What is Financial Literacy? Why should business owners care?

Financial literacy has become something of a buzz word but what does it actually mean? And why should small business owners care?

What is it? Financial literacy is “the ability to understand how money works in your business: how you make it, spend it and invest it to improve your financial position.”

Our focus is on improving the financial literacy of women who own or operate a small business. There are a plethora of financial education programs for individuals but a lack of courses designed to improve the financial literacy of small business owners in Australia.

Understanding financial terminology is like learning a new language. Can you explain the difference between Gross Profit and Net Profit? Are you clear on which direct expenses should be allocated as Cost of Goods Sold? Has anyone ever explained the relationship between your Profit & Loss (P&L) and Balance Sheet?

Being financially literate isn’t just about understanding financial terminology and financial reports. It also includes understanding which business structure is right for you (Sole Trader, Company or Trust), how to build a budget for your business plus how to manage your company’s cashflow.

Why should I care? There is a direct correlation between financial literacy and business success. Your level of financial literacy affects the speed and success of your growth plans. It affects your ability to borrow money for growth and your relationship with financial lenders. Understanding your numbers will reduce the stress associated with running your business and help you sleep better at night.

If you don’t understand your business’ true financial position, it’s easy to make poor financial decisions that can send your business broke. So many business owners make major decisions based on how much money is in their bank account. This amount is often inflated by GST. It’s not the business owner’s money. However, if this cash is not siphoned into a separate bank account it’s easy to forget this is not the business’ money and spend it!

Okay…so it’s important but how do I improve my financial literacy?

1. Learn the Language
For many business owners understanding their numbers is like learning a new language. Just like learning to speak French or Italian you need to invest time into learning financial terminology. Like what is gross profit and what is net profit (and which one is more important). Take the time to understand the structure of your P&L and Balance Sheet and the relationship between profit and cashflow. Empower yourself with knowledge by learning this new language.

2. Get your financial data up to date
Without up-to-date financial information you are driving blind. If you’re recording financial information in a spreadsheet, it’s time to upgrade. We recommend Xero, a cloud based accounting software. It is perfect for small business owners. It saves you time, is simple to use and can be accessed anywhere, anytime, from any device. It has a customisable dashboard and allows you to generate key financial reports at the click of a button.

3. Demystify your financial reports
Running a business without understanding key financial reports is like driving a car without a dashboard. Once a month (at a minimum) ensure your financial data is up to date and print out your P&L and Balance Sheet. The numbers tell a story about your business. It’s your job to learn how to read the narrative. With a solid understanding of your financial statements, you can make informed, strategic decisions about your business.

4. Build a financial road map
Once you can read the story your financial reports are telling you, the process of building a financial road map isn’t quite so daunting. What we’re talking about is creating a budget for your business. The first step is understanding where your business is right now and where you want to get to. Focus on delivering a profit each month by achieving revenue targets and minimising operating expenses. With the numbers locked into a budget you now have an action plan to help you drive the business to where you want it to be.

We subscribe to the adage “you can’t manage what you don’t measure”. You can’t measure what you don’t record. You can’t use the recorded information if you don’t understand it.

By focusing on improving your financial literacy you are:

  • learning the language spoken by bookkeepers, accountants, bankers and financial advisors
  • learning how to record financial data
  • learning how to read and interpret financial reports to make informed strategic decisions
  • learning how to build a road map to achieve business success and financial stability

We’re passionate about empowering women in business to have more money, more time and less stress in their lives. We do this by improving their financial literacy. If you’d like to improve your financial literacy, contact Acceler8 Program or call us on 1300 222 353. We run short and long financial education programs via online courses and face-to-face workshops.