Our Bookkeeping & Finance Blog

What is Financial Literacy and why is it Important?

literacy

A Guide to Financial Literacy: Why It Matters to Your Business

While it’s tempting to believe offering the best product or service in your market should be enough to run a successful business, new business owners should never underestimate the importance of financial literacy to secure momentum in growth and long-term viability.

Whether you are a new business owner or have been in business for a few years, it’s always the right time to improve your financial literacy and arm yourself with the necessary knowledge, awareness, and expertise totake control of your financial future.

What is financial literacy, and why is it important?

Financial literacy is the ability to understand money: how it works and how to earn, manage and spend it sustainably. It’s essentially the foundation for a growing business.

A business or an individual who is financially literate has a solid grasp of skills, including:

  • Budgeting
  • Investing
  • Personal financial management.

While it may not be the most exciting part of owning a business, financial literacy is essential for all business owners. Without a basic understanding of financial concepts, you won’t be equipped to make sound commercial decisions. 

Your financial literacy is intrinsically linked to your business success – both now and further down the track as your business grows.

What exactly does financial literacy mean?

The Australian Securities & Investment Commission (ASIC) notes that ‘financial literacy is defined as the ability to make informed judgments and to take effective decisions regarding the use and management of money’.

Put simply, it’s about having the information you need, when you need it, to determine how to organise, manage and execute financially significant actions. 

What are the basics of financial literacy?

At its core, financial literacy is about:

If you can get your head around these elements, you’re already off to a great start.

How financial literacy will impact your business

Being financially literate will make a measurable difference to your business, profitability, and potential. Once you gain a solid grasp of the financial side of things, the day-to-day operations become less of a headache, and you can focus on the bigger picture, such as:

The financial literacy statistics ringing alarm bells

Interestingly (or perhaps worryingly), many people lack thefinancial awareness needed to establish, maintain, and grow their businesses.

A survey by Intuit Financial Services revealed just 42% of Australian start-up owners scored 50% or better on a basic financial literacy quiz. Unfortunately, there’s a gaping chasm in financial literacy between the rich and poor when it comes to Australian households. 

According to Standard & Poor’s 2015 Global Financial Literacy Survey, only half of those in the poorest 40% of households were considered financially literate. That’s in stark contrast to the almost three-quarters of adults from the wealthiest 60% of Australian households having a solid understanding of money and the importance of financial literacy. 

How to become more financially literate

With these concerning statistics, the following are some sure-fire ways to improve your financial literacy (and boost your business in the process).

Developing financial literacy

Make it a priority to examine the fundamental concepts of financial literacy and how they apply to your business. They may differ from company to company, so make sure you don’t get caught up in a competition; instead, focus on yourself and your business plans.

Budgeting right

Budgets might be time-consuming, but they are critical. Detailed budgeting and management reporting will guide the financial direction of your business to keep you on track and ensure accountability.

Key tips:

Keep your budget up to date

  • Know your break-even points (how much money you need to make to stay in business)
  • Outsource to a qualified accountant or bookkeeper who has the understanding and experience needed to determine key performance indicators, cash flow, profit and loss statements and general management reporting

Investing in the future

Investing is more than just putting money aside for a rainy day. It’s also about understanding the financial needs of your business today, so you can protect it through future highs and lows, which are inevitable in business, no matter how prepared you are. 

Your investments will include:

  • Property

No matter how you invest, make it diversified, ensure you understand where your money is going and ask lots of questions. 

Personal financial management 

While most business owners keep their business and personal investments separate, the two are nonetheless connected. Ultimately, the success of your business impacts your lifestyle and the personal choices you make. Managing your own financial affairs plays a huge part in this.

Understanding taxes, borrowing funds, or any of the other above components is a crucial part of developing financial literacy. 

Being financially literate benefits you and your business

Perhaps you’re already financially literate, or maybe you require some upskilling. Whatever the case, you don’t need a degree in finance to take control of your business at a basic level. Simply spending time thinking, planning, and organising your financials is a great place to start. 

By being proactive in financial matters, you’ll be able to avoid many of the stumbling blocks in business. More importantly, you’ll gain the confidence to start steering your business in the right direction for you.

Do you need help with improving your financial literacy? Contact Numble today for expert guidance in understanding your business financials.