What is Financial Literacy?

bizfluent article image

Financial literacy is the ability to understand your financial situation and manage your money effectively. You should know how much money you have and how it is distributed among your bank accounts and other assets. You should also be able to create a budget to plan your financial activity. Even if financial literacy does not come naturally to you, you can learn the basic skills and knowledge you need to manage your finances. Financial literacy gives you the freedom to pursue activities you enjoy more than balancing your books.

Financial Literacy for Small-Business Owners

If you own and run a small business, it is especially important to cultivate financial literacy skills, so you can keep your company profitable. Employees’ primary source of income are paychecks from an employer. For them, financial literacy is a matter of learning to manage and invest this consistent flow of funds. But as a business owner, your net income is a moving target, calculated by subtracting business expenses from gross revenue. You must familiarize yourself with all the variables, especially if you do your own bookkeeping and do not get expert advice. If you understand your company's financial situation, you will know when it may be necessary to cut costs. Conversely, having a good grasp of your business’s financial health lets you know when you can buy a piece of equipment for the plant or new computers for your office.

How to Find Financial Literacy Programs

Financial literacy programs for small-business owners are available through government agencies and nonprofit groups. However, statistics show that most small-business owners do not take advantage of these often free or inexpensive resources: 58 percent have never had any training in bookkeeping even though 81 percent do their own books. The federal Small Business Administration holds financial literacy classes periodically, and a free online tutorial is available through a collaboration between the SBA and the Federal Deposit Insurance Corporation. Many city governments have small business development agencies that offer financial literacy training. An online search will direct you to resources in your area.

Building Financial Literacy

Financial literacy training for small-business owners is an ongoing process, and you are likely to keep learning as long as you run your business. An introductory class can give you the basics you need and with practice, you gain more financial literacy. Even if you hire an accountant to handle your books, you need to understand your financial situation and know how to use the information your accountant provides. If you do work with a professional bookkeeper or accountant, choose someone who is patient with your questions and answers them in ways that make sense to you.