A surprising number of small business owners indicate that they are financially illiterate. The good news is that gaining literacy is easy.
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.
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With these smaller companies, the line between personal finance and business finance is a thin one, with owners often relying on their own personal 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?
According to a recent infographic on financial literacy, only about a third of 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.
Intuit also recently published a study of small business owners with similar results, indicating that 40 percent of small business owners say they are financially illiterate – yet 81 percent handle their business' finances themselves. There is an obvious gap – but it is not insurmountable. 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 actually goes towards paying off the principal? A little knowledge goes a long way towards debt reduction.
Even though less than a third of us actually do it, it goes without saying that budgeting is the first step towards financial literacy. It doesn’t have to be hard, and 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.
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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 towards 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 tool 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 really 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.