Financial literacy: how important is it for entrepreneurs?

calculator on a desk, with a globe in the background

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calculator on a desk, with a globe in the background

We’ve previously looked at how accountants can use their strategic and technical expertise to go on to develop careers as highly successful entrepreneurs.

This week, we’re talking about just how useful accountancy knowledge can be to any entrepreneur. In fact, it can be crucial for founders in the early days of a business, who are still trying to establish a framework for the survival and growth of their enterprise.

Getting Established

No matter the business, most founders - particularly in the early days of their company - are focused on attracting and retaining those all-important clients and customers.

And it’s not just the sales and customer management - at a company’s early stages, the founder can end up doing a lot of the work to deliver the finished product to clients too, particularly in knowledge or skills based industries.

In the meantime, who’s balancing the books and managing the  business’s finances? Without a full-time accountant on staff, it can be hard to do anything more than just the bare minimum in terms of financial analysis.

Control

A financially literate business owner is more likely to be fully in control of their business. Gaining an understanding of what balance sheets and profit and loss statements mean provides a clear view of the financial state of your enterprise and subsequently facilitates smarter business decisions.

As a small business owner you don’t have to run all of the financial side of things, but gaining a degree of financial acumen means that you will be able to manage some of the business’s finances, and in the process give yourself the best chance of building a business that can thrive.

Engaging with the basics of accountancy can prepare you for a number of the challenges that you will inevitably encounter on your journey.

Scalability

All entrepreneurs need adequate financing to launch and subsequently grow their businesses. Access to loans or credit lines is a key factor in the process of expansion for small enterprises.

When the time comes to talk to private equity firms, banks or investors - all of whom could potentially become stakeholders in a growing business - the ability to be able to talk the talk (financially speaking) will undoubtedly prove to be invaluable.

Understanding the fundamentals of the financial tools that enable businesses to operate successfully helps entrepreneurs not only with formulating their overall strategy and balancing long-term investment with quarterly budgetary decisions, but also with staying on top of nitty-gritty details like customers who haven’t paid up, suppliers who have billed too much, or numbers that used to be black starting to slip into the red.

Every year, thousands of entrepreneurs set up and establish small businesses. The real challenge facing these entrepreneurs is to subsequently gain scale. All small businesses need to grow profitably in order to succeed. The ability to scale a business in a profitable and sustainable way requires financial literacy.

Financial literacy enables entrepreneurs to take responsibility for every dollar, euro or pound, and to maintain a sharp focus on costs and the simple measures of cash flow, all of which are critical in maximizing a small business’s chance of survival.

This knowledge will also make you better able to deal with the professionals whose job it is to assure the integrity of your business’s accounts, and consequently save both time and money.