First Midwest BankFirst Midwest Bank logoArrow DownIcon of an arrow pointing downwardsArrow LeftIcon of an arrow pointing to the leftArrow RightIcon of an arrow pointing to the rightArrow UpIcon of an arrow pointing upwardsBank IconIcon of a bank buildingCheck IconIcon of a bank checkCheckmark IconIcon of a checkmarkCredit-Card IconIcon of a credit-cardFunds IconIcon of hands holding a bag of moneyAlert IconIcon of an exclaimation markIdea IconIcon of a bright light bulbKey IconIcon of a keyLock IconIcon of a padlockMail IconIcon of an envelopeMobile Banking IconIcon of a mobile phone with a dollar sign in a speech bubbleMoney in Home IconIcon of a dollar sign inside of a housePhone IconIcon of a phone handsetPlanning IconIcon of a compassReload IconIcon of two arrows pointing head to tail in a circleSearch IconIcon of a magnifying glassFacebook IconIcon of the Facebook logoLinkedIn IconIcon of the LinkedIn LogoXX Symbol, typically used to close a menu
FDIC-Insured - Backed by the full faith and credit of the U.S. Government
Startup Business Employees Working At The Office
Get Insights

Get monthly ideas delivered right to your inbox.

Subscribe for Insights

For Your Small Business Melissa Houston April 14, 2023

The Benefits of Financial Literacy for Business Owners

As a business owner, it is essential to understand the basics of financial literacy. Being financially literate can help you make better decisions when managing your finances and give you an edge when competing with other businesses.

Financial literacy is a potent tool for business owners, granting them financial freedom and countless opportunities. Being financially literate means having a thorough understanding of financial matters.

From budgeting to financial planning, business owners can use financial literacy to make better decisions about their money and plan for a more secure financial future. Being savvy with funds also provides financial stability, allowing business owners to plan and stay one step ahead of their competition.

Knowing how to make smart financial decisions frees up resources, which get put towards growing the business. Whether through sound investing or savvy budgeting, financial literacy is the key that unlocks more significant opportunities for those running businesses.

Know your numbers

A firm grasp on all aspects of your finances, from cash flow to taxes, is essential. Knowing your numbers means taking stock of all income and expenditures related to running the business and understanding the basics of taxes. Use this information to create accurate budget plans and ensure the company stays financially on track. Understanding these numbers helps identify wasted money or potential long-term investments that could benefit the business.

Create systems that work for you

Having effective systems in place is key when managing finances. This includes creating invoices and payment reminders for customers, setting up regular transfers into savings accounts, and finding ways to automate tasks such as paying bills and filing taxes. Automation saves time and reduces any potential errors that could occur if done manually.

Here are some ways to improve your business financial literacy:

1. Understand your business's financial statements

The first step to improving financial literacy is understanding your business's financial statements. These statements include the balance sheet, which lists your business's assets and liabilities, and the income statement, which shows your business's revenue and expenses. By understanding these statements, you'll be able to identify areas where your business is doing well and areas where it could improve.

2. Know your business's key financial ratios

Another critical aspect of business financial literacy is knowing your business's key financial ratios. These ratios include the debt-to-equity ratio, which measures how much debt your business has compared to its equity, and the gross profit margin, which measures how much profit your business makes after accounting for the cost of goods sold. Understanding these ratios, you can better assess your business's financial health.

3. Understand how to read a credit report

If your business is looking to take out a loan or obtain credit from suppliers, it's vital that you understand how to read a credit report. A credit report is a document that contains information about your business's credit history, including any late payments or defaults on loans. By understanding how to read a credit report, you can better assess your business's risk of defaulting on a loan.

4. Understand how to calculate ROI

Another important metric for businesses is ROI (return on investment). This metric measures profitability by comparing the amount of money invested to the amount earned. By understanding how to calculate ROI, you can better assess whether an investment is worth making for your business.

5. Have a solid understanding of cash flow

For a business to be successful, it needs to have a solid understanding of cash flow. Cash flow is the movement of money into and out of business. Companies must track their cash flow to ensure they have enough money to meet their obligations.

6. Understand taxes and how they impact your business

No matter what type of business you have, it's essential that you have a solid understanding of taxes and how they impact your business. There are many different types of taxes that companies are required to pay, such as income taxes, property taxes, and payroll taxes.

The bottom line is that financial literacy is essential for any business owner looking to grow their company sustainably. A good understanding of financials allows you to make informed decisions when managing your finances and gives you an edge when competing with other businesses.

By knowing your numbers, creating systems that work for you, and understanding the different financing options available, you will be well on your way toward becoming financially literate! With this knowledge, you can set yourself up for success now and in the future.

 

This article was written by Melissa Houston from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

Subscribe for Insights

Subscribe