Financial Literacy for Business
As we have been discussing during this first part of this book financial literacy, understanding the tools and techniques available, and taking the steps to implement savings strategies are essential to successfully construct a financial roadmap and lifestyle. That said, it is also important to remember that financial and economic literacy are equally as important for small to medium size businesses as it is for the individuals running these organizations. While many would agree that smaller businesses form the backbone of the U.S. economy (and economies on a global level), the stark reality of the situation is as follows. Depending on the study or data set analyzed, between 75 and 90 percent of small businesses fail within the first five years, and the primary cause of these failures is a lack of working capital and financing. Regardless of whether the business in question is a service-oriented business or a goods business that produces goods for resale, the importance of financing is the same. In order to best execute and follow through on the goals and objectives of the organization, the entrepreneur or owners of the company must understand the financial and economic forces that can influence the organization.
The topics and ideas of financial and economic literacy, clearly, do not change in their entirety when the conversation shifts from individuals to smaller organizations. More to the point it is especially important to emphasize the following piece of information—financial and economic literacy are integral to business success and economic development. Either operating as standalone entities or as businesses embedded within the supply chains of larger multinational organizations, businesses need to understand financial terminology and information. In order to effectively accomplish whatever business owners want to do, the following needs to be focused:
1. Growing the top line (revenue) of the business
2. Attracting new customers and clients
3. Improving the quality of products and services delivered to existing customers
4. Developing new lines of business, either in existing markets or new areas
5. Keeping pace with changes both in the business landscape and customer requirements
Clearly, every business and industry is different, but there are several concepts and themes that cut across industry lines that should be implemented to help entrepreneurs and organizations make sure their finances are in order. The most important part, as it pertains to our conversation here, and having it linked to personal and business financial literacy, is that the tools, information, and techniques to improve financial conditions are available in forms that are affordable, scalable, and flexible. What this means, in essence, is that on top of understanding some core concepts, that applying these concepts to business tools is a relatively straight forward and logical process. Before delving into specific concepts and examples of how a better understanding of financial and economic literacy can help drive business performance, however, the following point must be emphasized. Regardless of how creative, innovative, or high quality the product or service idea is, if the business management and individuals running the organization do not have the money right, the organization will not succeed. There are three distinct areas that although interrelated are slightly different from one another, and must be firmly understood by the manager of the organization to fully grasp the ramifications.
Financial literacy and business—Financial literacy, especially as it pertains to business owners and management, is slightly different from financial literacy as it pertains to individuals. It may be tempting to chalk up financial literacy to saving money on expenses, or going paperless (both of which are good ideas, by the way), but it is more than that when viewed from the perspective of a business. Understanding the different types of financial issues that can influence business management is important for the business to successfully execute its business objectives. One simple example, for instance, would be to have a firm understanding of the financing requirements that match up with the goals and objectives of the business. Put simply, every new idea that a business wants to launch, update, or expand requires capital and sources of financing—business owners and entrepreneurs must be aware of the various options accessible to them.
Economic literacy and business—Economics, taught in college, consists of graphs illustrating the intersection of supply and demand, and are usually linked to goods, services, or ideas that are abstract at best. That said, it is important to keep in mind that economics is a very real and tangible force that can influence and drive business decisions moving forward. One straight forward, yet often misunderstood economic concept is the difference between net income and cash flow. Net income and cash flow are both accounting terms that virtually every business person is aware of, but they mean very different things. Net income takes into account accruals and other non-core business items, including accruals and deferrals, whereas cash flow only focuses on the cash coming in and out of the organization. We will get into the differences between net income and cash flow as we move forward, but it is important to keep in mind the following—bills and employees cannot be paid with net income—they have to be paid with the cash flows of the business.
Literacy and strategy—Business is obviously must be more than simply the numbers, but the numbers that are generated as a result of business operations determine whether or not the management team and organization can achieve future goals. Mentioned previously, the goals and objectives of the business, regardless of industry or type of business, require financing. This is where financing literacy, economic literacy, and the broader strategy conversation happening at the organization converge. For example, what type of financing options should the business pursue, and does the type of financing selected by the organization change depending on the specific goals? From a business development and business management perspective, financial and economic literacy have a definitive effect on the overall strategy undertaken by the individual business.
What You Need to Know
Finance and accounting for entrepreneurship encompass a broad range of issues that can, and do, take up entire books and courses. For our purposes, however, there are two broad categories of finance and financial literacy for business that we will analyze: operational finance and tax-related accounting. Clearly, developing, attracting, and retaining clients occupy top priority for a business of any size, but getting the numbers right can help improve your businesses performance and grow the business. Getting the numbers right is the first step toward getting the money right for your new business, and that will enable you to grow and develop your business in the ways you want.
Operational Finance
Operational finance is a technical way of saying that this is how organizations can focus on the nuts and bolts of how money flows in and out of a new or small business. I think that virtually all entrepreneurs, or anyone interested in starting a new business idea, possess a basic understanding of revenues, expenses, and (of course) profit and loss. That said, it is not sufficient for a business owner to simply have a basic understanding of how funds and money flows in and out of your business; you must be able to analyze and understand how these funds impact your business both in the present and moving forward. Some of the most important differences that I have seen trip up entrepreneurs and small business owners are included in the short list below. Clearly, this list is not an exhaustive or an all-encompassing checklist, but merely some of the items that, as a CPA, I feel should be included as you review the financials of your business:
1. Income is not cash flow—Income is great, and provides the life blood of business in terms of financial statements, commercial loans, and developing the business, but you cannot pay bills with income. Cash flow, on the other hand, represents the actual cash flowing in and out of the business, and also enables you to pay your employees, vendors, and utility bills. Income might be akin to your annual income, but cash flow is your direct deposit hitting your bank account.
2. Know your expenses—Growing the top line revenue of a business is the goal of mostly every entrepreneur and business professional out there, but that is only half the battle. Having a handle on, and managing your costs can help you achieve higher levels of profitability and help you redirect scarce funds to areas of growth. Tracking your costs, understanding what you are paying for, how much you are paying, and whether or not you should keep paying that much will only help improve your business performance.
3. Technology for business—While it seems like the pinnacle of technology is Snapchat, Facebook, Twitter, Instagram, and Uber, there are a whole host of business tools and options out there to help you better manage your business. From mobile-based payment applications, to property management tools, and mobile first tools that can help streamline your accounts payable, there are a host of options out there. Social media is great, and can certainly help you promote your business, but that merely scratches the surface of what technology can do for your business.
Tax Finance
Taxes are one of those things that nobody really likes to think about, talk about, or even do much about during the routine business year. Then around March the usual scramble begins to get a handle on what taxes are due, what deductions and credits are available, and my fellow CPAs are deluged with numerous questions and concerns. Taxes, however, are not just an issue that should be thought about every spring, but rather is something that should be analyzed, planned for, and discussed throughout the year. Depending on the type of business you operate, where your business is located, and how you manage your business during the year, you might actually be able to take advantage of certain credits and deductions you might not even know about. Let’s take a look at some of the tax areas and issues you might want to look into; knowing is half the battle, and knowing if your business qualifies can help you make the most of these tax opportunities.
1. Going green—Sustainability and environmentally friendly business operations continue to gain traction, coverage, and importance in the marketplace, but these are not merely academic issues for theoretical discussion. Your small business might very well be able to take advantage of tax incentives, such as the IRS hybrid vehicle credit and other local/state environmental credits—don’t miss out!
2. Mileage—Driving for Uber has, I think we all know, increasingly become a popular way to start or experiment with entrepreneurship, but in addition to your 1099 (income), you also might be able to deduct some of the mileage you rack up while driving people. Even if you do not drive for Uber or Lyft, this also applies if you are using a personal vehicle for commuting between any two places of business. Either way it is definitely something to look into.
3. Home office—This deduction can be a little tricky, so before attempting to take this deduction for your business it is important to make sure that you have fulfilled the following. First, that the home office space is used entirely for the business (separate entrance, etc.), and that second, you consistently use this space for your business, and not personal activities.
Note of caution: before implementing any finance, tax, or accounting strategy for your small business or startup please be sure to consult a CPA or other qualified financial professional. Going to the experts might cost you a few dollars upfront, but will certainly help your business in the long run.