What makes a successful entrepreneur? Is it passion? Determination? Focus? According to Cyrus Nikou, founder and managing partner of Atar Capital, leaders need to develop a practical set of skills.
“Entrepreneurs need to possess financial literacy,” he says. “At the very least, they should be able to read and prepare financial statements and have a basic understanding of how to manage a budget.”
Financial literacy is about more than balancing a checkbook. Here’s how financial literacy can empower entrepreneurs to reach their full potential.
The Importance of Financial Literacy
Financial literacy is an umbrella term that refers to the skills and knowledge needed to understand a company’s financial health.
This definition may sound basic, but a shocking number of business owners lack some of the most important information about their companies. For instance, a 2021 accounting survey discovered that almost a third (29%) of business owners couldn’t identify the area of their business with the highest expenses.
A lack of financial literacy is a surefire recipe for disaster. Business leaders must develop a greater understanding of details and processes such as:
• Cash flow
• Financial statements
• Budgeting
• Managing debt
On the other hand, having a clear understanding of concepts like profitability, liquidity, and solvency can empower you for greater success.
How Financial Literacy Empowers Entrepreneurs
How can financial literacy drive your business forward? The right financial skills can empower you not only to manage your business well but also to grow it for the future. Here are five key benefits of being financially literate:
1. Budget Better
No business can thrive without a working financial plan. Financially literate business leaders take steps to ensure that they allocate money for every aspect of their business.
For instance, you’ll need to adjust your annual budget to account for things like inventory levels or common expenses such as equipment or payroll.
Financial literacy can help you forecast your future revenue and expenses based on prior performance. Additionally, financially literate entrepreneurs can keep track of their ongoing expenses to make sure they adhere to their operating budget.
2. Monitor Your Cash Flow
One of the most important reasons to pursue financial literacy is to keep an eye on your cash flow. Your working cash flow will give you a clear idea of how much money is flowing into and out of your business.
Cash flow is different from profit, as cash flow has to do with how much cash you have at any given time.
That’s important because your cash flow has a direct bearing on your ability to meet your financial obligations. If you fail to monitor your cash flow, you may find yourself unable to pay your bills or even your own employees. In fact, a 2019 survey revealed that 29% of startups failed due to poor cash flow.
Besides, without proper cash flow management, you won’t know if you have the cash on hand to tackle a new business opportunity. Keeping a handle on your cash flow will empower you to make decisions that expand your business and move you into the future.
3. Assess Risk
Financially literate entrepreneurs use their skills to identify and mitigate risks. For instance, business leaders can take a proactive approach to managing existing debts or assessing the way overhead costs can adversely affect their profit margin.
Business leaders can take steps to establish emergency funds or diversify their revenue streams to protect against destabilizing economic conditions or industry trends.
Without these financial literacy skills, entrepreneurs will lack the ability to play damage control during an unstable market. This could have disastrous consequences for the future of their organization.
4. Manage Debts and Credit
Most businesses require some form of funding to maintain their operations. This may have included a startup loan, though it can also extend to ongoing lines of credit. Either way, business owners will need to manage their debts and credit to avoid missing payments or overextending themselves on a particular need.
These debts and credit can include:
• Working capital loans
• Equipment loans
• Business lines of credit
• Commercial mortgage loans
• Commercial vehicle loans
With the right financial literacy skills, you’ll be better equipped to not only manage these debts but eliminate past debts to keep your business moving forward.
And if you need to secure additional funding for your business, your lender will ask to see your business plan and your most recent financial statements. Having the skills to put these items together (or keep them up to date) will help you obtain the financial resources you need to scale your business.
5. Attract Partners and Investors
Depending on your industry, you may want to find local partners, investors, or new vendors to support your business. But stakeholders commonly want to partner with a business leader who understands the world of finance.
Financial literacy can help you assemble business plans and proposals that attract new partners and investors, empowering the future of your company through strategic collaborations.
Likewise, your vendors may be more willing to offer favorable rates and terms if you can demonstrate strong financial health. Having solid financial skills will keep you moving forward by strengthening your public reputation.
Invest in Yourself
Financial literacy helps business leaders stay in control of their investments and make decisions that lead to manageable business growth. The best way to invest in your business is to invest in yourself — develop the financial skills you need to carry your business into the future.
