The Importance of Financial Literacy in Setting Up a Business
“The Importance of Financial Literacy in Setting up a Business” by George Relish
Are you confident with your financial management skills? If not, then you are not alone. Unfortunately, this is one of the most widespread problems our population faces. It means that they cannot effectively manage, save, invest their finances.
According to recent statistics, up to 88% of British adults don’t feel confident in their financial literacy.
Zooming in on London, 55% admitted experiencing financial stress.
As for more specific topics, 91% claimed they lacked knowledge about investments, 90% about retirement, and 88% about ISAs.
You might be wondering why is financial literacy important if you’re not in the financial industry anyway?
There are numerous reasons why you should refine your money management skills. We will share some of those crucial points with you in this article. Let’s get started!
6 Ways Financially Literacy Can Help in Setting Up Your Business
Create Financial Forecasts
The main objective of a business is to earn revenue. The challenge when you’re just setting up your business, though, is you have no established data yet to check how profitable it really is.
The only option you have to obtain this information is to create a financial forecast. It will then help you formulate a reliable financial plan that can give your business direction, especially during the most critical period of your business一its first year.
You won’t create informed financial forecasts and plans without enough research and adequate financial literacy, though.
Understand Financial Statements
Financial literacy will also help you understand your financial statements. These include your balance sheets, income, and cash flow statements.
Balance sheets can reflect the current state of your business. For example, income statements show recent revenue within a certain period. Finally, cash flow statements aim to show how money flows both in and out of your business.
Make More Informed Decisions
Business owners need to make quick decisions frequently. The problem is, certainty is a privilege we don’t always have. Strong financial literacy can bridge the gap. It can help us determine the financial implications of each move and even prepare for the potential consequences in advance.
Here’s an extra tip: You don’t need to process volumes of financial data independently. There are numerous digital platforms equipped with AI and data analysis features specifically designed to help business owners like you in day-to-day decisions, whether it’s deciding which inventory to replenish or the product to phase out.
You will still need a basic understanding of the financial mechanics of your business to make the most out of these tools, though.
Hone Your Negotiation Skills
There are a lot of negotiations required when you’re just launching your business. Negotiation is a business practice performed at every turn, from determining salaries, benefits, and shares.
Did you know financial literacy is essential to business negotiations as well? At the very least, it will help you discern the potential benefits and ramifications of the matters being negotiated.
It will keep you from signing into contracts blindly and aid in finding the middle ground that works in the interest of your business and—hopefully—for all the parties involved.
Strategise a Risk Management Plan
Not even the best financial experts and researchers would have predicted the onset of the current global health crisis.
However, some were still quick to adapt. These were the businesses equipped with a reliable risk management plan for any situation, whether it’s a publicity scandal, a natural disaster, or anything in between.
It is impossible to develop a fool-proof strategy without having a solid understanding of finances, though. So how are you going to make rational projections? How will you discern the right financial steps to minimize loss and prevent bankruptcy? How are you going to establish the safety nets that might just save your business when the tidal waves of economic distraught come?
Become Financially Efficient
Finally, having strong financial literacy skills simply makes you more efficient in managing your business. It can impact your daily operations, influence hiring decisions, and help determine the best marketing campaigns.
It can help you see the profitable routes better and keep you ahead of the competition. Indeed, it’s an essential skill if you want to become a more competent business owner.
To Sum Up
Financial literacy is more than just knowing how to spend your money wisely. Instead, it is a complex skill that involves understanding financial concepts, terms, documents, and strategies.
You don’t have to be a financial expert to launch a business. However, having a strong understanding of basic financial concepts is needed if you wish your business to succeed.
Financial literacy can help in creating accurate financial forecasts, support your decision-making and negotiations, craft fool-proof risk management plans, and just make you a better business owner in general.
There really is no reason to neglect to hone this skill. After all, we live in a digital age where many educational references are free and accessible in just a few clicks.