Why every businessperson should learn to master the basics of financial management
As a business consultant I often tell starting entrepreneurs this:
“Don’t let your lack of financial knowledge stop you from pursuing your dreams…however, make sure you educate yourself in becoming financially literate so you can quickly have a handle on the financial perspective in running a business. The sooner the better.”
Not everyone who started or who is planning to start a business knows everything about finances. But most successful entrepreneurs I know had either a background in (basic) finance when they started or have found ways to become financially literate while developing and growing their business venture. To successfully run a company you cannot rely on your basic knowledge and experience in handling personal financial matters like managing your (wage) income, cancelling your bills or putting money aside into a savings account. When it comes to managing a business, financial literacy involves much more.
Financial literacy is defined as the ability and knowledge to understand the financial matters of a business, but also the matters of the financial world in general. It refers to the set of skills that allows an individual to make informed and effective business decisions through the understanding of finances.
And sure, I’ve argued many times with entrepreneurs who believe they should rather focus their efforts on being “entrepreneurial”, like developing the next cool product, conducting effective marketing campaigns or closing the next deal, while claiming that the finance matters of their company should be better left to accounting professionals. Even though I concur that it is not wrong to delegate certain financial tasks, which often result in time saving, I strongly advice entrepreneurs to be constantly aware of their company’s finances, in particular to possess the ability to interpret the financial data that their accountants generate for them.
As a business owner you are accountable for your company affairs meaning that you have to know enough about key finance terms, must be able to read financial statements and have to be capable to figure out whether your company is generating profit or if it is just making enough to break even. In short: when it comes to the funds generated by your company, you should be at the forefront and not at the sidelines.
Below I have summarized the most important benefits of being a financially literate entrepreneur:
Better financial analysis, decision-making and management
Probably one of the most important benefits of financial literacy is the ability to comprehend and analyze financial data, assess alternatives for actions to take, make informed choices and then execute and manage those decisions. Since money and finance touch almost every aspect of daily business operations, financial literacy offers the skills necessary to evaluate and direct decisions regarding the allocation of financial resources among a variety of competing opportunities with the goal of maximizing the value of the resources being managed.
Reporting to investors and lenders is easier
When managing a small or medium-sized company you will often have to deal with co-investors (business partners) and lenders (banks or private financiers). These stakeholders expect you to submit quarterly financial reports and annual financial statements in order to keep them informed about the financial status of the business. Your financial knowledge will surely support you in crafting comprehensive reports furnished with insightful analyses that your partners and lenders are longing for.
Planning ahead will be smoother
Besides analyzing and interpreting financial information to draw conclusions about the current health status of the company, financial literacy also assists you in planning ahead in the form of budgets and financial forecasts. The process of budgeting takes you away from your short-term, day-to-day management of the business and forces you to think longer-term. The budget basically provides you a quantitative expression of your proposed plan of action for a specified period. Financial forecasting on the other hand is the process of estimating future business performance (sales, costs and profits), which allows entrepreneurs to anticipate events before they occur. Forecasting is done periodically and is based on the latest expectations of what will happen over the coming periods.
Fulfillment of tax obligations
When it comes to tax obligations, entrepreneurs often leave it up to accountants to take care of monthly declarations and annual filings. However, as a business owner you should have some basic knowledge in taxation methods and principles, since you will be ultimately responsible for all tax matters of your company. Financial literacy will support you in understanding some elemental differences in financial accounting and tax accounting, in particular how revenues and profits are determined for tax reporting purposes.
Proper record keeping as required by the law
One final advantage of being financially literate is the ability to maintain business records according to accounting principles and guidelines and also consistent with legal standards. In many countries there are strict legal stipulations for certain financial documentation and administration procedures that businesses need to adhere to, such as personnel wage records, registry of changes in shareholders’ equity, records regarding intercompany loans and loans/advances between the company and shareholders.
Our course Fundamentals of Accounting & Finance, introduces participants to the basic principles of accounting and finance. During the course we discuss key accounting aspects, such as the role of ethics and accounting principles and participants will explore the process of analyzing business transactions and the preparation of elemental financial statements. Participants are also introduced to financial planning, including financial forecasting and budgeting.
The course is not only relevant for (starting) entrepreneurs, but also for managers, supervisors and staff from any function, and for anyone interested in mastering the basic principles of accounting & finance.
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