Financial literary is a vital necessity for business people, especially young entrepreneurs.. Small and medium scaled enterprises need to be familiar with the figures and understand its application for business decisions. Understanding and working with figures effectively will determine if a business has a future or not.
Financial literacy helps identify how best to allocate your limited resources for maximum return. It gives an entrepreneur enormous advantage and affects every decision made in the marketplace. The entrepreneur must know the difference between the terms: “assets” and “liabilities” and their values.
A vital part of every business is the “cash-flow” and “capital gains”. An entrepreneur must master these. Entrepreneurs need to know how to mitigate or transfer their risks by using insurance policies. Many entrepreneurs fail to understand that the business is an entity on its own and should be treated as such. Many businesses are not even registered, especially among artisans, skilled professionals and the self-employed.
If a business is not registered, how will it be able to keep proper books or maintain bank accounts for budgeting and record-keeping? In fact, many entrepreneurs don’t know how to separate the business money from theirs; they spend everything together.
There’s the story of a young and promising retail business entrepreneur who was having serious cash flow problems. According to the story, he was always in debt, despite the fantastic daily cash flow he gets. He had operated by return-on-sales for the last 10 years; it’s called supplier credit. He gets goods on credit. After sales, he returns the cash credit to his suppliers before determining his own profit. Because of the sophistication of the business model, his accounts were always in a mess. He once got an irresistible offer to buy a luxury car, managed to pay for it and acquired some landed properties but when it was time to pay his suppliers back, it was always a struggle. His business account was never balanced despite the heavy daily turnover. It was discovered that he couldn’t separate business cash from personal cash. He forgot that he was using supplier credit. He had been spending the suppliers’ funds along with his own.
Sadly, he’s been running on this cycle of failure for almost 10 years without understanding where the challenge came from.
Financial literacy requires that one has a basic understanding and knowledge of financial statements and the ratios. A popular proverb says, “Whatever is worth doing at all, is worth doing well”. As an entrepreneur, go for knowledge. If your business is worth living & labouring for, then you need to get literate especially for new opportunities ahead.
To be financially literate, you will need a small change in your business perspective; a new way of thinking. You will have to get your hands on financial books written for “dummies”; it simplifies all those ‘formulas’. Financial journals and newspapers will also help a great deal.
Meanwhile, you can also ask an accountant to teach you how to read financial statements and interpret figures. Equipped with this vital financial knowledge, you’ll be ready for exploits in the marketplace.