5 Reasons Why Financial Literacy is Key for Entrepreneurs

Do you ever think what is financial literacy? Why it’s important for entrepreneurs? Do you’ve any financial skills? These are the questions that need to be answered in “yes” if you want to run successful entrepreneurship.

“Financial education is more valuable than money”

― Mac Duke The Strategist

We’re surrounded by the people who’re undertaking different kinds of employments to earn their livelihood. People are undertaking jobs, running different businesses, providing different services to the community to earn their livings.

I’d like to ask you a question;

What do you think about the entrepreneurs running businesses that are the same or different from each other? Not on the basis of what they’re offering but how they are offering.

I see them differently on the basis of their knowledge of finance. Yes, you can argue that entrepreneurs can have a lot of differences among them. You’re true. But, no matter, other differences they have or not, they can be differentiated either they’ve financial skills or they don’t.

What is meant by financial literacy

Financial literacy is the availability of the acumen or knowledge about the finances of the business. The financial skill set of entrepreneurs allows them to make a decision on the available financial information. It provides solid backing to their decisions about the business. Financial literacy is the package of skill set that enables the entrepreneurs to manage the business with skilled eyes.

Why it is important for entrepreneurs

In the 2019 CB Insights conducted a survey of the top 20 reasons why startups fail, they come out with 29 percent saying running out of money was the core reason for their failure. Further 18 percent had pricing, cost issues. It makes 47% of the people who failed to assess the financial aspects of their startups and failed.

We can easily review entrepreneurs who have to close their businesses by not following the business in a proper way. Their decisions might be impulsive and not rational in any way that led to the downfall of the startup.

As an entrepreneur, not only your business is on the stake but also the livelihood of people who are employed by the business is also dependent on your project.

The sole purpose of any startup is to earn a good market share plus remain in profit with constant growth. A financially skilled entrepreneur is more likely to make a decision that is wise and backed by financial principles. The probability of success is greater than otherwise.

I know few of you may say, there are millions of entrepreneurs who’re running their businesses without these kinds of skills, I’d say exceptions are always there. Further, we’ve to analyze whether they had achieved what they have to if they had applied financial literacy tools in their business, it’s a long debate.

“Never spend your money before you have it.”

– Thomas Jefferson, third president of the United States

We’ve seen around us that people don’t pay attention to their financial management in their daily lives that result in issues for them in the end.

• People around us who couldn’t make their credit card payments.

• People around us who couldn’t have sufficient savings from their earning.

• People around us who couldn’t service saving to live later part of their lives comfortably

• People around us couldn’t afford the education fees or healthcare bills.

All are good examples of bad financial management, people don’t have the financial literacy to stream their existing finances in a better way to come up with good results.

Benefits of being financially literate?

An entrepreneur who’s running a business must be aware of its health like any other thing which has an expiry date on it. If someone doesn’t know how to read the expiry date of the medicine, he’ll be in trouble for sure.

It’s the same case with financial literacy for the business if an entrepreneur doesn’t know about his business’s financial conditions, he’ll be going to face the trouble sooner or later.

1- It allows proper budgets

Forecasting about the business is something that needs to be addressed timely, it can’t be done without budgeting. A financially literate entrepreneur will be keeping an eye on his budget round the year to achieve their preset target whether these are profit, revenues, or expenses.

Imagine if you’re a festive supplier but you don’t have the supplies before the start of the season, what will you do? You’ve missed the opportunity.

However, if you had a proper budget prepared at the start of the year, it’ll be easy for you to build the inventory levels in line with the budget due to your previous year’s performance.

A budget enables you to keep a check on your business and won’t let things drift away. I’ve seen many entrepreneurs went deep into the receivables or debts without realizing or couldn’t properly manage their expenses that resulted in losses.

“We must consult our means rather than our wishes.”

― George Washington

2- It allows credit management

Most of the business empires or even the countries in the world are running on debts. I don’t say debt itself is something to worry about but it is how to manage the debt. It can’t be done without having the financial literacy of the entrepreneurs.

You need to manage your debts by using them for the same purposes you’re seeking those debts.

Working capital debts: These are the loans that a business acquires to run the working capital of the business or to bridge the receivables gaps.

Capital loan: These are used to increase the capital of your business in the shape of the addition of machinery etc.

Vehicle Loan: These loans are mainly availed to provide motor vehicles to your employees of the business or at times for commercial purposes as well.

Credit cards: Credit card is expense now-pay later kind of loan. It is very much common n the people, however, it is still a loan that needs financial management.

Mortgage loans: These loans are normally requested to acquire a building for personal use or at times for commercial purposes.

It’s the foremost duty of the entrepreneur if he wants to be successful to utilize these debts for the specific purposes it has been approved for. Because there was a certain need for them and it would’ve added value to the business.

But, an entrepreneur who doesn’t have sufficient financial literacy may ruin all this by making some international trips, nights in the hotels, sunbaths at the beaches, and go bankrupt.

“A person either disciplines his finances or his finances disciplines him.”

― Orrin Woodward

3- It allows analysis based decision making

An entrepreneur who’s a master is in financial literacy, who can properly read the income statements, balance sheets, cash flows, and financial ratios will be in a better position to make a proper analysis of the business conditions than otherwise.

Decision-making will be based on proper knowledge of the business, it’ll be based on proper footings to improve the business positions.

“You cannot make progress without making decisions.” Jim Rohn

4- It helps the business to grow

No one should expect to achieve success in the long run if you’re not running the business by applying financial tools. You can have small wins but in the long run, it’ll be difficult to keep on winning the short ones. Startups often face difficulties once not managed professionally, face issues like liquidity, and ultimately fails and cease to exist.

However, startups having professional accounting systems in place are more likely to survive and to face any adversities due to their well thought out business model.

5- It gives you the control

I’m a strong advocate of having financial literacy, it is true that you can control your business without having any financial knowledge even you’ll be doing it well, but is true? No.

Financial literacy allows you to oversee your business by reviewing the financial statements where your business is heading. It gives you ample time before it is too late to come up with the remedies. It is hard for the employees to damage your business internally once you are good at finances.

“You must gain control over your money or the lack of it will forever control you.” — Dave Ramsey

How to become financially literate

There are no limitations in today’s world if someone needs to improve, you will find multiple options available to you.

Books: It will be hard for the ones who don’t like to read books, however, they have to, if they want to improve their financial literacy to come to the need of the hour.

Take financial literacy Courses: There are different institutes that are offering financial literacy courses on campus, off-campus. In order to improve the knowledge, you’ve to register to free or paid financial literacy courses.

Financial management tool: There are multiple financial management tools available over the internet to improve the financial understanding of the business, use them frequently to learn them well.

Read financial newspapers and newsletters: Be disciplined in reading financial newspapers or newsletters to improve your skills. A regular read will often show you something relevant to your business.

Conclusion

Financial literacy lacks all around the globe, it’s something that needs to be acknowledged and efforts should be made to improve it. Startups tend to fail due to poor management of finances, mainly due to a lack of financial literacy.

Entrepreneurs can find countless benefits of financial literacy, few of them are discussed in the article.

It allows proper budgets: You’ve to go by the book of the budget in order to achieve the business targets which you set at the start of the year.

It allows credit management: Financial literacy allows the entrepreneurs to manage the business credits in a better way to make them useful for the business than ad additional liability.

It allows analysis based decision making: An entrepreneur who can not only review but understand the business’s financial reports, his analysis, and decision making will be reliable that’ll be backed by the proper reasoning.

It helps the business to grow: Most of the startups lose their way due to their failure to manage their finances, once it is done, there is a higher probability for the business to grow.

It gives you control of the business: It allows you to keep a grip on your business. If you are good at finances, you’ll be in a better position to decide about them.

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