bookkeeper
Hiring a great bookkeeper is one of the most important steps a small business can take regarding financial stability. A good bookkeeper can help keep your financial records in order, ensure all bills are paid on time, and help you stay organized and aware of your financial situation.
Analyze your money each month
Monthly financial statement analysis is essential because it allows you to track your company’s economic progress over time. This analysis can help you identify areas where your company can increase sales and make financial progress. You can find places where you need to make changes (cut expenses) to improve your financial situation. Additionally, a monthly financial statement analysis can help you identify potential financial risks your company may face.
Don’t be discouraged.
Small business owners create jobs, drive innovation, and boost growth. Financial Literacy is key to their success.
Please never get discouraged if you don’t have money management training. It’s not too late to learn. And once you get the hang of what to look for, how to take proactive steps, and how to react quickly, you might discover that this money work is fun.
Wait, you didn’t come out of the womb as an entrepreneur?
We might not have learned the importance of financial literacy in high school, but we have certainly overheard our parents and other adults moan and groan about money.
It was too expensive!
You can’t afford that!
What do you think I am? Am I made of money?
Ouch! Most people sidestep the whole subject of setting financial goals in life and business. In an upcoming article, I’ll mention situations where we struggle with money and how these struggles can show themselves in our work.
Please contact me if you’re looking for more information or want help implementing these concepts into your own life and business. You can also find my book My Money Pivot: An Entrepreneur’s Guide to Finding & Making More Money on Amazon. You can apply for a complimentary consultation, and we’ll have a no-pressure conversation about what’s happening in your world. If you share your profit and loss sheet with me, I can quickly review it. This call can help determine if working together to improve your business makes sense.
Janet Johnson is a small business advisor and author of My Money Pivot: An Entrepreneur’s Guide to Finding & Making More Money and this educational blog. All views expressed belong solely to Ms. Johnson and do not represent the views of her employer. The website, MyMoneyPivot.com, is currently managed by Luz Marcos, Virtual Assistant.