Proper finance management is one of the most critical facets of running a successful business. Too often, new entrepreneurs neglect to take their financial well-being seriously, and it’s not long before it affects their businesses.
Financial literacy is making informed decisions about financial options and responsibilities. By applying financial knowledge, you avoid costly mistakes and prepare a plan of action should any unexpected situations arise.
Here is a breakdown of fundamental aspects of financial literacy that any business owner should know if they want to keep their company afloat.
How do business loans work? It starts with the business owner getting their finances in order. The business owner needs to research their borrowing options and have a plan ready.
Once you have your plan together, the lending institution will decide based on the criteria included in your business plan. You must scrutinize the requirements of your lending institutions to ensure that they align with your business plan and financial situation.
For example, if you propose a working capital loan, your prospective lender will want to see proof of your current monthly sales and cash flow. Some lenders require collateral, which guarantees you will repay the loan. Collateral includes real estate, stocks, bonds, and business assets.
SBA loans, for example, are awarded to companies with sound financials and help purchase or expand real estate or machinery. SBA loans also give the owner access to a stable source of capital without the need for collateral.
Different types of loans have varying interest rates. Ensure you repay your loans in time because if you fall behind, your lender could end up foreclosing on your collateral.
A credit score is a number that represents your ability to repay any loan, including mortgages, car loans, and business financing. Lenders use credit bureaus to get information about how well a person pays off their bills.
Lenders look at your credit score before making a loan offer. A business owner with solid credit can get financial assistance from government agencies that provide loans to start-up businesses.
Businesses with excellent credit scores are more likely to be approved for loans or receive better terms than those with poor scores. Your credit score could also determine what interest rate you pay on any loan you may get.
Financial statements report your company’s financial health and are a valuable tool for identifying patterns in spending. The types of financial statements are the balance sheet, the income statement, and the cash flow statement.
The Balance Sheet shows the assets of a business, such as property and equipment, and the business’s liabilities, such as accounts payable. These items reflect your company’s financial condition at a given time.
The balance sheet is also known as a statement of position or state of affairs or position statement. A balance sheet’s goal is to show you how much cash you have to do business and what assets you own.
The income statement breaks down the revenues and expenses of a business over a set period. This statement aims to show how much money you made in a specific period and how much cash you have left over to operate your business.
The cash flow statement details your company’s cash at the end of each month or quarter. It shows what happens to your money when it’s not immediately available for other purposes, such as financing payroll or paying suppliers.
Having up-to-date technology means updating your computer systems, software, and websites for greater ease and efficiency. You should also use the best data aggregation tool for your financial activities.
When using technology to run your business, you need to be aware of cybersecurity issues and take precautionary measures to prevent unauthorized access or information breaches.
Outsourcing financial tasks
Outsourcing refers to hiring a third-party company to handle your finances. Outsourcing your financial tasks is an excellent way to save money when hiring an outside service provider to manage everything involved in the financial aspects of your business.
You will access professional knowledge and ideas to help you grow your business without breaking the bank. Different types of outsourced financial management include bookkeeping, accounting, and consulting.
Accounting educational resources
Educate yourself through different learning resources such as business finance blogs and articles. Some established companies provide educational tools to help employees acquire basic financial management skills.
Resources are available online to help you understand the basics of accounting. These resources can also offer helpful tips for reaching attainable financial goals. Introductory accounting courses are also available through virtually any college or university. Study accounting courses online without paying a fortune in tuition.
Before you go
Financial literacy is critical for all business owners. You can make informed decisions about your business by understanding the basics of financial statements, ratios, and cash flow. Financial literacy will help you avoid common pitfalls and make your business successful.