How to Avoid Driving Down the Interstate Blindfolded
Our Kick-Off to National Financial Literacy Month
April is National Financial Literacy Month, and I personally cannot think of a better time to discuss the importance of understanding financials. You don’t have to be the CEO of a Fortune 500 company to have a healthy grasp on your numbers. In fact, I sincerely hope that many others do. Financial literacy is important whether it’s for yourself and your family, as the owner of a small business, as a non-profit director, or in any capacity where you have some control over money coming in and money going out. This month presents a timely opportunity to review and upgrade not only your financials, but equally as important, your financial knowledge.
First, some history. National Financial Literacy Month had its beginnings over twenty years ago, and has since evolved into a month-long observance. The idea of dedicating a month to this topic has broad support – the House and Senate have issued joint resolutions in support of National Financial Literacy Month, and the U.S. Department of Education promotes its observance.
What is Financial Literacy and How Does it Affect Business?
According to Investopedia.com, “financial literacy” is the “ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.” And unless the business you’ve started or are otherwise running is a financial services firm, accounting, budgets, and numbers may not be your strong suit. That’s okay – they’re not a lot of people’s favorite things either (we are a select few)!
Yet, understanding your business’s finances, including cash flow, profit and loss statements, balance sheets, and budgets, is essential to understanding the overall health of your business. In fact, according to a study by U.S. Bank, as reported in Business Insider, 82% of small businesses fail because of cash flow problems. That’s why every for-profit and non-profit organization owner, officer, and director should prioritize financial literacy in their continuing education. And it’s also why we’re going to help you do just that.
For the next few weeks, we are going to observe National Financial Literacy Month in the best way we know how. You can expect our own version of financial tutorials right here in our blog. We will talk about everything from the terms you need to know to common misconceptions to why it’s so important to review some basic concepts, such as EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), Working Capital (Cash and other Current Assets less Current Liabilities), Aged Accounts Receivable, and many more.
Where Do You Stand?
For this week, let’s start with some basics. Take this financial literacy quiz to see if you’re on the right path to financial brilliance, or if maybe you have some brushing up to do.
1. Do you have a financial professional on staff?
Having the expertise of a CPA or internal (or outsourced) CFO can save you time and money in the long run.
2. How often do you forego infrastructure development to save money?
Saving money is, of course, important, but so are efficiencies.
3. Do you have an annual budget?
Navigating the fiscal year without a budget is just like driving down the interstate blindfolded! By reviewing past revenue and expense flows to forecast future income and expenses you can create a budget to see clearly where you are going.
4. If yes, do you monitor actual vs. budget?
The annual budget is a living, breathing document, meant to be part of your monthly financial review process – planned versus actual expenses. It’s okay to make periodic adjustments, a process that helps you know if the company goals are on track.
5. Do you firm grasp on your profit and loss statement and balance sheet?
Both documents are crucial, but each provides its own benefits. A balance sheet provides a snapshot as to how effectively a company’s resources are used. A profit and loss (P&L) statement provides a summary of the company’s revenue and expenses incurred during a specific period of time.
6. Is your G/L infrastructure meeting the need?
If your monthly financial reporting: (a) is either non-existent or (b) is not helping you run your business, consider a review and restructuring of your GL. Make it work for you – not the other way around.
How many “Yeses” did you score on the Financial Brilliance Meter?
0 – 1 – Financial Dunce
2 – 3 – Financial Aptitude
4 or more – You are on the road to Financial Brilliance!
No matter where you scored, we’ve got you covered. Stay tuned for the best ways to increase your financial literacy this month, so that a perfect score is waiting for you the next time you take the quiz. And if you scored perfectly now, congratulations! But, as you know, as a leader, professional, and human being, there is always room for growth.
If you need additional assistance, we’re only a phone call or email away. Barker Associates has extensive experience working with organizations to better understand their financials and help them drive into their future blindfold-free. Use this link to my calendar to choose the best time for your free 30-minute financial analysis consultation.