Do you understand the financial performance of the company? Do you know the financial mechanisms that are fundamental to it? Are you making decisions based on a full understanding of the financial statements?
The importance of financial literacy for entrepreneurs and investees cannot be overstated. You are responsible to yourself, your team, your customers, and your suppliers for instilling financial knowledge in your business. When you truly understand the financial side of your business, it’s easier to make healthy, informed decisions and run more profitable businesses.
Most people start their own business because they have an idea or are very good at something. They want the freedom it brings them to work for themselves and build their own business. But often they get stuck in the day to day affairs and do not have time for their financial education.
Imagine you are financially literate
– You understand what your financial statements actually mean
– You know that bookkeeping is required to produce accurate financial statements
– Your financial statements and other key indicators are a valid tool you can rely on
– You can focus on strategies that help your business grow
– Your level of financial literacy as a business owner or entrepreneur will greatly affect the success of your business
Financial literacy provides:
- a solid understanding of your key financial statement’s knowledge of key accounting concepts
- understanding of the difference between cash flow and profit
- understanding of how to better manage your debtors and creditors
- knowledge of how to track income and expenses throughout the year
- time-saving methods for automated administrative tasks
- understanding of other data and information you need to collect (e.g. debt restructuring, etc.)
How will this benefit you?
- You will better understand your business with a more complete financial picture
- It will push you to manage and control your cash flow
- You will understand and prepare for your tax obligations
- You will be better able to adapt to changes and unexpected business events, you will be able to plan for growth
- Better and more accurate decisions – without guesswork
- You will better understand the financial implications of the decisions you make
Your business success depends on your financial literacy
What is financial literacy?
An entrepreneur’s financial literacy is a combination of knowledge, behaviors, and attitudes required to make the right business decisions. The purpose of financial literacy is to do business with less stress and risk so you can develop and grow in the marketplace the way you want to, not the way you have to.
When you fully understand the financial side of your business, you will be more confident. You will rely less on others to simply tell you what to do in your business; instead, with the help of available financial experts, you will have a detailed understanding of your business and an open mind to new business opportunities.
TIP #1 What is done in bookkeeping and what is done in accounting
Accounting focuses on the day-to-day financial activities of businesses, while bookkeeping summarizes them into standardized financial statements.
Accounting records all the financial activities of the business in a timely, accurate (current and punctual) manner, based on credible documentation so that you can track your income and expenses.
Anyone who earns from self-employment and is a business owner must have some sort of accounting system in place to keep track of their finances.
Bookkeeping helps you manage your money, collect your receivables in a timely manner, know where you are losing and where you are earning, and understand your cash flow, both short and long term.
For business owners who use bookkeeping, up-to-date records are a big help in day-to-day operations. So do not keep the records with you, take everything to your accountant (emphasis on “everything”).
The purpose of bookkeeping is to accurately record the financial transactions resulting from business activities based on good accounting practice.
The difference between bookkeeping and accounting
The bookkeeper is responsible for accounting for the submitted records in accordance with the law and regulations.
The accountant has the more complex task of preparing financial statements. He must therefore monitor, analyze and propose changes to the legal requirements. These services can be provided only by legal entities and individuals who are authorized to perform these activities on the basis of a special law.
In addition to business owners and management, financial statements are used by lenders who evaluate the creditworthiness of the company, investors who analyze investment opportunities in the company, customers and suppliers, but also by the state, which verifies that the company complies with all laws and regulations.
TIP #2 Accounting documentation
Every accounting action is based on credible and accurate documentation. Records are created based on the occurrence of a business event. So, when a business event has occurred, it is recorded.
It would be good if you ask the accounting service for written accounting policies. These set out the principles, basis, practices and rules that apply when preparing and presenting financial statements. If you continue to keep your own accounting records, you will continue to operate under the same principles and policies.
Even if you have someone to keep your books, as an owner and business owner, you need to understand the basic accounting logic behind the numbers and learn the terminology that is important to navigating the financial statements. By doing so, you will get to know your business better and be able to make more informed and successful business decisions and communicate more easily with bankers, suppliers, customers and business people you meet around you.
TIP #3 Track your cash flow
Research shows that most entrepreneurs fail for lack of money. But experience shows that few of them know how to manage their cash flow.
If the entrepreneur does not monitor, control and plan cash flow to pay for his due obligations but also for future needs, he will not be able to survive in the market for long. Providing the necessary liquidity as air is needed by the body. Therefore, it is crucial that you monitor and understand the financial position of your business.
Hiring an accountant won’t help you if you do not understand the basics of accounting logic and financial statement terminology. Do not like numbers? Although at first glance it may seem like they involve complex mathematical operations, this is just a common psychological barrier that most people have when they see numbers. We all know that 100 + 350 = 450, you do not have to use an abacus for that.
TIP #4 Replace spending with income
Just as people who spend less than they take in invest or invest surpluses in savings, and others cover their financial deficits with loans, so too do entrepreneurs manage their money.
When it comes to proper money management, the importance of creating a business financial plan (budget) and sticking to it is always stressed. Getting into the habit of carefully reviewing all expenses means having complete control over your spending habits.
You may say that you have never kept a personal financial plan and that you have survived. But that does not mean your business will survive either. It is crucial to monitor cash flow, what gives your business revenue and how it is spent.
TIP #5 Stick to a financial plan
A financially literate person constantly monitors the state of their personal/family finances to control their spending and prevent being unable to cover liabilities with disposable income or assets. When we carefully monitor our spending, we always know what we are spending our money on and how much we have left for savings or investments.
The most important lesson in personal finance is to live within your means. How relevant is this to entrepreneurs? The entrepreneur’s vision is supreme. However, it can sometimes be too ambitious. The field of entrepreneurship is quite unpredictable. It is easy to spend too much capital or make financial decisions based on future income, driven by ambition.
The “if I quit, I’ll fall” strategy may seem tempting and even work for a while if you have a large capital stock. But contrary to what you may think, your pocketbook is not a bottomless pit. Such an approach can shake the foundations of your business, especially if you are a beginner.
TIP #6 Manage your debt wisely
Managing debt means thinking responsibly and rationally to conclude if, when, and under what conditions borrowing is necessary. Credit is an inevitable part of doing business, and taking risks is part of the core of entrepreneurship, so you may find yourself taking them lightly.
Do not buy equipment or real estate because it’s an opportunity, only buy it if it’s absolutely necessary for the business from which the loan repayment income will come. The economics of loan-financed investments should be at least equal to the average loan rate, or you will have difficulty repaying the loan.
Maintain good relations with the bank, find out the terms and conditions of different financial institutions and find the best terms. If you plan and take care of your cash flows, you will take out a loan at an acceptable cost, but be sure that all the rights and obligations you assume are clear, understandable and favorable to you. Ask the bankers to explain anything that is not clear to you.
TIP #7 Save for a rainy day
Most people remember the story of the worm and the ant, where the ant worked and saved for a rainy day, while the cricket jumped without thinking about the future and ended up starving when the bad times came.
The lesson here is that we must always save for the good times and be prepared for the worst. This may sound rather pessimistic, but if you are prepared for the worst, you can certainly handle anything that happens. Such as a crisis caused by a coronavirus pandemic.
Listening to stories of failed entrepreneurial ventures and believing it will not happen to you may be an optimistic approach, but being aware that nothing is stable and change is the only constant will help you get through difficult times when income is erratic, diminishing, or nonexistent.
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