As a Business Owner, Why Should You Care About Financial Literacy?
As an entrepreneur, much of the success your company sees is a primary outcome of your skill set and resources. Although you will work to hire the right talent onto your team, it will be essential that you possess knowledge about all operations of your business, especially in finances. Knowing that you should be a jack-of-all-trades can be intimidating; however, there are simple things you can do today to become a smarter business owner.
Remember it is not essential to have a business degree or become a CPA to be successful in managing your business. But what you should acquire is enough knowledge to communicate intelligently with your accountants and finance teams in order to get your business off the ground and running.
Not only will becoming financially literate help you to start your business, but the long-term health and longevity of your company depends on your financial literacy.
What Financial Knowledge Should You Have?
Your business could offer both a great product and a good customer experience. However, without a proper understanding of finances, your business could be in trouble. Below are a few topics you should be financially literate in.
1. Product Line Profitability
Product line profitability is a metric used to calculate the profit you see on a product minus the expense it cost to produce that product. Understanding how much each of your products produces in profit is critical to your business’ success. If you continue to pour money into a product that isn’t successful, there could be long term consequences. Fortunately, understanding how to calculate and keep up with product line profitability is simple.
2. Cash Flow Statements
A cash flow statement summarizes the amount of money coming into your business and the amount of money that leaves your business. Not only is a cash flow statement mandatory to include in your company’s financial reports, but it also helps you to understand how well your company manages its money. You might learn that an excessive amount of money is being used in your shipping process when you know there’s a smarter alternative. Keeping up with your cash flow will help to make you a smarter business owner.
3. Balance Sheet
A balance sheet summarizes the financial balances of an organization, including information about a company’s assets, its liabilities, and shareholder equity. This sheet is used in conjunction with a cash flow statement and an income statement (as described below) to have a good understanding of the financial health of your business.
4. Income Statement/Profit & Loss Statement
An income statement describes the total costs, revenue, and expenses your business incurs during a specified period of time. An income statement is usually created each quarter, or at the very least, every year. This statement describes a company’s ability to actually generate profit. Knowing whether or not your business is profitable, or whether it is projected to be profitable, will help you make necessary adjustments to see the success you are looking for. Again, having an understanding of this sheet in addition to the above sheets will help you to be a more financially literate business owner.
Remember, it is okay to ask your accountant or financial advisor questions when you are unfamiliar or uncertain with a topic. The process to becoming financially literate does not happen overnight, and the more you can learn about the financial structure of your business, the more likely your business will continue to see scalable success.
If you are struggling to find answers to your questions, Pillar One can help organize, manage and analyze your financial information to help you maintain more focus on your business. Schedule an appointment today to start your journey to financial literacy.