“Financial education is more valuable than money.” – Mac Duke
Have you ever realized what financial literacy is and how important it is for entrepreneurs?
Are you an entrepreneur with any financial experience?
The answer to these questions is yes if you want to be a successful entrepreneur.
Financial literacy refers to the knowledge and skills needed to effectively manage personal and business finances. It includes an understanding of financial concepts such as budgeting, saving, investing, debt management and financial planning.
Financial literacy is very important for entrepreneurs because they need to make informed decisions about managing their business finances. By understanding financial concepts, entrepreneurs can better manage their cash flow, create accurate financial forecasts, and make informed investment decisions. Knowledge of finance also enables entrepreneurs to communicate effectively with investors and lenders. They can clearly explain their business plans and financial needs, increasing their chances of securing funding.
Here are five important reasons why financial literacy is important for an entrepreneur:
1. Improved performance
Everyone in the organization looks to entrepreneurs as leaders who can solve problems and make difficult choices. But it’s difficult for these managers to operate as effectively as their workforce expects without adequate financial knowledge.
Have you ever wondered how you can improve your financial skills and run your business at the same time?
Being an entrepreneur is a 24/7 job where you wear multiple hats and strive to excel in every department. With the hectic corporate routine of an entrepreneur, attending physical classes to sharpen your financial knowledge becomes difficult. Consider earning an online MBA Finance degree if you want to improve your financial capabilities and knowledge. Enroll in an online program while working full-time to gain enough financial knowledge to help make strategic decisions in your company. The good news is that you don’t need any prior financial knowledge to take these courses.
2. Helps in planning for growth
Strategic planning is one of the key aspects of entrepreneurship, and for a start-up to establish itself and succeed in the long term, it must focus on planning and growth. A growth plan for a small business often includes financing options such as loans and advances from banks or other financial institutions.
With an innate understanding of accounting and finance, you as an entrepreneur can make practical plans for scale and growth without taking on more liabilities than you can manage.
This ability to create effective, financially viable plans will help you develop other business strategies and manage the company with a more hands-on approach. At the same time, financial literacy and an understanding of plans make it much easier for you to deal with discrepancies between internal or external stakeholders.
3. Proper budgeting
Forecasting your business trends is ideal and this is only possible with budgeting. With the acquired financial knowledge, entrepreneurs can control their budget throughout the year to achieve a predetermined goal, whether it is to maximize profits and income or to minimize expenses.
What would you do if you were a supplier of holiday supplies but needed more stock before the holiday season started? You lost the opportunity. However, prior year performance will make it easier for you to build inventory levels in line with budget if you had a solid budget created at the beginning of the year.
A budget keeps your business on track and keeps things from getting out of hand. As an entrepreneur, you can find yourself drowning in debt and receivables if you fail to budget your expenses and income effectively, and therefore, you need to be financially literate.
4. Effective credit management
Most of the world’s economic oligarchies and even nations rely on debt to survive. Debt isn’t the cause of concern, it’s how it’s handled. This cannot be done without financial literacy of entrepreneurs.
As an entrepreneur, you need to manage your debts by using them for the following purposes:
- Working capital debts. Acquired loans to leverage business working capital and close receivables gaps.
- Capital loans. With equity loans, entrepreneurs can increase their business capital in the form of machinery, equipment, etc.
- Vehicle loans. The loans were mainly provided to employees for providing motor transport services or using the vehicle for commercial purposes.
- Credit cards. It’s an expense now, pay off a small loan later. It is the most common loan, but needs strict financial management.
- Mortgage loans. Loans usually appealed for building/house or personal use.
To be successful, the entrepreneur must use these debts for the exact purposes stated in the application. But entrepreneurs without financial literacy can destroy all this if they do not know how to use these funds.
5. Making well-informed decisions
Corporate governance is no longer a matter of guesswork. Instead, savvy business owners make sound decisions using DDDM (data-driven decision making). Thus, developing your financial knowledge enables you to make informed decisions and avoid relying too much on your gut.
As an entrepreneur, you make most of the decisions for your company. That means every decision you make will affect the overall performance of your business. A basic understanding of accounting principles can help you make better informed decisions.
How will this affect your profitability, for example, if you decide to take on a new customer and give them a discount? On what terms will you be able to secure them? How much of a risk would it be in terms of money, and how might it pay off later? Likewise, when should you bring in a new candidate to join your team? Adding one more salary is a big stretch on the company’s finances.
An entrepreneur who is financially literate and knows how to read income statements, balance sheets, cash flows and financial ratios will be better able to analyze the state of the company than one who is not and make informed decisions.
6. Ensure business growth and survival
Anyone running a business without financial tools cannot expect to be successful in the long run. Small successes are possible, but it will be difficult to sustain them long-term. When obstacles are not effectively addressed, startups often struggle with concerns like cash flow before failing and going out of business. However, due to their well-thought-out company plan, startups with competent accounting systems are more likely to thrive and overcome challenges.
By being a financially literate entrepreneur, you can properly budget, measure your success, and protect your company’s finances. In addition, you can reduce business costs, better control credit and make wise choices about where and how to use resources. Thus, sound financial judgment enables you to ensure the longevity of your business.
Therefore, an entrepreneur must have financial knowledge to climb the ladder of success without obstacles.