How much do you really know about money? And your money in particular?
They say money makes the world go round and as a business owner, you might be inclined to agree. It may come as a shock that in Australia, 1 in 3 adult men and 1 in 2 adult women do not understand key financial literacy concepts. That’s around 8.5 million Australian adults!
As a basic foundation to set yourself up for success in both your personal and business life, you really need to know:
- What your financial goals are
- How to create a budget (and stick to it!)
- What cash flow is and how you can track it
- How to hold yourself accountable when it comes to creating positive spending habits
The secret to creating a profitable business
When it comes to business it’s simple really – if you want to make money (who doesn’t?!) you need to know how money works. Research has shown there is a direct correlation between financial literacy and business success.
In business, financial literacy isn’t only about knowing where the money comes from and where it goes. It’s about understanding how money works.
Having a good understanding of the fundamentals of finance as a business owner will help you to:
- Understand how you make it, spend it and invest it to improve your financial position
- Make better business decisions and speed up business growth
- Understand how to build a budget for your business
- Help you sleep at night better by reducing stress related to running your business
- Learn to manage your business’ cashflow
While the finance side of business leaves many of us overwhelmed, uninspired and even yawning, it’s one of the most important things you’ll ever do for yourself and your business.
The 5 key components of financial literacy
To avoid sleepless nights and a great deal of stress (that is if you aren’t experiencing this already!), it’s important you have the ability to understand and apply important financial skills.
This means understanding budgeting, cash flow, interest rates and debt management, and being able to allocate your income towards your various financial goals such as savings, debt repayment, ongoing expenses and a rainy day fund.
Financial literacy also plays an important part in a range of outcomes including wealth accumulation and planning for retirement, superannuation savings, and women’s economic empowerment. The 5 key components of financial literacy are:
- Keeping track of your finances
- Planning ahead
- Choosing financial products
- Staying informed
- Having financial control
Understanding your business cash flow
Cashflow comes in from revenue and goes out to pay for your expenses, though sometimes it feels like it’s only flowing out, and fast. Cash flow is one of the biggest reasons why small businesses fail early on. More businesses fail due to poor cash flow management rather than lack of profit because cash flow is unpredictable.
The best way to manage your cash flow is to stay on top of where the money is going and ensure you don’t hit that dreaded red zone. You can do this by:
- Closely monitor your revenue vs. your outgoing expenses.
- Not purchasing bulk stock as this ties all your money up in inventory that may not sell.
- Staying on top of your account management and chase up those overdue payments.
- Thinking about how you can reduce your overheads, whether this is limiting staff during quiet times, or switching to more cost-effective amenities.
7 positive money habits you can use right now
To get you started on your financial literacy journey, try implementing these positive money habits:
- Upskill on financial literacy – there are some great online courses and resources to help with this.
- Annually review your service providers like utilities and phone companies to ensure you have the most cost-effective plan for your needs. Cancel any subscriptions you are not using.
- Use your credit card only for emergencies and avoid after pay services.
- Make 10% of your income, your “rainy day” buffer and put it into a separate bank account you have limited access to.
- Have a separate bank account for savings – try to only put money in and not draw any out.
- Use a cash flow tracker to understand what you spend and on what, and how much money is left at the end of each pay cycle.
- Use a budget to create a ‘spend control’ – only spend within your budget estimates.