The Importance of Financial Literacy

Written By: Alex Tveit, Vice President, Morrison Financial

There are some key pillars that are important when you are creating the foundation for your business. You need to understand the initial legal framework where you are operating, you need to understand your market, and you need to understand your numbers.

It is easy to get caught up in focusing on your business idea. After all, it’s your passion for your idea, or how you can commercialize it, which has helped you make the ambitious move towards becoming an entrepreneur. While there is nothing wrong with this focus, it could be fatal if you forget to make sure that the foundation of your business is robust.

Understanding your numbers is key in understanding your business

Even if you outsource your bookkeeping, or if you have an accountant in house, it is still important that you have some fundamental financial literacy. Without understanding the key numbers making up your business, the hurdles for Canadian entrepreneurs are more difficult to maneuver across.

“The biggest cited regret by failed entrepreneurs is that they did not pay enough attention to learning how to track and manage finances in their first year. “

A study conducted by Intuit Canada showed that one in three business owners underestimated the amount of time they would spend on financial management. Over half those surveyed did not use an electronic or cloud-based software, but rather resorted to keeping track of their finances by hand.

What are the implications of having weak financial literacy?

While some of the dangers of not keeping on top of your company’s financials are clear, such as not being able to track your expenses and profit accurately, some are not so apparent:

1. Without a clear guide to your financials, acquiring debt or equity financing will be very difficult.
2. Lack of an ability to create and understand accurate budgets and forecasts.
3. It leaves you prone to risks from dealing with variable costs, such as exposure to foreign exchange volatility.
4. It could leave you missing out on grants and/or tax credits available to your business.
5. It could hamper your ability to negotiate from a position of power, resulting in not being able to accurately price your product or service.
6. Makes you more susceptible to look at your business through rose-coloured glasses.

What are some key areas which strong financial literacy will help your business?

First, realize that basic financial literacy is not fundamentally difficult. Even those without accounting or finance experience can relatively easily understand the basics. Also, even though the majority of Canadian SMB’s do their own financials, it is important to recognize when you need help. Accounting and legal aspects of running a business, are often areas where most entrepreneurs will need help from professionals.

Let’s look at some areas that strong financial literacy can help you with:

1. If you budget/forecast for the next 12 months, it will give you an indication of where your business is headed. Regardless if you are presenting to investors and financiers, or just using them for your own purposes, it is important that your financial plan is realistic.
2. It helps you create a cashflow, so that you can prepare for any capital funding needs in advance.
3. It helps you assess where you may be able to delay payables. In some cases, you may be able to use credit cards by up to 55 days’ interest free. In others, you can get points to use for travel, or to put against your costs.
4. It helps you understand account receivables collection, and its importance in keeping your financials healthy. It would also potentially allow you to understand instances were credit insurance on your receivables would be beneficial.
5. It helps you measure, and make more effective, key metrics of your business, such as inventory turnover.
6. It helps you understand the language of investors and financiers, which in turn makes you able to negotiate better terms. It also helps you understand reporting requirements once you have acquired financing.

Sometimes all the different aspects of running a business can seem overwhelming. While rewarding it can be tough, especially if you are working by yourself. What you as an entrepreneur must realize, is that you are not on an island by yourself. There are resources available to you to take advantage of. From mentorship arrangements through organizations such as Futurpreneur, to topic specific workshops and seminars held by experienced organizations. Most of us realize that the only way we can foster a great economy in Canada, is through supporting entrepreneurs, and helping create a great foundation for them to prosper in.