Marian Evans, General Manager at Elevate BC Ltd
Clumsiness around money is common. In the UK, many people prefer to talk about almost anything except money matters, including politics, health and relationships, according to a survey of 1,000 British respondents by Lowell. But a lack of financial literacy can prevent individuals from fulfilling their business potential.
Understanding money develops the skills, habits, and information needed to effectively stay on top of finances. Not only is it important for young people to understand their finances to become independent, but also if you want to do business, I would argue that financial literacy is critical.
As a business consultant with a background in financial services, I often have clients who are initially ashamed to admit that they are not completely comfortable with their finances, confident to question numbers or question management information. This is more common than you might think, and as a confidant of many leaders, I can assure you that you are not alone if you need support with your financial literacy.
It’s a good start to get to grips with the following terms:
• Savings and investments
• Credit and interest rates
For me, there are few things more frustrating than missed business opportunities. But equally, while you need to be smart enough to take calculated risks as you grow a business, you also need to have a good foundation from which to take those calculated risks. About 20% of small businesses fail in their first year, 50% fail within five years and 33% make it to 10 years and beyond. Time and again, a common reason why companies fail is due to poor financial management. In my experience, many fail due to lack of financing or working capital, overestimation of their financial prognosis, and poor financial understanding and management.
Steps to Improve Your Financial Literacy
It pays to make friends with your finances, keep them close, and talk about them often. You can’t manage what you don’t control, and if you don’t understand your numbers, you don’t understand your business. So here are some of my tips to improve your financial literacy:
1. Extinguish your ego and avoid the trap of turnover vanity. Focus on key metrics such as gross margin, operating margin, inventory, and credit and debtor days to enable you to control your cash flow.
2. Don’t bury your head in the sand. Give your financier (banker or investors) early warning signs. Don’t wait until the last hour.
3. Exercise a healthy financial fitness and build that muscle with consistent habits, such as daily or weekly assessments, so you can spot problems early and take action.
4. Don’t be afraid to talk openly and with professionals about your company finances on a regular basis. Find a confidential advisor; they are worth their weight in gold.
5. Don’t be too risk averse to looking for investments to grow. Just do it with your eyes open.
6. Don’t skimp on finance staff. If you can’t do it yourself, hire someone who can. Even if you run a part-time business, this is the key to longevity and proven success.
7. Use free systems and support online. Some solutions offer customer relationship management systems and financial budget spreadsheets.
8. Improve your financial hygiene. Keep things clean, clear and up to date and make sure your accountant stays up to date.
9. Study a simple business financial management course to understand the language of your finance director and financial partners. Or find a tutor who is credible and qualified.
10. Make decisions for the financial life of the company, rather than for people’s enjoyment.
Why understanding your company’s finances is so important
Figures show that the growth of ‘being your own boss’ is not slowing down anytime soon. According to the University of London“Over 400,000 start-ups were formed in 2020 in the UK alone.” The US Bureau of Labor Statistics reported that “2020 was a record year for new business creation.” However, coupled with the rise of becoming your own boss, there is a rise in insolvent companies.
The best business leaders are well aware of their company’s numbers and can confidently state them without checking. They make it their primary job to know that it takes a lot of money to run day-to-day operations, including financing payroll, overheads (fixed or varied) rent, and utilities. Having robust financial controls ensures suppliers are paid on time and leaders know how much it takes to invest in the business.
In my experience, it’s often owners who are less aware of how much revenue is generated by selling products and services and the value of the returns needed for people’s salaries. I’ve also seen some companies go too far by believing their own hype in a high-growth and risky strategy. With personal business press, media and pitches to investors, they end up failing to meet the financial demands when a deeper dive into the management accounts is needed.
Owners can lose sight of finances, and often an entrepreneur has the vision and leadership skills needed to run the business, but they have less interest in finances. To some extent, this risk can be navigated as a business grows if the owner has enough capital to deploy that expertise (that is, when the business grows to the point where it needs a Chief Financial Officer, for example). This doesn’t mean founders can wash their hands with finances, but it does mean there’s a check-and-balance system.
Making friends with your finances
The red flags that a business is failing is often poor cash flow management, which is often fueled by over-reliance on a few large customers and an unclear business strategy. But even if you don’t succeed at first, remember that many successful business leaders have experienced failures, including people like Steve Jobs, Reed Hastings and Walt Disney.
I hope this article inspires you to make friends with your business finances so you can realize your true potential. My advice is to stay sober and always build on a solid foundation.