Financial knowledge is one of the most important skills for anyone wanting to make the most of their money. Many people fail to thoroughly understand basic financial skills and concepts, leading them to make poor financial decisions.
Before I began my entrepreneurial journey two decades ago, I wish I had spent more time studying financial knowledge and becoming literate in business finances. I could have saved myself so much money and headache simply by understanding how to manage my money more effectively.
What is Financial Knowledge?
Financial knowledge or literacy is the ability at which one understands the finances of business. Financial knowledge also refers to one’s ability to make informed financial decisions using problem-solving and critical thinking. Down below are some of the many aspects of financial knowledge:
- The Tax Code
- Principal and Interest
- Assets versus Liabilities
- Good vs. Bad Debt
- Saving and Spending
Many schools don’t teach personal finance or financial literacy as part of their curriculum. So, we must learn these skills as soon as possible to prevent financial crises.
Benefits of Financial Knowledge
- Understand How Money Works: Financial literacy teaches you about how money is generated, how cash flow works, the value of money, the role the government plays in money, and what digital currency is.
- Learn How to Generate More Money: Understanding money teaches you how to generate more of it. For example, learning to invest, purchasing assets with debt, and developing smart spending habits will help grow your wealth over time.
- Spend and Save Smarter: The more knowledgeable you are about money, the more cautious you become. For example, if you’ve been living lavishly for a while and struggling to make ends meet, you might start spending less and saving more.
- Grow Your Investments: Learning investing strategies such as investing in index funds can help you build passive tax-free wealth over time with minimal risk.
- Calculate Financial Risk: Financial knowledge teaches you how to calculate financial risks to reap the most reward without throwing your money away. For example, you might calculate the financial risk of purchasing a rental property for your real estate portfolio.
- Understand Assets vs. Liabilities: Assets are things that put money in your pocket and grow over time, such as investments and real estate. Liabilities are things that take money out of your pocket and decrease in value or stay the same, such as credit card loans and rent.
Why Financial Knowledge is Beneficial for Entrepreneurs
Anyone starting a business should have financial knowledge. Being knowledgeable about finances is essential for entrepreneurs because it allows them to calculate financial decisions and manage their money effectively.
Benefits of Financial Literacy for Entrepreneurs
Understanding How Much Capital You Need for Your Business: Before you start your business, you need funding to get it going. Instead of using your own money, unless you have tons of it, you can raise capital, or funds, from others.
For example, you can use Angel Investors, venture capital, an SBA 7(a) loan, a line of credit from a financial institution, peer-to-peer lending, etc. By gaining financial knowledge, you can decide which funding method is right for your business.
Reducing Your Company’s Taxes: Your company will face hefty taxes unless you have the financial knowledge to reduce them. For example, you can write off your employees’ salaries, depreciation, office supplies, business insurance, and work-related meals and travel expenses.
Reading Financial Statements: As an entrepreneur, you must understand financial documents, such as an Income Statement, Balance Sheet, and Cash Flow Statement. Understanding these financial documents tells you where the money is going and if you need to make any changes.
Taking Calculated Financial Risks: Entrepreneurs need to be able to make calculated financial risks for their business. For example, you can calculate the Return on Investment (ROI) of purchasing new software for your business to see if it’s worth the risk.
Financial Knowledge Resources
Here are some free and paid resources for increasing your financial literacy to set you up for success:
- Rich Dad, Poor Dad by Robert Kiyosaki
- The Intelligent Investor by Benjamin Graham
- The Millionaire Next Door by Thomas Stanley
- Think and Grow Rich by Napoleon Hill
- How to Money
- The Financial Confessions
- Beginner to Buyer
- WhiteBoard Finance
- Graham Stephan
- Andrei Jikh
- Financial Education
- The Financial Diet
- Finance for Everyone: Smart Tools for Decision-Making
- How to Save Money: Making Smart Financial Decisions
- Purdue University’s Planning for a Secure Retirement
- Fundamentals of Entrepreneurial Finance: What Every Entrepreneur Should Know
Run a Google search for “financial advisors” and sift through the results to find your perfect fit. You can meet in person or online, depending on your preference.
- The Economist
- Investor’s Business Daily
- Bloomberg Business Week
What Happens When You Lack Financial Knowledge?
Poor Credit: Not being financially literate could result in poor credit because you can’t make payments on your loan, make late payments, or default on your loan.
Bankruptcy: Your business might go bankrupt because you borrowed too much money and can’t pay it back, poor cash flow, minimal financing, and poor decision making.
Debt: Taking out a loan to pay for things like cars, credit cards, and other consumer expenses could put you further into debt because you don’t know how to manage your money.
82% of businesses that fail do so because of cash flow problems. (Review 42)
Investing in Your Future
Investing in your financial knowledge is an investment in yourself. Understanding basic financial concepts can help you avoid common money mistakes and improve your financial position.
Investing in your financial literacy is especially vital for your future as an entrepreneur. Running a successful business requires learning how to budget, invest, reduce your taxes, understand financial documents, use debt as leverage, etc. So, the sooner you become financially literate, the better.