Many small business owners in South Africa have indicated that they are financially illiterate, fortunately for them gaining literacy is relatively easy.
Small business owners and heads of startups can benefit from improving their overall financial literacy. Smaller businesses in the SOHO (small office/home office) arena are notably dependent on the skillsets and knowledge of their owners.
Compare to larger companies, where founders and CEOs can recruit the help of industry experts from several disciplines; the SOHO owner has to be a "Renaissance man" (or woman). They need to know everything from operations, payroll, marketing, branding, product placement, design, finance and more.
Of course, this means, that SOHO operators with little or no financial background have to be financially literate enough to budget, oversee accounting and taxes, calculate price points as well as project revenues and success rates to ensure their business's success.
With smaller companies, there is a thin line between personal finance and business finance. Many owners rely on their own credit line and resources to ensure that their businesses are successful. In this article, we explore which types of financial literacy small businesses need.
Why is financial literacy necessary for business owners?
Very few new business owners are "financially literate," despite the myriad of often expensive seminars, courses, and books on the subject. Of course, this not because small business owners are incapable, in fact, most people have enough savvy to acquire the literacy necessary to manage their business finances effectively without the need of purchasing a how-to book or expensive seminars from apparent charismatic gurus.
Financial literacy is crucial because it provides business owners with the tools to run their companies effectively. Our advice is only to seek and take advice from established financial experts with proven track records.
How to improve financial literacy.
A great starting point in improving your financial literacy is to start building a business library. Conduct research and find bestselling finance books on takealot.com at other book retailers. Subscribe to economic print media outlets and magazines, find and listen to business podcasts and subscribe to financial newsletters and blogs. Remember to sign up with us for daily articles if you haven't already.
Borrow smart and diligently.
If you need to borrow money or take out a loan, be careful not to jump at the first financial provider, no matter how tempting an offer is. Remember to do your research first, compare terms, interest rates and fees from multiple lenders.
Understand your expenses before borrowing money.
Before applying for loans, take the time to research and understand your monthly expenses. Start by cutting back where you can, and you might even find that you don't require a loan at all.
Understand your debt.
Debt doesn't necessarily need to be a bad thing; if you understand it, have control over it and make use of it for the right reasons. Are you perhaps being charged via your credit card for services you don't remember signing up for? Understand the details of every bill you might have. How much of your credit card bill is interest and how much goes towards paying off the principal? Having a little bit of knowledge about your debt will go a long way to reducing it.
Budgeting.
Budgeting is a crucial step toward financial literacy. Budgeting need not be a complicated process; it could be as simple as keeping a monthly spreadsheet. At the end of each month, compare your actual expenditure to your small business budget. The chances are that not everything will at first align to the rand, but don't beat yourself up. Acknowledge where every cent went and make adjustments as you go along.
Understanding your credit rating.
For several small business owners, company loans and credit is based on their personal credit rating. Financial literacy means understanding yourself, and that also means understanding what others know (or think they know) about you.
Merely understanding cash flow will contribute in the long run towards sound financial literacy, and for the most part, this is quite simply a practice in tracking.
Numerous small businesses, especially startups, can have significant dips in income and expenses every month, making it tough to pinpoint where they're at financially.
Keep a level head, don't panic, part of financial literacy is learning to become comfortable with impending chaos that comes with running a small business and knowing how to respond appropriately to the inevitable unexpected circumstances coming your way.