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Mastering Financial Literacy: A Guide to Making Sound Financial Choices as a Business Owner

It’s estimated that the average person makes up to 35,000 decisions a day. If you’re a small business owner, you’re likely making thousands more than that — and some of those decisions can either make or break your business. Arm yourself with financial literacy for business owners to ensure every decision you make brings your company closer to success.

What Is Financial Literacy?

Financial literacy is the continued learning and understanding of money management best practices, including budgeting, investing, and saving. It’s a crucial process of self-education that sets you up for financial stability and success, and it applies to both business-related and personal finances.

Importance of Financial Literacy for Business Owners

Financial literacy is essential for those looking to start their own business. Before you begin the journey of becoming an entrepreneur, arm yourself with risk management skills, knowledge of the market, and awareness of all potential business opportunities.

Most small business owners can’t afford the luxury of a full-time accountant right off the bat, so they must have a general understanding of their own financial landscape. Without financial literacy, the following challenges could arise:

    • Missing tax deadlines or filing incorrectly

    • Implementing a weak growth strategy that isn’t sustainable

    • Being unaware of potential opportunities (or shortcomings)

If all this sounds intimidating, don’t worry — you don’t need the knowledge of a full-time professional accountant to make smart financial decisions for your business. Luckily, there are many tools and resources available to help.

Budgeting and Financial Planning

Budgeting is one of the most important elements of financial literacy. The cornerstone of a financially sound business is a detailed, realistic budget. We could write entire textbooks devoted to business budgeting, but the following tips are of the utmost importance:

    • Research industry standards for each spend category. This will help you understand if you’re in the typical ballpark or if you should up your spending to stay competitive.

    • Overestimate your expenses. Wiggle room in certain budget categories allows you to shield your business from consistently going over budget.

    • Make an emergency fund. If we’ve learned anything recently, it’s that the world is unpredictable. Most experts recommend stashing away three to six months of operating costs to help you deal with the unprecedented, but any amount will help.

    • Decide where you can cut costs. Forming your cost-cutting plan ahead of time will make the hard decisions a bit easier if and when times get tough. Perhaps you can eliminate office rent costs or reconfigure your insurance coverage.

    • Shop around for the best suppliers. Speaking of cutting costs, you may be needlessly overspending with certain suppliers when comparable options are available for less.

    • Stay organized with a budgeting app. Popular budgeting apps for small businesses and startups include Goodbudget, inDinero, and ToshI.

Monitoring Financial Results and Reinvesting Profits

After careful planning and budgeting, it’s time to get into the nitty gritty of maintaining — and eventually growing — your business.

7 Financial Reports and Forms to Monitor

Stay on top of your business’s financial performance by monitoring the following reports and forms:

    1. Cash flow statement: This is a high-level report showing the movement of cash and “cash equivalents” in and out of your business. Cash equivalents typically include government bonds, money market notes, and certificates of deposit.

    2. Budget vs. actual report: Remember the budget you worked so hard to create? This report will juxtapose what you planned to spend versus what you actually spent to help you identify where you’re staying within budget and where you’re overspending.

    3. Balance sheet report: This will contain all of your company’s assets (like cash, inventory, and equipment) and liabilities (like credit card balances and loans).

    4. Net profit margin report: To help you understand your profitability, this reports on your net profits after deducting all costs, taxes, and interest.

    5. Weekly sales report: If your company uses software to track sales performance metrics like leads and conversions, you’ll want to review this report.

    6. Accounts payable and receivable: Often two separate reports, these cover any income you expect to receive (receivable) and any money you owe (payable).

    7. Annual report: The U.S. Secretary of State requires all businesses to file an annual report summarizing business activity and member information.

Keep your eye on marketing metrics like customer engagement and loyalty. While not directly tied to finances like the reports above, these numbers will help you understand your customer base and those making purchasing decisions that impact your bottom line. Monitor the following:

    • Social media campaigns, followers, and engagement

    • Google analytics and web data like traffic and rankings

    • Email marketing performance like open rates and click-through rates

7 Ideas for Reinvesting Your Small Business Profits

Once your business is turning a profit and you’re able to pay out yourself and any employees, you may be wondering how to reinvest back into your company for healthy, continued growth. Here are some ideas to get you started:

    1. Employee morale boosts like events and bonuses

    2. Productivity software to save time and work more efficiently

    3. Marketing campaigns that fall outside of your normal budget

    4. Personal growth initiatives like conferences, books, and training

    5. Upgraded equipment, which can save you money on repairs long term

    6. Emergency fund for a cushion when the going gets tough

    7. Research and development to ensure you’re on top of areas needing improvement

Personal Finances (They Matter for Entrepreneurs, Too)

The fundamentals of healthy personal finances are universal for everyone, whether or not they own a business. That being said, there are a few best practices entrepreneurs in particular should adhere to:

Minimize Personal Debt

If you’ve accumulated significant personal debt that may seem insurmountable, the situation can cause a great deal of stress. This can take away from your ability to run your business smoothly. Before going into business, try minimizing your debt as much as possible.

Build a Hefty Emergency Fund

You’re probably building an emergency fund for your business in case something unexpected happens, so practice the same with your personal emergency fund. This will give you peace of mind of knowing you’re personally covered no matter how your business fares.

Form a Retirement Plan

Many entrepreneurs become their own boss in order to retire early and enjoy their later years in peace. This is a crucial part of your personal finance journey as an entrepreneur. Whether retirement is three years away or 30, research tax-advantaged retirement options like IRAs and 401(k)s and start contributing now.

Don’t Forget to Lean on Financial Professionals

While upping your financial literacy is a smart decision for any entrepreneur, remember that you don’t have to go it alone. Countless tools and resources are available to help you reach your business’s goals.

Free Accounting Software for Small Business Owners

There are many free accounting software options available for small business owners. Some of the most popular include the following:

    • Akaunting

    • CloudBooks

    • GnuCash

    • Mint

    • NCH Express Accounts

    • Odoo

    • Sunrise

    • Wave

    • ZipBooks

    • Zoho Books

Professionals Are Here to Help

Even the most financially literate entrepreneurs need help from time to time. If you’re ever unsure of the best financial decision for your business, talk to your accountant or financial advisor. You can also take advantage of your local small business development center or SBDC, which offers free advice and training for your unique business situation. Find an SBDC close to you today.

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