Article:

The 4 Critical Components of Financial Literacy

27 May 2020

Angela Edwards , Audit, Assurance & Advisory Partner |

Are you new to business ownership or about to launch your very first business venture? Even though you might be reasonably proficient at managing your personal finances, being proficient in your business’s finances can be a challenge. While there are tools that streamline finance processes and quality business advisers to provide professional advice, financial literacy is essential to ensuring business success in the long term.

There are several direct benefits to learning the foundations of financial literacy, including improving your ability to make better-informed business decisions and boosting your confidence. So, how do you begin this journey? The team at BDO Kerikeri have condensed it into four simple components, outlined below.

 

1. Learning the language

A good place to start is to learn the language of business finance. Invest some time into learning basic, everyday financial terminology. Know the difference between “gross” profit and “net” profit, and which is the more important metric of the two. Seek some clarification and instruction around your business’s profit & loss and balance sheets, and the relationship between profit and cashflow. Once you’ve learned the basic terminology, you will have a better understanding of your financial data.

 

2. Getting up-to-date data

Next, ensure that your financial data is kept as current as possible. Paper-based spreadsheets are now more or less obsolete and pose too many risks for your business. From day one, collate your data onto one of the many excellent cloud-based accounting software platforms on offer, such as Xero. You will save time as the information can be accessed anytime, anywhere, and on any device. You can also generate key financial reports instantly and easily.

 

3. Understanding your financial reports

Financial reports are the dashboard of your business. These numbers paint an accurate picture of your business’s performance, provided they are kept up to date. So, it is crucial that you learn your way around these fundamental reports. Remember, with a good understanding of your financial statements, you can make more informed, strategic decisions about your business.

Your financial reports will also help you familiarise yourself with how cashflow works (how money moves in and out of your business) and boost your financial literacy. Again, your accounting software will be your greatest enabler.

 

4. Working to a budget

Once you understand what your financial reports are saying, the road ahead won’t look so daunting and you can get started creating a budget for your business. First, understand where your business currently stands financially, compared to where you want it to be. Focus on delivering regular monthly profits simply by achieving revenue targets and keeping a cap on operating expenses.

With a proper budget in place, you have an action plan for driving your business forward.

 

Get professional business advice from leading local experts

For many new business owners, getting a solid handle on business finances can certainly be a major challenge at first. Fortunately, there are a few steps, in addition to the ones above, that can help you succeed. These include performing due diligence before borrowing funds as well as understanding your monthly expenses before borrowing, understanding and managing any debt, comparing your actual sending to your planned budget, and understanding your credit rating.

 

BDO Kerikeri provides local support to businesses of all sizes in the area through professional accounting advisory services. Additionally, the team hosts Walk in Wednesdays for Xero users who want to make the most out of the software. For more information and advice, don’t hesitate to get in touch with a BDO office near you.