Cote (2020) defines Financial Literacy as the knowledge around financial statements, terminology, concepts and the understanding of using this knowledge to improve your Small-to-medium Enterprises (SMEs) financial growth. Financial literacy is an important tool SME’s must use to improve their long term financial health.
How to improve your financial literacy
- Understanding Financial statements – The Balance Sheet, Income Statement and Cash Flow statements are the 3 main financial statements which every business owner must know the objectives for. Understanding these statements allows business owners to identify the key areas where their business’s financial health could suffer beforehand.
- Key business ratios – Ratios such as Debt-Equity ratio, Gross Profit Margin, Working Capital Ratio, Quick Ratio, Earnings Per Share and Price Earnings Ratios are a few key ratios which are crucial to a business as they provide SMEs to understand where their business is doing well and where to improve.
- Reading a credit Report – A credit report is a document that contains information about a business’s credit history such as late payments or defaults on loans. Credit reports are used to understand a business’s risk of defaulting on a loan.
- Calculating ROI – ROI is a ratio used to understand what types of investments is worth undertaking for an SME
- Understanding Cash Flow Statements – Understanding cash flow statements allows SMEs to track their cash incomes and expenditures. (refer to “Improving Cash Flow Management” for more)
- Understanding taxes – Depending on your location, state and industry, the taxes applicable for your SME differ. However it is crucial to have a good understanding of which taxes affect your SME.
Taking time to expand on general financial literacy has its benefits even for an individual. However it is a crucial element for SMEs as their long term financial stability will depend on making the correct calls depending on the business’s current state of affairs. If you’re an SME owner who would like to learn more on the points mentioned above, our linked articles will give you a more in depth discussion on these essential topics.