Financial Literacy for Business Owners

If you are a business owner you may already be financially literate, but just how strong is that literacy? Even if you are there are likely some things your CFO, Controller, or in-house accountant can do to improve your understanding of your financial situation. On the other hand if you aren’t financially literate then these same people should be helping you to become so.

What is Financial Literacy?

As a working definition we could say that financial literacy for business owners is the ability to read and understand financial statements and other financial documents, analyze financial information, and make informed decisions based on that information. It actually gets more involved and includes such things as understanding what drives certain amounts on the balance sheet and income statement in particular. Although not used as much as these two statements, thorough financial literacy also includes at least a rudimentary understanding of the statement of cash flows, also known as the cash flow statement.

Lacking Financial Literacy?

If you are not clear on how to use your financial information, make sure you have a conversation with your CFO, Controller or in-house accountant. If you lack someone on your staff of a level that can assist, a Part-time CFO or Controller can help you and the cost of that is generally less than you might think. Regardless of how you get up to speed on this, it is in your best interest to do so sooner rather than later.

Need More Financial Literacy?

As I mentioned in the first paragraph of this article, even if you do have what would be consider good financial literacy for business owners there are always more things you can learn to help you get a better grasp of just where your business stands financially and operationally at the moment and get an idea of what must be done going forward to reach your goals. What do I mean by that?

Some Examples

Perhaps you are pretty adept at reading the balance sheet and income statement. You may be familiar with commonly used statistics such as current and quick ratio, working capital, return on assets, etc. But, do you understand what drives those numbers? For example, do you have a grasp of inventory turnover and things that can be done to improve it? Do you know what you can do to not only reduce the accounts receivable days outstanding but also what you can do to prevent receivables from becoming past due? On a finer level, do you have clarity on how different kinds of debt should be used, if at all? For example, long-term debt should be used only for things that will provide benefit over a long period of time, such as equipment that will be depreciated. On the other hand, short-term debt like a line of credit should only be used to finance things that will be used quickly, and as such this debt needs to be paid off on a current basis. I specifically mention debt as it is one of the most common areas I see where business owners get off track by doing such things as getting delinquent on a line of credit to the point that it is essentially operating as long-term debt but still being used to fund assets with short-term benefits. I could go on and on but let’s just say that there are a lot of things driving the information on the financial statements and the decisions you make can impact your company over the long haul. Again, a Part-time CFO or Controller can be of great help to you.

What about You?

Think about it now and decide if you really possess enough crucial financial literacy for business owners to make informed decisions. If not, what will you do to get up to speed?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.


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