How good financial literacy will help you in business
“Beware of little expenses. A small leak will sink a great ship.” Benjamin Franklin
Do you know the difference between P&L, PAYG, GST, BASS, and MYOB? You might know what they mean but do you know when and how to use them?
Now you might be great at sales, design or customer service, for example, but what happens when you move up the ranks into management or decide to start your own business? Suddenly, you’re spending more and more time paying wages and invoices or chasing up payments from your clients. This can be a problem if you’ve never studied accounting at school or learned to do any sort of bookkeeping properly.
For many people, doing any sort of maths-related task is daunting so we avoid them as much as possible. Sometimes, we can get away with it but sooner or later as managers or owners, we’ll have to deal with the financial bookwork and try and make sense of it.
Why many new businesses fail
You’ve probably heard that most new businesses fail within the first few years but do you know why? If you list things like lack of planning, picking the wrong product, or poor leadership are all common reasons but there is one reason that trumps them all. A lack of adequate cashflow even in an otherwise profitable business is often the major cause.
This happens when there are too many expenses to be paid before enough income is received to cover them – which can happen in high-growth periods. Also, some businesses have a lot of money tied up in things like equipment and stock but they don’t have enough cash left in the bank to pay their expenses on time.
Some expenses can be delayed but wages are not one of them. Your staff quite rightly expect to be paid their full wage whenever it falls due. Failing to put aside enough money to cover taxes and superannuation is another common problem. You might be able to get an overdraft from your bank to help you out in the short term but if the shortfall continues, you’ll end up in a downhill spiral that can be difficult to recover from.
Knowing how to manage your bookwork and using it as a basis for good financial planning is the key to staying afloat and growing your business sustainably.
Why you need to know what’s going on
All mangers and business owners need to have a basic level of financial literacy. Knowing why it’s important to record all your transactions and balance the till at the end of the day will help motivate you to be diligent about things like this. It doesn’t mean you have to do all these tasks yourself but you should be able to understand and explain their purpose.
The things you need to know include:
- The amount your business or department owes to other parties
- The amount other parties owe to you
- When and how things should be paid
- Which of your assets can be converted to cash quickly if needed
- How and where all your records are kept
- How your financial reports are created and who is responsible for them
As the person responsible for your business or department, you are accountable to all relevant stakeholders, including any investors, suppliers, staff, and customers. If you are the director of a company, you have a legal obligation to ensure all financial reports are accurate and consistent with your knowledge of the business status. To do this, you need to be able to read and understand the reports yourself.
When you can analyse your profit and loss projections, you are in a good position to weigh up the risks versus benefits before making decisions for your business. For example, if you can see that winter has consistently been a slow time of year you might hold off making any non-essential purchases during that time. However, if your sales forecast looks good, you might be prepared to invest in new innovations.
One big advantage of sound financial planning is that you can prepare your business for unexpected situations or fluctuations in the market. This includes having backup plans for meeting your expense obligations when your income suddenly slows or stops.
Many small business owners don’t seem to have enough time to keep up to date with entering all transactions properly, let alone make any financial projections. In the early stages, they are more concerned with getting things up and running and tend to put off setting up an adequate accounting system.
The problem is that it’s very easy to make small mistakes that go unnoticed. They can take a long time to find and correct and, in the meantime, they can create issues that snowball with major long-term implications. For example, incorrectly entering negative figures into a spreadsheet can make a balance sheet look healthy while the business could be in deep crisis.
Even when details have been entered correctly, a manager or owner who doesn’t analyse the reports regularly might not notice areas of inefficient expenditure and high wastage. It could be something as simple as not being aware of high stationery costs or travel claims. When these are examined, it’s often quite possible to find better ways to do things.
What can you do?
Learn to balance the books
If you are just starting out in business or new to a management role one of the best things you can do is make sure you know how to do basic bookkeeping. If you don’t, then make it a priority to go out and learn these skills as soon as possible. Here are some possible ways to do that:
- Do a short online course such as Future Learn’s Bookkeeping for Personal and Business Accounting or Udemy’s Bookkeeping Basics: Understand the Fundamentals
- Enrol in a local or online TAFE business course such as a Certificate IV in Accounting
- See if your local council runs financial management courses for business owners
Not only will the skills you learn help you in your business, they’ll also help with your personal finances and other areas of life.
Use accounting software
You don’t have to design your system from scratch either. There are many excellent software platforms and apps that have been specifically designed to take the headache out of business record-keeping.
You’ve probably heard of MYOB and QuickBooks but these aren’t the only options. There are many other programs out there designed specifically for your industry or country. For example, Cashflow Manager was created by an ex-employee of the Australian Taxation Office, Rounded is great for freelancers and sole traders, BizzWizz is ideal for retail and trade businesses and Opto Software is aimed at manufacturing.
Not everyone has the patience and skill to setup and maintain proper financial records for their business or organisation. The good news is, not everybody has to.
Instead of struggling through your bookwork yourself, make it a priority from the start to hire a professional to do it for you. They’ll make sure that everything is done on time, your reports are accurate, and you’ll have the information you need for financial decisions. Best of all, they’ll free up your time so you can concentrate on the things you are good at. The investment will pay for itself in no time.
Call to action…
Malcolm is the Chief Executive of the SA Fire and Emergency Services Commission and Chair of the SAFECOM Board, to which the State Emergency Service, Metropolitan Fire Service and Country Fire Service report. He has also been an officer in the Royal New Zealand Navy and the CEO of major corporations including Elders, Coates Hire and the recruitment agency, Manpower.
In his recent podcast interview on The Mentor List, Malcolm’s major piece of advice to others was:
“To get accountability for the balance sheet and the cash flow as soon as you possibly can in your career…. The sooner that you can get responsibility of those three things (profit and loss statements, balance sheets, and cashflow) together in your career, the sooner that you really have control of the organisation.”
He said this because he learned his lesson the hard way. To find out more about Malcolm’s success story, his leadership philosophies, and the business challenges he faced, take the time to listen to his interview today. You’re bound to pick up some pearls of wisdom that could make a difference in your life.
Kick start your personal journey to success from the conversations David has with his inspirational guests on The Mentor List. www.mentorlist.com.au
Click here now to listen or subscribe for automatic updates.
When you like what you hear, subscribe, rate and review!