5 Ways financial literacy helps you run your business

Building your business is more than just knowing key financial terms; it’s about understanding how to apply them effectively.

As you embark on the journey of growing your business, you’ll find that applying your financial literacy knowledge becomes crucial, especially when you find yourself needing to know your financial standing, creating a budget, and establishing tax strategies tailored to your business needs.

With advice from a Padgett firm owner and CPA and with testimonials from small business owners like you, you’ll see how financial literacy plays a crucial role in:

1. Mastering cash flow and budgeting
2. Implementing effective pricing strategies
3. Enhancing negotiating and decision-making skills
4. Strategic tax planning
5. Making informed investment decisions

Through real-world examples and expert guidance, you’ll gain a deeper appreciation for the transformative impact of financial literacy on your business operations and overall success.

Mastering cash flow and budgeting

Understanding your company’s cash flow and budgeting processes is essential for maintaining financial stability and planning for future growth. By analyzing cash flow statements and creating detailed budgets, you can identify areas of strength and weakness in your finances. This knowledge empowers you to make strategic decisions to improve cash flow, manage expenses effectively, and allocate resources efficiently.

Joey Vrooman, owner of Padgett Bismarck, stresses the importance of knowing the fundamentals of financial literacy to successfully manage their cash flow. “It’s the key to budgeting,” he states. Without an effective budget, you find yourself struggling to pay bills, meet payroll, or invest in growth opportunities. Joey has seen clients pay attention to the wrong facets of their business to measure their success, leading to budgeting mistakes.

A small business owner who regularly reviews their income and expenses, creates a detailed budget, and tracks cash flow to ensure they have enough liquidity to cover operational expenses and investments are more equipped to make informed decisions about spending and saving.

Key factors to managing your cash flow and budget:

• Monitoring income and expenses: Keep track of all incoming revenue streams and outgoing expenses to understand your cash inflows and outflows.
• Managing accounts receivable and payable: Monitor accounts receivable to ensure timely payment from customers and negotiate favorable payment terms with suppliers to optimize cash flow.
• Reviewing financial reports: Regularly review financial statements, such as cash flow statements, profit and loss statements, and balance sheets, to assess your business’s financial health and identify areas for improvement.
• Identifying cash flow drivers: Determine the primary factors influencing your cash flow, such as sales cycles, payment terms, and seasonal fluctuations, to proactively manage cash flow.

Implementing effective pricing strategies

Pricing your products or services appropriately is crucial for maximizing profitability and maintaining competitiveness in the market. With financial literacy, you can analyze cost structures, market trends, and customer behavior to develop pricing strategies that align with your business goals. By comprehending the financial implications of different pricing strategies, you can set prices that optimize revenue while delivering value to your clients. 

Roger Harris, President of Padgett, emphasizes the significance of financial literacy during market changes, such as inflation. “Understanding how to manage inflation and pricing in an inflationary world can sometimes be confusing and critical to the success of a business.” During these times, it’s essential to grasp pricing structures to uphold margins, as they play a pivotal role in business success. “Margins are there for a reason, and you need to understand how they’re impacted.” By implementing effective pricing strategies that support desired profit margins, businesses can enhance their financial sustainability and competitiveness in the market. 

Improving financial literacy skills enables you to make informed pricing decisions, ultimately driving revenue growth, improving profitability, and navigating competitive and unprecedented markets more effectively. 

Key factors to implementing effective pricing strategies: 

• Understanding costs: Calculate all costs associated with producing and delivering your products or services, including materials, labor, overhead, and any other relevant expenses. 

• Setting profit margins: Determine the desired profit margin for your products or services based on your business goals, target market, and competitive positioning. 

• Differentiating value: Identify unique selling points and value propositions that set your products or services apart from competitors, allowing you to justify premium pricing or command higher prices. 

• Reviewing and adjusting: Regularly review pricing performance, track key metrics such as sales volume, revenue, and profit margins, and adjust pricing strategies accordingly to adapt to changing market conditions and business objectives. 

Enhancing negotiating and decision-making skills

Financial literacy empowers you to negotiate effectively and make informed decisions. Whether you’re negotiating contracts, salaries, or partnerships, understanding financial implications allows you to advocate for your interests and drive favorable outcomes for your business. By considering financial factors alongside other considerations, you can make well-rounded decisions that benefit your organization in the long term. 

Shahrukh Siddiqui, owner of Credit America Auto Sales and client of Padgett Mobile, stresses having a comprehensive financial understanding to negotiate the best deals and avoid overpayment. He advises those in the car business to “make your money when you buy the car, not when you sell it,” cautioning against hidden interest fees. 

Additionally, financial literacy allows small business owners to anticipate and address potential financial challenges during negotiations. Thorough financial analyses and scenario planning enable contingency plans, enhancing negotiation effectiveness and adaptability in dynamic environments. With solid financial literacy, owners can confidently navigate negotiations and decisions that propel their business forward. 

Key factors to enhancing negotiating and decision-making skills: 

• Leveraging financial insights: Analyze financial data, assess risks, and evaluate potential outcomes to leverage financial insights to support your negotiating position and drive favorable results. 

• Understanding the market: Garner a deep understanding of your industry, market trends, and competitive landscape. This knowledge enables you to assess market dynamics, anticipate changes, and identify opportunities for negotiation. 

• Clarifying objectives: Define your objectives clearly. Whether you’re negotiating contracts, partnerships, or pricing, knowing what you want to achieve allows you to focus your efforts and develop a strategic approach to negotiation. 

Strategic Tax Planning

Tax planning is a crucial aspect of financial management for small business owners. With financial literacy, you can navigate complex tax regulations, identify potential deductions and credits, and optimize your tax strategy to minimize liabilities. By proactively managing your tax obligations, you can free up resources to reinvest in your business and fuel growth. 

Amy Krueger, owner of Amy Krueger Realty and client of Padgett Gainesville, shares her experience: “I was so excited when I got my first paycheck and didn’t necessarily treat my business as such. I didn’t know that I had to put money aside for taxes or money in your emergency fund.” As a former stay-at-home mom, she discovered that there was more to running a business than she initially thought. By understanding the basics of her tax obligations and getting personal guidance from her advisor, she’s been able to optimize her tax strategies. 

Given the dynamic nature of the tax landscape, it’s important to seek professional guidance. Having a professional advisor answer your questions throughout the year can provide peace of mind and help you navigate complex tax matters effectively. 

Key factors to strategic tax planning: 

• Understanding tax laws: Stay informed about tax regulations and updates relevant to your business. 

• Tracking expenses: Maintain meticulous records of business expenses to maximize deductions. 

• Utilizing deductions and credits: Identify eligible deductions and tax credits to minimize tax liabilities. 

• Timing strategies: Strategically time income and expenses to optimize tax benefits, considering factors like tax brackets and deadlines. 

• Consulting with an advisor: Regularly consult with a tax advisor for personalized guidance and to review tax-saving strategies. 

Making informed investment decisions

Investing wisely is essential for building long-term financial sustainability and resilience. Financial literacy enables you to evaluate investment opportunities, assess risks, and forecast potential returns. Whether you’re considering investments in equipment, technology, or expansion initiatives, understanding the financial implications allows you to make informed decisions that align with your business objectives. 

Greg Levon, owner of The LeVon Group and a client of Padgett Lakeville, stresses the importance of evaluating the return on investment (ROI) on every expenditure. “Know what your ROI is on everything. Otherwise, you’re spending all this money, and you have no idea what you’re getting in return for it,” he asserts. Levon recalls a pivotal moment when he checked his finances and discovered he was allocating $8,000 monthly to marketing. “I had to stop and question this investment and how it translated to sales.” The very next month, he dropped his marketing budget to $0. “It took several months of tweaking my budget and understanding my ROI to really grow my business.” 

With financial literacy, you gain the insights needed to allocate resources effectively, maximize returns, and drive sustainable growth. By continuously evaluating the ROI of your investments, you can optimize your financial strategy and position your business for long-term success. 

Key factors to making informed investment decisions: 

• Analyzing finances: Understanding your current financial position, including cash flow, profitability, and liquidity, is crucial. Assess your business’s financial health and determine how much capital you can allocate to investments. 

• Aligning investments with business goals: Consider whether the investment supports your long-term growth strategy, enhances operational efficiency, or expands your market reach. 

• Performing cost-benefit analysis: Perform a cost-benefit analysis to determine the potential return on investment (ROI). Compare the expected benefits of the investment against the costs involved, including upfront expenses, ongoing maintenance, and opportunity costs. 
• Evaluating risks: Consider factors such as market volatility, industry trends, regulatory changes, and competitive landscape. Assess the potential impact of these risks on your business and determine if the potential rewards outweigh the risks.