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What is financial literacy and why should you develop it?
Financial literacy is a set of knowledge and skills that help you effectively manage your company’s money and personal savings. A financially literate entrepreneur adapts more quickly to market changes, manages turnover more confidently, understands where money goes and what decisions affect profits.
How to assess your level of financial literacy
To assess your money management skills, answer 10 questions. Give yourself one point for each ‘yes’ answer. The more points you have, the higher your financial literacy.
If you have less than half of the answers ‘yes’, it means that your financial system is based on experience and intuition, but not on data.
Six expert tips will help you become more systematic and financially literate as an entrepreneur.
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Tip 1. Define your financial goals and strategy
A financial goal is an understanding of what business indicators an entrepreneur wants to achieve.
You need to set goals in three areas: How to set a business goal and achieve it: tactical: for 3-6 months.
For example, close the cash gap, increase the margin by 10%; strategic: for 1-3 years. For example, enter a new niche or open a branch;
personal: build a safety cushion, save for investments, reduce debt burden.
Tip 2. Separate personal and corporate finances
When an entrepreneur uses a joint account, it is impossible to understand how much the company has actually earned and how much it has spent.
Keep separate accounts and budgets. A company or sole proprietor should have a business account, and the owner should have a personal account. Any purchases for the family, mortgage or restaurant bills should not go through the business account. When money is not mixed, it is easier to manage operating profit, plan payments and keep the business in the black.
Pay yourself a market-based salary. To avoid chaotically withdrawing money from the business, you can set yourself a monthly salary. It is desirable that the amount corresponds to the market average: usually, a business can afford it without harming its turnover.
Withdraw dividends correctly. To have more money for personal expenses, you can withdraw dividends from net profit. To do this, the company needs to formalise a decision on the payment of undistributed profits. The concept of dividends does not apply to sole proprietors, but they can introduce a rule whereby they withdraw net profit. For example, 50% is paid to themselves and 50% is reinvested in the company.
Tip 3. Keep financial records
To monitor financial performance and make the right decisions, you need to keep several types of records.
Management balance sheet. The balance sheet shows how wealthy the company is and what it owes its wealth to. Assets are what the company has: money, equipment, inventories, accounts receivable. Liabilities are where the money came from: debts, loans, equity capital.