Financial literacy: it’s a broad term that covers a wide range of topics, and trying to decide where to begin the learning process can be confusing. In honor of Financial Literacy Month, we are focusing on the importance of financial literacy for business owners specifically, and the key components that make up financial literacy. Of course, this month is also a great time to make sure your personal finances are in order. For a helpful overview of managing personal finances, we recommend this guide.
Essentially, being financially literate translates to understanding the story behind your numbers. This, in turn, opens all kinds of doors for your business. If you dig deep enough to discover what the numbers on your financial documents actually mean, it will enable you to discover the path to growing your business. The numbers aren’t there to intimidate – they are there to guide you in the right direction.
When it comes to understanding the story behind your numbers, we’ve boiled it down to 5 Key Documents & Metrics that successful business owners review each month:
1. Income Statement (Profit & Loss)
Indicates financial performance of a company-specific period
Money You Made (Revenue) – Money You Spent (Expenses) = Net Operating Income (NOI)
2. Balance Sheet
Highlights what a company owns and owes, as well as amount invested by shareholders
Assets = Liabilities + Shareholders’ Equity
Forecast: projects where you want to be
Budget: involves creating a plan to get there
4. Cash Flow Statement
Shows money moving in and out of the company
5. Company KPIs (Key Performance Indicators)
Includes benchmarking and performance metrics – where you are vs. where you want to be
The key is not to merely review these documents, but to comprehend them. For example, “revenue” and “expenses” aren’t very telling on their own. But when you dive deeper, you will discover what those numbers truly represent: which clients are contributing to your revenue, and how much do they contribute? What are your top ten expenses?
When you understand the answers to these questions, you can pinpoint exactly what needs to be done to elicit growth. Review your finances through a lens of forward-thinking positivity. Use the numbers to forecast where you want to be and to determine what needs to be done to get there. For example, “How many clients will I need to reach my revenue goal?”
Don’t feel limited or daunted by the numbers. Break them down into definable and measurable parts. Let your financial documents be a guide to tell you what you can do. Being financially literate means recognizing what makes up a number – and knowing you have the power to change that number in a manner reflective of your goals as a business owner.
Are you ready to dive in? Check out the classes offered at EO Catalyst in Nashville, or contact BluePrint Strategy today for help with building your business BluePrint and planning for future growth.