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Business owners need to improve their financial literacy. In a survey of reasons why startups fail, CB Insights found that 29% went out of business because they ran out of money. This all-too-common problem can be remedied by being financially literate, as financial knowledge can help business owners avoid mistakes that would cause their business to go bankrupt. That's because financial literacy gives business owners a nuanced understanding of vital aspects of business, like accounting, taxation, budgeting, and payroll.
Improved financial literacy will also help business owners strategically prepare for downturns, take advantage of opportunities, and come up with viable solutions to problems such as overspending and disproportionate resource allocation. Indeed, financial literacy improvement ought to be one of the goals of every business owner, and the tips below will help in that regard.
Get financial literacy lessons
The glaring absence of personal finance in K-12 standards means that generations upon generations of Americans are likely without formal education in matters related to finance.
That said, nothing is ever too late when it comes to learning, as business owners can attend financial literacy training sessions, consult with financial planners, or even take actual courses in finance or accounting. Taking a basic course in accounting, in particular, is highly recommended since a basic understanding of it helps not only in improving financial literacy, but also in interpreting financial statements.
Create a financial advisory team... and consult with them
Just as business owners need to form teams to run the business' operations, they must also form a financial advisory team composed of a CPA, a business and trust and estate lawyer, a P&C advisor, a life insurance advisor, and an investment advisor.
This team will be a valuable resource in terms of understanding the financial side of the business. Having said that, business owners will need to meet with this team regularly for financial planning and coordination and to pick their brains about financial matters.
Scrutinize the business structure
Going over the business' legal structure is a great way to learn not only about the legal aspects of running a business, but also how these aspects affect the financial side of things. Mostly, this financial impact has something to do with how the business is taxed. And given how sole proprietorship and limited liability company (LLC) are two of the more popular legal structures for small and mid-sized businesses, it makes perfect sense for business owners to be scrutinizing both.
For LLCs in New Jersey, in particular, taxation covers sales tax and income tax, as well as a variety of other charges, like corporation business tax, gross income tax, insurance premiums, and recycling tax. On the other hand, an Entrepreneur article on sole proprietorships in the country details how they are taxed differently, with the business owners' income and expenses both included in their personal income tax, which they will have to pay on top of their self-employment tax. By studying these structures, business owners will then get a firmer grasp of finance in relation to taxation.
Use data aggregation apps
Lastly, business owners need to leverage technology. One way to do so is by using data aggregation apps, like QuickBooks, Wave, and Due. These apps help business owners understand better their business' financial health through constant and real-time monitoring of a variety of metrics, including cash flow, credit, and expenses.
Crucially, these apps employ artificial intelligence, allowing them to make sense of all financial data collected and give recommendations based on said data. These same data can also be discussed in meetings with the financial advisory team or used as a reference point when reviewing the business' legal structure.
As a final note, business owners need to adopt a mindset of lifelong learning. In this way, every opportunity is a chance to learn, whether about finance, about the other aspects of business, or about life in general.
Article specially contributed to dmfinancialliteracy.org
Contributed by: JBrander