Financial literacy is a term that has been used quite a bit since the financial crisis, which has left an indelible mark on the millennial generation that is rapidly becoming the largest group in the workforce.
Understanding the ramifications of financial literacy and personal finance are clearly important themes, but another aspect of financial literacy is often left unexamined. Small and medium size businesses form the backbone of the national economy and the economy in New Jersey. Either as stand-alone entities operating across the state, or as businesses that are embedded into supply and support chains for the numerous multinationals located in the state, small and medium size businesses are an important economic force. The harsh reality is, however, that most new businesses fail within a few years of opening, and a primary reason for their failure is a lack working capital and funding. Financial literacy is undeniably linked to business strategy and business objectives – if entrepreneurs and business owners do not truly understand the financial ins and outs of business, they are much less likely to successfully achieve stated objectives.
To do what any business owner wants to do, to focus on growing the business and providing top notch quality to customers, the money has to be right. Getting the money right, however, is not something that will just take care of itself; it requires work and an understanding of what needs to be done. The impact of financial literacy on your business is not an abstract concept from a book. Obviously, every business and every market is different, but there are several concepts and tactics that can be used to make sure that the business has its money in the right place. Working with a financial professional familiar with the business is a great start, but the driving force must be the entrepreneur or business owner.
The first thing to understand, as it connects financial literacy and business strategy, is that income is not the same as cash flow. Income is an accounting concept, and as a CPA, I know that there are specific ways to differentiate income from the cash flows entering and exiting the business. For a business, cash flows are the most important financial metric that should be tracked – without being literate in cash flow, the business will not be able to grow and succeed. Since virtually everyone has a smartphone, and since with every smartphone, there are any number of apps, this is an opportunity to leverage technology for productivity. Snap-chatting is certainly important, but there are apps and tools that you can and should put on your phone and tablet to manage business. Many are available free of charge, and there are apps to help small business owners track everything from rental payments to inventory levels – and there is no reason to not leverage these tools.
The second thing to understand, and not reliant on technology, is that any business must have a financing plan in place, and this links directly back to the connection between strategy and financial literacy. Every new idea, product, website, app build-out, or services in new markets requires funding to support these initiatives. This is where financial literacy, business planning and strategy really are meshed together; without understanding the financing resources and tools available to the organization, the leaders of the organization will not be able to execute their goals and plans. There are obviously financing options that include selling ownership stakes in the business, and borrowing money, but there are new options starting to influence the business landscape. Crowdfunding, and raising capital on Kickstarter are just two of the high-profile options that have recently emerged as viable options. Understanding the opportunities and implications they have for the organization, both strategically and financially, are critical for entrepreneurs and business owners to understand.
Third, and lastly, is the importance for business owners to have the confidence and ability to articulate the financing requirements and objectives for the business. The ability to articulate and explain the driving needs for financing, and financial implications of proposed business objectives will make doing business with external partners simpler. In addition to explaining the goals and financial framework of the business, the objective presentation of business goals, capital needs, and the uses of that capital will make obtaining that capital easier. Instead of feeling like the contestants on Shark Tank, often caught unaware of just how much capital they truly need to fund their business goals, entrepreneurs with a firm grasp of both their business strategy and financial literacy will be in a strong position to negotiate and obtain financing.
Financial literacy is important, good for your personal finances, good for business, and the tools are available to help any entrepreneur achieve improved business success. Resources include CPAs, certified financial professionals, and freely created and vetted resources such as //www.360financialliteracy.org/.
The time to start is today, and your business will do better for it.