Written by Daniel Evans
On a number of our programmes, I get the opportunity to immerse myself in the delivery by running workshops/ground sessions – not as many as when we started where I would deliver a large chunk of these, but it’s a part of our work that I enjoy a lot so if I can, then I will! I had a few fundamental principles that I would bring up time and time again like a broken record to hammer in the point but they were the things that I had seen to be critical factors in the success or failure of a business.
One of these was the importance of financial literacy. Now many of the entrepreneurs we work with are not ‘numbers people’ or have a background in finance or accounting – neither do they need to. However, those that understood the importance of knowing their numbers fared better than those that tried to avoid them. You can outsource your accounting and bookkeeping but at the end of the day you still need to understand the output of what’s been put together.
Afterall, so many business failures root back to financial problems. Many times these were issues that could have been avoided if the business owner had the financial literacy skills to spot the danger ahead of time or if strong financial management practices had been in place, again the dangers would have been better anticipated. It’s not the funnest or most exciting part of running a business but it is definitely one of the most important – understanding how to manage your finances, create budgets, secure funding, and maintain healthy cash flow is essential for long-term success.
The Importance of Financial Literacy
Financial literacy is the foundation upon which successful businesses are built. It involves not only understanding financial concepts but also making informed financial decisions. It is crucial for entrepreneurs & business owners for several reasons:
Smart Decision-Making: Financial literacy empowers you to make informed decisions about your business’s finances, investments, and growth strategies. To know how you are going to deploy your resources you first need to know what resources are available right?
Risk Management: It helps you identify and mitigate financial risks, ensuring the stability and resilience of your business. Are there particular months where you may have cash flow issues? Are you left vulnerable to other shocks? If you take on a contract and are not paid for 90 days but have to deploy costs now, can you afford to do this?
Securing Funding: Investors and lenders are more likely to support businesses with a solid grasp of financial matters, increasing your chances of securing funding. Whether debt, equity or grant funding – it is very unlikely that you’ll be given anything unless you understand and can articulate your numbers well!
Long-Term Sustainability: Proper financial management is essential for the sustained growth and profitability of your business. Understanding your revenue streams and their patterns, knowing your costs and being able to identify potential savings, and allocation of resources – all critical to the success of your business.
Steps to Financial Literacy for Business Owners & Entrepreneurs
We could put a whole blog together on each of the below topics but here is a high level summary of what we think you need to do to improve your financial literacy & your business’s financial management.
Understand Basic Financial Concepts: Start by mastering fundamental financial terms and concepts like revenue, expenses, profit, and loss. This foundation will make more complex financial topics easier to grasp. Again one of the things I’ve told our entrepreneurs time and time again – every business owner should know how to read a Profit & Loss Statement/Account and a Balance Sheet – no exceptions! Watch this 10 min video if you don’t know how.
Create a Comprehensive Financial Plan: There are several schools of thought around the importance of a business plan but the one thing that is not in dispute is the importance of a financial plan. Your financial plan should include a financial section with detailed projections, budgets, and financial goals. It’s your roadmap for achieving financial success. Here is our cash flow forecast template to get you started. I’d recommend doing 3 versions – 1. What you expect to happen, 2. What happens if things are going worse than expected & 3. What if things go better than expected. Understanding again how your costs breakdown is key – especially to figure out what your breakeven point is (revenue = costs). Also be sure to set targets for your revenue too.
Budget Wisely: Develop a realistic budget that outlines your anticipated income and expenses. Regularly review and adjust your budget to reflect changes in your business – this is a dynamic process. You will rarely get this right but it is more important to see these as ballpark figures rather than something you have to hit exactly. One of the fundamental principles within accounting is the concept of prudence (i.e. to practise cautiousness) Being prudent, my advice would also be to always underestimate your revenue but to overestimate your costs.
Manage Cash Flow: Cash flow is the lifeblood of your business. Learn how to monitor and manage it effectively, ensuring you have enough cash on hand to cover expenses and invest in growth. Overall, the practice of cash flow management is to get your customers to pay you as soon as possible and delay costs as much as possible. So get customers to pay promptly and make full use of your credit terms with suppliers to improve your cashflow. However, be ethical! Always pay on time and if you can afford to pay suppliers (especially smaller businesses) ahead of time then doing so will always improve your relationship with them. You never want to be that tricky customer that businesses chase for payment – treat others how you’d want to be treated (so if you want to be paid on time then you also pay on time).
Separate Personal and Business Finances: Keep your personal and business finances separate to maintain clarity and avoid financial complications. As a limited business you are mandated to do this (i.e. separate bank accounts) but not so much as a sole trader but we’d still recommend you do so to prevent confusion.
Explore Funding Options: Research different funding options available to entrepreneurs, such as loans, investors, crowdfunding, or grants. Choose the one that aligns with your business’s needs and goals. This isn’t to say you have to get funding – if you can go without then great but funding can unlock new opportunities for your business if used right.
Build an Emergency Fund: Having an emergency fund can help you weather unexpected financial challenges, ensuring your business remains stable during tough times. Every business should try and build up reserves when they can. It is not always easy (especially the way many costs are going today) but careful financial management will help. Treat it the same way you would for personal savings – even little & often is better than nothing!
Invest in Financial Education: Consider taking courses or seeking out resources that focus on financial management for entrepreneurs. Financial education is an ongoing process that can greatly benefit your business. There are many great resources & organisations out there that can help you strengthen your financial literacy skills – it will never be a waste of time! For example check out our friends at FundingHero.
Consult Financial Experts: Don’t hesitate to seek advice from financial professionals, such as accountants or financial advisors. Their expertise can provide valuable insights and guidance. Getting a good accountant we think is an absolute must and can be your go-to source of advice for financial related issues and questions. Who would we recommend? That’s easy – Agile Accountants for Bookkeeping & Accounting. Apogee Associates for R&D tax credits. Kaiku for support re equity investment.
Regularly Review and Adjust: Finally, remember that financial management is not a one-time task. Regularly review your financial statements, assess your progress, and make adjustments as needed.
Now these are just a few tips but even working on these points will help you to take control of your business’s finances and put you in a much better position to make all your business decisions. Again, this is an ongoing process that you have to keep working at and there are some excellent resources to help you do so. Without proper financial management, the business will fall down. Maybe not today, but at some point in the future. However, it is never too late to strengthen these practices and we know you’ll be left with a better business as a result.
Get in touch with the team via email@example.com to discuss any of the topics mentioned above or to explore more ways that we could support your business.