Business
The Importance of Financial Literacy as a Business Leader
Published : 2 months ago, on
Operational costs? Assets and liabilities? Cashflow, labour costs and gross margin? If you are a business leader or owner and are puzzling over these terms, there may be room to improve your financial literacy skills.
Today, business leaders and owners must possess a diverse range of skills to survive the ever-changing landscape of business, and financial literacy is a must to achieve success.
Studying an MBA, business degree, Graduate Diploma in Business Administration or other similar courses can help you gain the vital knowledge you need to understand financial terminology, but if schooling is not currently an option, we’ve got you. Read on to discover what financial literacy is, why it is important in business, and strategies you can adopt to improve your own financial literacy.
What is financial literacy?
Financial literacy is a skill that enables business owners and leaders to have a thorough understanding of financial matters to make informed decisions relating to money.
From budgeting to financial planning, financial literacy allows business leaders to plan for a more secure financial future for the company. This skill, however, must extend beyond the basics such as identifying KPIs or managing a balance sheet and instead encompass knowledge around understanding interest, risk management and financial planning. These skills can then be utilised strategically to ensure growth and sustainability.
Why financial literacy is important in business
Financial literacy is important in business for several reasons.
Offers protection against scams and fraud
Financial scammers may target businesses and can have a significant, negative impact on their finances.
Business leaders who understand what a scam may look like or what the most current ploys are have the ability to recognise early warning signs and take measures and action against scammers.
Leaders will also have a more thorough understanding of preventative and security measures to put in place to protect a business and protect its customers.
Allows for better investment choices
Understanding finances will allow a business owner or leader to diversify investments and project potential returns to grow or innovate a business.
Being financially literate would allow a person to make more informed decisions surrounding short-term gains and long-term growth that better align with the overall business strategy.
Improve customer and investor confidence
Customers and investors are more likely to trust a business leader with a higher degree of financial literacy than one without.
A leader who understands finance is more likely to make sound decisions that will help a business start, survive and succeed, and a savvy investor will easily pick up on this.
Provide more leverage for negotiations
Businesses often require the negotiation of contracts, deals and partnerships.
Good financial literacy will allow a leader to navigate and understand the impact agreements or contracts may have on the business, negotiate better terms that may be more beneficial, or know when to walk away from a bad deal.
Strategies to improve financial literacy
There are several ways you can improve your financial literacy.
Understand business financial statements
Financial statements are written records that relate to the financial activity of a business. These records may include a balance sheet which lists assets and liabilities, and an income statement which shows your business expenses and revenue.
By understanding these documents, businesses are more likely to identify what areas they are doing well in, and which areas need improvement.
Create easy-to-manage systems
Having effective systems in place to manage the creation of invoices, payment reminders for customers, scheduling payment transfers, paying bills and completing tax-related duties is an important part of simplifying and reducing financial administration errors.
Automating this via business or accounting software such as MYOB is an easy way to manage all these tasks from a single source of truth.
Understand the impact of taxes
Having a solid grasp of the tax regulations relating to your industry and business size is important in order to minimise your tax burden, avoid penalties and optimise your business spending to save money on taxes.
Tax laws and regulations are always changing, and there are often business tax offsets and instant asset write-offs that can help reduce tax bills. Stay up to date by reviewing the Australian Taxation Office website or engaging with your accountant on a regular basis to ensure you are maximising opportunities relating to tax.
Know how to calculate ROI
Understanding how to calculate return on investment (ROI) is another important metric to have a solid grasp of.
ROI may be calculated in many different ways, but in its simplest form, it compares the amount of money invested against the amount of money earned. By understanding how to calculate ROI, you can assess whether an investment is worth making.
Improve your cashflow
Cashflow refers to payments made into or out of a business.
If a business is suffering from poor cashflow it may be unable to pay employees, contractors or invoices. In extreme circumstances, it may result in business closure. To avoid this, it is important to learn how to maintain a positive cashflow by closely monitoring cashflow and by making smart financial decisions that ensure a consistent stream of money is pointed inwards.
Make decisions based on data
Being data-driven when making decisions is one of the most important ways to become financially literate.
Relying on data ensures decisions are informed, and shows others that are based on factual insights rather than guesses. Data-driven decisions are likely to be more accurate and can help you steer towards smart decisions and away from poor choices.
The importance of financial literacy for business leaders cannot be underestimated – it is essential for businesses to grow and succeed. A good understanding of financials will allow business leaders and owners to make intelligent, informed decisions and give them an edge over competitors.
Set yourself up for success now and improve your financial literacy today.
