Along with the many skills required to be a successful entrepreneur, at least some degree of financial acumen is very important. Money is the lifeblood of any business so it’s vital you understand your financial position and how money is flowing in and out.
Having the necessary financial skills can range from understanding general financial admin including the importance of using and processing the correct paperwork such as 1099 forms and other tax paperwork, to effective budgeting and understanding funding options.
‘The accountant does it’
While you could and should use the services of a financial professional such as an accountant or tax advisor, it doesn’t mean you don’t need to concern yourself with financial matters.
Just like you would go to a professional like Oak independent financial advice, for your own finances. A tax account or advisor will be able to help you with your business taxes. While your professional will be able to help advise on the financial position of your business and prepare your paperwork when it’s time to file for taxes, you need to understand your financial position and make decisions just like you would for your personal finances.
For example, you need to know what funding options may be open to you; your accountant may be able to offer opinions and advice, but in the end it’s your decision as to what path to follow.
Similarly, everyday financial admin can be taken care of by an accountant or bookkeeper but you need to be familiar with the basics of financial reporting so as to understand your financial position.
Basic financial admin
You should be familiar with at least the following:
Balance sheet – shows what you own in terms of assets including money due in from customers and what you owe in outgoings.
Profit and loss account – shows how well your business is doing in terms of generating profits on business activities by illustrating how much it’s costing to provide your service relative to what you’re paid for it.
Cash flow account – a very important source of information. Cashflow reporting shows the money flowing in and out of your business and this can have an enormous effect: many businesses have foundered purely due to poor cashflow affecting their working capital position even when sales are good.
Understanding the above means you have a good overview of the financial state of your business so making it easier to take action should it be required.
Your business credit rating is important to be aware of as is understanding how it can be enhanced. When you start up, it may be on the poorer side but can be improved as time passes; basics such as paying bills, fees and loans on time can help.
You can check your credit rating through one of the three main credit bureaus: Equifax, Experian or TransUnion.
It’s important to understand what funding options may be open to you.
Along with the traditional sources such as banks, alternatives exist now such as crowdfunding and there may be others specific to your business type or situation. For example, some funding advice and help from bodies such as the SBA (Small Business Administration) is available for women in business.
Being aware of your options is a definite skill and needs nurturing as the funding landscape can and does change over time.
Identifying what investments you may require, such as maybe new machinery or a premises move, with a plan to fund it is a key skill.
Keeping accurate records and reviewing them frequently helps to ensure you budget wisely and keep on track.
Knowing when and when not to spend is an important financial skill. It’s easy to try to scrimp and save on certain things but then spoil it with an unwise purchase. Always ask yourself if the item or service you’re considering spending on will move your business forward?
Will it help productivity? Help people do their jobs more efficiently? Save time? Save money in the long run?
As with other aspects of entrepreneurship, continuous learning regarding finances is important to not only stay up to date but become even more skilled in managing your business’s finances.