Financial literacy at core of good small business
In fact, financial literacy is critical for small business success.
"Financial literacy is more than simply being able to balance a check register. It's probably one of those topics that many choose to ignore out of fear," said Sterling Gurney, investment adviser for Edward Jones in Snohomish.
He agrees that small business owners are very wise to bone up on the fundamentals of finance.
In the world of business it's the language of accounting that helps us to communicate and understand each other. Income statements, financial ratios, liquidity, cash flows and balance sheets are important to know and appreciate.
"It's more than simply pawning the work off on a CPA or bookkeeper," said Will Chen, a certified public accountant in Edmonds. "Business owners need to be aware of the reports that are being generated and also learn to appreciate how they tell the story of the business. Cash flow analysis is critical since cash flows represent the lifeblood of a business. While a good accountant or CPA can coach a business owner to help interpret the data, it is really up to the owner to take the information and make the critical decisions."
Consider some of the business decisions that will ultimately be expressed in financial documents. Critical assets such as plant and equipment -- are these to be owned or leased? Business vehicles could be owned or leased. And for some small businesses it's best to simply pay an allowance to employees for use of their personal vehicles. This will simplify issues relating to direct vehicle expenses.
In a manufacturing setting, carrying excess inventory (raw materials, work-in-progress or finished goods) can kill a small business. If you're financially literate, you would be able to spot these concerns. How you effectively manage your debt and expenses will also play a significant role in your success and bottom line.
Budgeting is certainly a critical puzzle piece. This is the discipline of looking to the past for trends and patterns and then simply making an educated projection on the expected financial activities for the upcoming period -- typically for the year. Projections are tricky, of course. Does anyone know exactly when a recession is about to begin -- or end? Do we have a sense of consumer confidence or the direction of interest rates?
Interest rates are also a bit of a challenge. What does a small-business owner do with cash that needs to be invested, yet be available for liquidity? Microscopic returns are being paid on cash these days. Yet with the low rates for investing, we also find low rates for borrowing. And cash is king -- so they say. When negotiating with suppliers or other business associates, one may find significant discounts or consideration that translates to high value and return for the business. In such a scenario, maintaining a low-interest line of credit may prove helpful as cash leverages the supply chain.
Tax implications are also part and parcel to financial literacy; they eventually play a part in virtually every business decision that a small business owner makes regarding finance.
"Taxes are always an important consideration when looking at choices, especially for those facing a heavy tax burden. However, a business owner should not make decisions based solely on taxes but rather based on the mission of the business. It would be a mistake to chase tax credits and incentives only to lose sight of your purpose," Chen said.
If you're feeling intimidated by the topic of financial literacy, you're not alone. Small-business owners often wear too many hats and see this as one business function that can be delegated to an outside professional. There are workshops, continuing-education classes, seminars and plenty of websites that would help anyone to become more confident in their financial literacy.
"It's time well spent; better yet, invested!" Gurney said.
Juergen Kneifel is a senior associate faculty member with the Everett Community College business program. Send comments to entrepreneurship@ everettcc.edu.
SBA loan workshop
Everett Community College is hosting a Small Business Administration Loan workshop conducted by Coastal Community Bank at 7 p.m. April 26 in Gray Wolf Hall Room 168. Call Coastal Community Bank at 425-257-9000 to reserve your spot.
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