Money Matters: Financial Literacy for Small Businesses

By business.com editorial staff,
business.com writer
| Updated
Apr 06, 2020
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A surprising number of small business owners indicate that they are financially illiterate. The good news is that gaining literacy is easy.

  • Business owners of small companies and startups benefit from improving their financial literacy.
  • Financial literacy sources include business books, financial magazines, corporate podcasts and finance blogs.
  • Only choose financial literacy sources from proven experts with impressive business resumes.

Smaller businesses in the SOHO (small office/home office) category are very dependent on the skills and knowledge of their owners.

Unlike larger companies, where founders can bring in experts from multiple disciplines, the SOHO operator needs to be a "Renaissance man" (or woman), and know about everything from marketing to operations, product placement and design, and, of course, finance.

SOHO operators with no financial background are still expected to be financially literate enough to budget, do accounting and taxes, calculate price points, and project revenues and success rates well into the future to ensure continued success.

With these smaller companies, the line between personal finance and business finance is a thin one, with owners often relying on their credit and resources to make their businesses a success. What type of financial literacy do small business owners need to bring to the table? Does the ability to balance your personal checkbook make you financially literate enough to run a small business?

The importance of financial literacy for business owners

Very Americans are considered "financially literate," despite the proliferation of often very expensive seminars, courses, and books on the subject. 

This is not because we as small business people are incapable; on the contrary, most people have enough savvy to gain the literacy they need to effectively manage their small business finances without having to purchase the latest financial plan from some charismatic leader.

Financial literacy is important because it gives business owners the tools to manage their organizations effectively. Heed advice only from established financial experts with a proven track record of success.

Way to improve financial literacy

The easiest way to improve financial literacy is to start building your business library. Review and research the bestselling business books available on Amazon and other booksellers. Subscribe to finance newspapers and magazines. Listen to business podcasts and subscribe to financial newsletters and blogs.

Take the expensive courses if you must, but small business financial literacy can be achieved on your own with just a few simple, common-sense steps.

Perform due diligence before borrowing

If you need to borrow, don't jump at the first lender willing to write you a check, no matter how tempting. Compare terms, interest and fees from multiple lenders, using an online portal such as MoneyLend.net. Don't assume you won't qualify for the best rate; you never know unless you apply.

Understand your expenses before borrowing

Before applying for a loan, take time to truly understand your monthly expenses and make cutbacks wherever possible – you may find out you don't need a loan or that you need to borrow less than you expected!

Understand your debt

Debt doesn't have to be a bad thing, if you understand it, control it and use it for the right reasons. Are you still paying credit card bills for things you don't even remember using? Understand the details of each bill. What was it for? How much of your credit card bill is interest, and how much goes toward paying off the principal? A little knowledge goes a long way toward debt reduction.

Budgeting

Budgeting is the first step toward financial literacy. It doesn't have to be hard; it can be something as simple as a spreadsheet. At the end of every month, compare your actual spending to your written small business budget. Chances are, not everything aligns to the penny, but don't beat yourself up. Just understand where your money went, and make adjustments as you go along.

Understand your credit rating

For most small business owners, business loans and credit is based on their personal credit rating. Financial literacy means understanding yourself, and that also means understanding what others know (or think they know) about you.

Simply understanding cash flow – how money moves in and out of your business – will go a long way toward financial literacy, and for the most part, this is simply a matter of tracking. It doesn't take a CPA, and a simple spreadsheet, QuickBooks account or other small business tools will do the job nicely. 

The built-in reports can help you get an overview of what's going where, what months are more likely to bring in more revenue, and what an "average" month looks like – that is, if you have an "average" month.

Many small businesses, especially early stage ones, can have dramatic swings in income and expense from month to month, making it difficult to pinpoint where you're at.

Don't despair – part of financial literacy is being comfortable with the inevitable chaos of small business realities, and responding appropriately to unexpected circumstances.

business.com editorial staff
business.com editorial staff
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