Why Financial Literacy Is Essential for Business Owners in Colorado

It is not easy to point out a single key factor that will help drive a small business in Colorado toward the path of success. However, most experts will suggest that financial literacy is a critical tool for driving long-term business success.

Understanding how each dollar invested will create greater value for your business is extremely important to foster growth. For that purpose, financial literacy is a game-changer. Irrespective of your age or background, it is a skill that helps everyone establish a solid foundation for financial management.

What Is Financial Literacy and Why Should You Care?

Financial literacy teaches you the basics of earning, managing, and investing money. Being financially literate helps you to use financial tools and strategies effectively and benefit from them. You understand the ideas behind financial concepts and apply them while making strategic decisions.

Every decision you take will have a financial implication on the business. A better understanding of basic financial concepts allows you to make smart decisions and handle your business finances more efficiently. 

Additionally, this helps you to improve profitability and better manage production costs and existing debts. A better understanding of the accounting basics of your company will help you in budgeting for specific activities and planning for the future while keeping the bigger picture in mind. 

Armed with this knowledge, you tackle problems from a new angle and weigh your options more effectively when faced with difficult decisions. In short, financial literacy is the key to becoming a well-rounded business leader.

Beyond that, financial literacy plays a crucial role in ensuring the stability of your personal finances as well. A deal or investment that sounds good at first glance may not be good at all once you consider the overall cash flow impact or tax implications. Being financially literate will help you to analyze the data and make informed decisions. 

Need help determining if your business is ready for a small business loan? Contact a loan expert at Energize Colorado today!

Benefits of Financial Literacy

Here are six benefits of improving your financial literacy that can help a small business in Colorado sustain its growth trajectory.

Better Cash Flow Management

This may be news to you, but cash flow problems are a major reason behind the failure of most small businesses. Financial literacy will help you maintain a “lean and mean” cash flow. It allows you to manage cash flow dynamics more effectively through observations and data.

Tracking the cash inflow and outflow through a simple cash flow statement has many advantages. This means you will have enough liquidity to invest in new growth opportunities while meeting obligations like payroll, taxes, and utilities. Besides, it will also help you to manage cash flow gaps and avoid debts by planning ahead.

Successfully managing cash flow is not just a part of your business but is also an important aspect in other areas of life. Being financially literate will help you develop a household expense management strategy and identify potential saving opportunities.

Make Better Growth Decisions

The truth is, gut instinct may not be enough to make the right decisions for your business at every stage. Financial literacy equips you with the crucial tool of knowledge, enabling you to evaluate opportunities and assess risks based on data analysis. 

This gives you the ability to weigh the options related to new acquisitions, hiring, and business expansion. For small businesses, this helps to reduce financial risks.

Understanding crucial financial metrics like ROI and break-even point allows you to plan for financial strategies within your comfort zone. Besides, the ability to make educated decisions also helps you in facing difficult business scenarios confidently.

Tax Planning and Compliance

Admittedly, tax laws are complicated. Apart from meeting the basic tax obligations for your business, you also need to meet tax requirements related to payroll. Streamlining tax planning and minimizing tax burdens can be a struggle, more so if you do not understand the basics of tax structure and deductions. 

A large number of small businesses have to pay severe penalties for errors like underpaying estimated taxes and late filing. Having a solid grasp of the local tax regulations helps you to keep such surprises at bay.

Financial literacy helps you navigate through the maze of tax laws and comply with the tax requirements. It also helps you to separate legitimate business expenses from personal ones – another common mistake small businesses make.

Protect Your Business From Common Financial Pitfalls

Financial literacy gives you the ability to understand the risks your business may face. These may include interest rate hikes, debt repayment, insurance needs, and various emergencies. The knowledge will also help you prepare for downturns and create a financial safety net to tackle challenging situations. The steps needed can involve diversifying revenue streams and securing insurance.

Other common mistakes that small businesses make include failure to budget, underestimating costs, undervaluing products or services, and failing to account for seasonal revenue fluctuations. Avoiding such pitfalls is a critical aspect of financial literacy. 

Driving a business toward success involves understanding the relationship between budgeting, planning, and forecasting. Obviously, this is not something you are expected to do on your own. Even so, financial literacy helps an entrepreneur to map out short and long-term financial goals while mitigating potential threats. 

Build Wealth Beyond the Business

The truth is that any business ownership involves some inherent risks. While pouring money into a business is important, some situations may demand holding on to cash or diversifying your investments. Having sound financial knowledge is necessary to build wealth beyond the business through asset-building and long-term strategic investments

By spreading your investments, you can build a separate financial portfolio beyond your business. In case you are not familiar with various types of investments, financial literacy will give you the right level of knowledge.

Financial knowledge also helps you to look ahead and plan for exit strategies that make financial sense. A well-crafted exit strategy sets expectations for your company’s future and allows you to weigh potential buyout offers. In addition, it helps you with succession planning and passing leadership roles to other employees.

Empower Your Team Through Financial Education

As an entrepreneur, do you want a workforce where every employee feels financially empowered? Absolutely! 

Financial literacy empowers employees and allows them to contribute more effectively. One survey suggests that only 34% of adults meet the minimum benchmark for financial literacy. Conducting financial literacy training sessions or workshops provides an incredible opportunity for filling this gap.

If you are moving your business to Colorado, you might set a goal to ensure a stable financial future and avoid failure. Equipping your employees with financial skills is one of the best ways to do that. Not only does this increase productivity, but it also helps the employees to remain wealthier and happier.

Quite simply, gaining knowledge about savings, credit, and insurance is crucial at every stage of life. This will help employees steer clear of future financial challenges. Financially literate employees make informed decisions and have higher chances of making smart investments. Such employees can plan for major life events more effectively and avoid complications related to taxation. 

How to Level Up Your Financial Literacy as a Business Owner

No matter whether you plan on growing your business in Denver or Colorado, here are some useful resources that help improve your financial literacy.

• As a responsible lending organization, Energize Colorado is dedicated to providing financial support and guidance to the small business ecosystem in Colorado. The Energize Community Program provides business owners with education, mentorship, and technical assistance. The goal is to help them build strong financial foundations.
• The SBA has developed a business guide to provide the basic financial knowledge to entrepreneurs for planning, managing, and growing their businesses. This guide equips you with the necessary skills for managing the day-to-day business operations.
• The SBA has also set up multiple Small Business Development Centers (SBDCs) that provide small business owners and start-ups with financial counseling and training. These programs deliver professional-grade technical assistance to manage every stage of a business operation.
• Money Smart for Small Business (MSSB) training has been developed jointly by the FDIC and SBA and consists of instructor-led curricula. These courses provide you with the practical financial knowledge needed to start and manage a small business.

Beyond boosting your financial literacy, there are some practical steps that you can take to manage your finances more effectively.

• The first step is to take a financial education course or join a workshop that will help you gain knowledge. Reading books and articles on financial education also helps.
• Tracking the key business metrics is essential to measure your performance. These include tracking performance in the sales, marketing, and finance sections.

• Use financial software to track the key metrics and manage your business finances. While there is a learning curve with such software, it will help you stay efficient in the long run.
• Get help from a CPA for preparing and filing taxes and getting recommendations about reducing your tax burdens. Connect with a financial advisor to get personalized guidance while making complex financial decisions.

Benefits of Financial Literacy: FAQs

What are the most important financial literacy skills for business owners?

While there are multiple important aspects of financial literacy, understanding the cash flow dynamics of the business is one of the important skills that you can learn.

Can financial literacy help prevent business failure?

Financial literacy can definitely help you identify risks and take the right steps to prevent your business from failing.

How does financial literacy impact my ability to get funding or loans?

Once your financial confidence is high, you can evaluate financial offers with enhanced clarity and negotiate better loan terms.

What’s the connection between personal and business financial literacy?

Financial literacy helps you learn the basics about debt, investment, budgeting, and tracking personal spending. This knowledge gives you the foundation to manage business finances and helps you to meet your life goals as well.

Financial Literacy Is a Business Strategy

Improving financial literacy is necessary for entrepreneurs looking to run a successful business. Moreover, it is an important step for ensuring the better functioning of the Colorado economy. As Benjamin Franklin famously said, “An investment in knowledge pays the best interest.”

Once you have created a business plan, make sure to seek out learning opportunities and leverage existing resources to improve your financial literacy. This critical skill set is woven into not just your business, but in every aspect of life.

Need help determining if your business is ready for a small business loan? Contact a loan expert at Energize Colorado today!