How Being Financially Literate Can Help You Run a Business

The average college student graduates with little to no understanding of how to handle their personal finances. Some of these students go on to own their own businesses. It is a tricky situation. Many entrepreneurs are of a creative disposition, while financial skills favor the more analytically minded.

Financial literacy

photo credit: Andrea Piacquadio / Pexels

You don’t need complete mastery to develop adequate financial skills for running a business. You do need to be able to:

  • Understand your own finances without relying completely on a third party
  • Make informed decisions that will improve the long term health of your business

The more you know, the better positioned you will be to strategize and grow. In this article, we take a look at several important ways you can benefit from more financial literacy. We also examine how to develop and foster these skills.

What is Financial Literacy?

Financial literacy is a sweeping phrase that describes all things having to do with finance. At the business level, it could mean knowing enough about finance to set a budget, manage finance-related software, and hold a general understanding of how short-term financial decisions have long-term impacts.

You don’t need to be a professor of finance to successfully run a business. However, you do need to understand enough to make the right decisions, and not depend exclusively on others for important money-related insights.

Keep the Big Picture in Mind

Financial literacy helps business owners keep the big picture in mind. Instead of getting ingrained in the day-to-day, a financially literate business owner can act on valuable insights into how a decision today might be impactful ten months down the line.

This is particularly impactful when it comes to making growth decisions. How long will X take to pay off? What will our profit margins be as we finance it? What will our profit margins be after we have finished paying for it?

Understanding the long-term impacts of financial decisions takes some of the guesswork out of business strategy. It can also add a degree of excitement and motivation to daily operations. Knowing that you are working towards something bigger can help drive you in the early stages of your business.

Forming a Smart Budget

Financial literacy also helps businesses budget wisely. This could mean developing a budget that accommodates not just ordinary time, but also one that has contingencies in place for growing pains, potential future investments, and slow periods.

Without some financial awareness, forming a budget can be a difficult process that is often laden with costly errors. The more you know, the better positioned you will be to make budgeting choices that benefit your business now, and in the future.

Improved Negotiation

Financial awareness also improves your ability to employ educated negotiation tactics. For people looking for a job, this might mean negotiating your salary better. For people who are running their own business, it could mean talking to vendors or making informed offers to potential hires.

Without financial literacy, it is easy to get taken advantage of. Similarly, it’s also easy to lose out on great potential employees because you didn’t know how to offer them what they were worth.

It Starts at an Early Age

If you’re reading this article, it probably means that you aren’t an eight-year-old child with years of financial literacy skills ahead of you. You might have one though. It’s important to keep in mind that financial skills should be developed at an early age.

Your kids don’t need to be able to do your taxes for you. They should understand the basics of developing a budget. Consider encouraging your children to save for specific things they want. A game, a toy, a trip to the zoo.

You can even introduce more complicated subjects, like compound interest, using metaphors that their young minds can understand. Professor Jaimie Peters explains how to do this.

“The concept of compound interest is the powerful key that kids hold – they have so much more time to reap the benefits of compound interest. The “Magic Penny” – the game where you ask if a person would like $10,000,000 or a penny today, double that to two pennies tomorrow, double that to four pennies in two days… etc… for a month – is a fun way to show how quickly things can compound (hint, as long as it is not February – take the penny). Then talk about what that means for retirement.”

Children are in a great position to benefit from financial literacy. Start them young, and allow them to enjoy a future full of options.

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