Financial Literacy For Business Owners – Navigating Personal Finance in the Digital Age: How Your Cell Phone Can Act as Your Personal Finance Hub
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Financial Literacy For Business Owners
Unless you’ve started a financial services company, accounting probably isn’t your strongest skill. However, understanding the finances – cash flow, budget projections, profit and loss, etc. – is essential to understanding the overall health of your business. Therefore, every business owner should make financial literacy a priority in their continuing education.
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However, you do not need to earn a finance degree or pass a CPA exam. You just need to build a solid knowledge base about business finance so you can easily communicate with and understand your accountant and/or financial advisor. Here are 11 simple strategies recommended by members of the Financial Council.
An important part of your business is also to have a succession or emergency plan if something happens to you or your partner(s). Sitting down with a certified financial planner (CFP®) can help you address these gaps in your business plan. At the same time, you can benefit from working with a CFP to ask questions and learn more financially. -Amir Eyal, Milestone Plans LLC
Develop a team consisting of a CPA, an attorney (business and/or trust and real estate), a life insurance advisor, a P&C advisor and an investment advisor. master plan, and that the team is fully coordinated and transparent. -Michael Seltzer, Verite Group, LLC
The cash flow statement is the lifeblood of any business. It shows where the money comes from, where it goes and how much. Some of the brightest business people I’ve met don’t understand debits, credits and basic accounting. However, when discussing the performance of their business, they almost all describe a cash flow statement in layman’s terms. -Rob Gabridge, Tarfis Wealth Management
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Accountants often provide reports and statements with the assumption that business owners understand the intricate details of how these reports are compiled. They are terrific resources for business owners to get one-on-one training and advice. Don’t be afraid to spend time with your accountant and ask as many questions as possible. -Moe Adham, Bitaccess Inc.
Too many business owners focus on getting their books in order once a year when tax time comes around. Today’s accounting software, such as Quickbooks, makes it easy to sync bank transactions in real time, taking much of the drudgery out of keeping accurate records. Use the wide range of reporting options available to provide accurate snapshots of your business’s financials. – Ismael Wrixen, FE International
CPAs are super helpful, but remember they are the auditors and tax people. Instead, CFO companies have accountants, controllers and CFOs who run accounting for companies and explain the meaning of finances to business owners. Strike up a relationship with a CFO firm, as they will share how they can help you, but they will also educate you a lot along the way. -Chris Schwalbach, AVL Growth Partners
Business owners can greatly improve their financial literacy by comparing their financials to those of a respected peer business owner in their industry. Few things are more valuable than learning from a successful peer or group of peers. Comparing finances is a great way to do this. -Levi Morehouse, Ceterus
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Many business owners rely on CPAs for financials. CPAs have tons of specific, nuanced knowledge, and when asked to explain a figure, some may try to shield you from the gory details with, “It’s complicated.” When you review the numbers with them, ask them to explain it to you as they would to a fifth grader. Do this for a year, and you’ll be surprised how well you understand your finances. -Atish Davda, EquityZen
Use a free data aggregation app that allows you to understand where your financial health stands (cash flow, credit, etc.). Small business owners have unique needs, so use an app designed specifically for small businesses. The good ones have a nice balance between using AI to make recommendations and educational context, so you can make smarter decisions and learn along the way. -Greg Ott, Nav Inc
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Building a solid understanding of accounting will support financial literacy. This will enable business owners to effectively interpret their financial statements and act accordingly. No need to sit for the CPA exam; rather, simply enroll in a beginner/intermediate accounting course. As a bonus, these efforts will help build internal controls for the business. -Collin Greene, ShipHawk
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Sit down with an accountant or CPA every month to review your statements. Ask why certain expenses are categorized as they are, why certain expenses do not appear on the profit and loss statement, but rather the balance sheet, and to explain the balance sheet in more detail. Finally, discuss the difference in reporting financial statements using cash versus accrual accounting. -David Gass, Anderson Business Advisors, LLCFinancial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing. The importance of financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money.
In recent decades, financial products and services have become more and more widespread in society. While previous generations of Americans bought goods mainly in cash, today various credit products are popular, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Board of San Francisco revealed that 28% of all payments were by credit card, with only 20% made in cash.
Given the importance of finance in modern society, lack of financial literacy can be very detrimental to an individual’s long-term financial success. Unfortunately, research has shown that financial illiteracy is very common, with the Financial Industry Regulatory Authority (FINRA) attributing it to 66% of Americans.
Financial illiteracy can lead to a number of pitfalls, such as being more likely to accumulate unsustainable debt loads, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to bad credit, bankruptcy, foreclosure and other negative consequences.
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Fortunately, there are now more resources than ever for those who want to educate themselves about the financial world. One such example is the government-sponsored Financial Literacy and Education Commission, which offers a range of free learning resources.
Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming increasingly common.
Although there are many skills that fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debt, and evaluating the trade-offs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.
Other products, such as mortgages, student loans, health insurance, and self-directed investment accounts, have also grown in importance. This has made it even more imperative for individuals to understand how to use them responsibly.
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Financial literacy also covers short-term financial strategy as well as long-term financial strategy. Financial literacy involves knowing how investment decisions made today will affect your tax obligations in the future. This includes knowing which investment vehicles are best to use when saving for retirement.
From day-to-day expenses to long-term budget forecasts, financial literacy is crucial to managing these factors. As mentioned above, it is important to plan and save enough to provide adequate income in retirement while avoiding high debt levels that can lead to bankruptcy, defaults and foreclosures.
However, in its economic well-being of US households in 2020 report, the US Federal Reserve SystemBoard of Governors found that many Americans are not prepared for retirement. About one-fourth indicated they have no pension savings, and less than four out of 10 of those not yet retired felt that their pension savings are on track. Among those with self-directed retirement savings, more than 60% admitted to feeling low confidence in making retirement decisions.
Low financial literacy has left millennials — the largest portion of the American workforce — unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who report having a high knowledge of personal finance, only 19% answered questions about fundamental financial concepts correctly. Twenty-three percent report using expensive alternative financial services, such as payday loans and pawnshops. More than half lack an emergency fund to cover three months of expenses, and 37% are financially fragile (defined as unable or unlikely to come up with $2,000 within a month in an emergency).
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Millennials also carry large amounts of student loan and mortgage debt—in fact, 44% of them say they have too much debt.
Although these may seem like individual problems, they have a wider effect on the entire population than previously believed. All one needs is to look
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