Running a business, regardless of its size, is not an easy thing to do. You must understand how the cash flow works and all other money-related stuff in the industry.
Naturally, you want to earn revenue from your organization; profit is not the only thing about finance.
Financial literacy is vital in building your business, including personal finances. If you understand how finance works, you will know how to consolidate high-interest debts, keep books efficiently, make a financial plan for the business and yourself, and create effective financial decisions.
This article will cover what financial literacy is and why it is vital in business.
What Financial Literacy Is
Financial literacy is understanding your business’ finances, including all money-related activities, such as debts and account receivables. It gives you the knowledge of financial terms, theories, ideas, statements, and common practices. All these things can help you see the company’s clearer picture of its financial situation as it affects the scalability of the business — the capacity to grow to meet the demands.
You don’t need to be a graduate of a university or any specific course to become literate financially. Even if you don’t have any idea how accounting works, you can learn the basics that will help you improve in making financial decisions.
The Importance Of Financial Literacy In Businesses
Being financially literate is a must if you don’t want to fail your business journey. That will help you be more accurate in your financial calculations and endeavors. Overall financial literacy gives the advantage to dealing with many challenges related to your business finances.
Managing Cash Flows
One of the most obvious importance of financial literacy in business is the ability to manage cash flows better. The company’s cash flow doesn’t only focus on the actual money you receive when making sales. It also includes the purchase of resources to make and sell the products you have.
When your client or customers want to buy bulk orders from you and set a payment term, such as bi-weekly or weekly, it is also included in the cash flow even though you haven’t collected the money. This is usually called account receivables.
Even if you haven’t gotten the full payment yet, you still need to manage and allocate where the funds go.
Aside from the receivables, debts are also part of the cash flows. Make sure that you pay everything on time to avoid paying for high-interest rates. These interests affect the company’s profitability and finances when left unpaid.
Handling Your Taxes
As a business owner, handling your taxes is a part of your duties. You have to pay your income tax, self-employment tax, and other obligations to avoid any financial issues in the future.
It’s best to understand what your tax situation is. You’ll be able to calculate the total amount and avoid paying less or more. If you pay lower than you’re supposed to, it could affect your business financial situation as you need to get additional funds to pay for your taxes.
On the other hand, paying more than you need also disrupts the company’s cash flow.
If calculating your overall tax is complex for you, it’s best to hire a tax professional or an accountant to handle the taxes. However, if you study how to compute it over time, you won’t need to hire professionals to do the computation.
Financial literacy can help you improve your negotiating skills. Understanding how finance works allows you to see the bigger picture, whether you are negotiating for materials, stocks, or your employee’s salary.
You’ll understand how certain adjustments can impact your business. For instance, if you give more benefits to your employees, it could positively and negatively affect the financial flow. You’ll be paying for more, but they can become more productive.
When negotiating about finances, you’ll be able to see how it affects the business’ financial situation. This means you can sway the conversation in your favor and turn it into a win for your organization.
Advocating The Team’s Budget
When you need a budget for a certain project or product, understanding finances helps build a strong case. You’ll be able to allocate the funds efficiently and identify which areas can be adjusted to get the funds you need.
For instance, your company needs funds for a new marketing strategy, and you don’t have enough funds for it. You might consider adjusting the program to meet the budget or go for a loan. Computing everything is the key to avoiding any financial setbacks.
You’ll also be able to calculate the expected return on investment when allocating the budget, helping you prevent any loss from your company. It’ll also give you an insight into whether the amount is a good investment, especially when buying new items to run the business.
Analyzing Your Financial Statements
Financial statements represent the financial status and performance of the company. The data is usually gathered annually, but some companies do it biannually. If you’re financial literate, you’d be able to analyze them independently.
When looking at financial statements, you’ll find the factors that affect profitability and whether a marketing campaign is successful or not. This will also show any loss and if the company is making a profit.
By analyzing the data, you’ll be able to understand the financial health of your organization. This is a critical element in any business as it could identify any financial problems the company is experiencing, allowing you to make business-oriented decisions.
Become Financially Literate
In any business, understanding finance is essential. You can hire professionals to work it for you, but as a business owner, it is best to know how it works; besides, it’s your company.
When you become financial literate, you’d be able to calculate your company’s expenses, expected profit and loss, and budget accurately. You will also manage the cash flow, pay taxes, allocate funds for specific projects, negotiate, and analyze the company’s financial situation.
This will allow you more control over finances, helping you decide for the betterment of the organization regarding its financial structure. So, become financially literate to run the business better, and manage its finances more efficiently as you make decisions to help the company.
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