Financial literacy is essential for your personal financial health and even more crucial for the financial health of your small business. Being a small business owner comes with many responsibilities, one of which is maintaining the company's finances and helping keep it on track toward a solid financial future.
Whether you are just starting to explore financial literacy as a business owner or are looking to freshen up your skills, below you will find areas of financial literacy critical to business owners, as well as tips for improving your financial literacy.
Area of Financial Literacy All Small Business Owners Need to Know
All small business owners should focus on four key areas of financial literacy to help better understand the business's financial situation and ways to fix it if needed.
Accounting
Every business owner should have a basic understanding of bookkeeping, even if there’s a dedicated bookkeeper on the payroll. Accurate record-keeping will save a lot of time and headaches and provide an accurate picture of the business's financial state.1
Taxes
As a small business owner, staying on top of tax obligations is critical. Failing to understand what taxes you are responsible for and when they are due will lead to penalties and late fees that can quickly add to costly expenses.1
Financial Reports
Constantly monitoring and understanding your company's financial reports is also critical. Your company's P&L (Profits and Losses) will paint a picture of your business's profitability and how it generates most of its income. Your balance sheet will provide an accurate picture of your assets and liabilities to see your company's overall value.1
Profit and Financial Projections
Knowing your company's current performance is crucial, but understanding how they are projected to perform is equally essential. By learning how to create and use financial projections, you can update your business plan, seek to attract investors, map out potential growth, develop new business goals, and much more.1
Tips For Improving Your Financial Literacy
Ready to get started? Below are a few tips to help you along the way.
- Learn your business financial ratios: It is essential to know the key financial ratios that affect your business, such as debt-to-equity and gross profit margin.
- Know how to calculate ROI: Growing and investing in your company's future is exciting but ensuring that that investment will pay off is vital. Learn how to calculate your return on investment for your major expansions and purchases to see if they make fiscal sense for your company.
- Understand cash flow: To continue to move forward in business, you need a solid understanding of cash flow. This is knowing how to track the flow of money in and out of your business to ensure you have enough to cover your expenses and obligations.2
Important Disclosures:
This material was created for educational and informational purposes only and is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes:
1 Basics of Financial Literacy that Every Small Business Owner Needs, Rhode Island Small Business Development Center, https://web.uri.edu/risbdc/basics-of-financial-literacy-that-every-small-business-owner-needs/
2 The Benefits Of Financial Literacy For Business Owners, Forbes, https://www.forbes.com/sites/melissahouston/2023/02/28/the-benefits-of-financial-literacy-for-business-owners/?sh=d4d9bdd77015
Sources
https://web.uri.edu/risbdc/basics-of-financial-literacy-that-every-small-business-owner-needs/
https://www.forbes.com/sites/melissahouston/2023/02/28/the-benefits-of-financial-literacy-for-business-owners/?sh=d4d9bdd77015
