5 Reasons Why Business Owners
Need to Know Finance

See also: Avoiding Common Financial Mistakes in Business

Business ownership can be an incredibly rewarding experience, but it also comes with its fair share of challenges and responsibilities, whether that be getting a business startup loan or understanding the different phases of a business on your own. If you aren’t prepared to handle everything that comes with it, you might be better off staying away from the startup world altogether.

One of the areas that new business owners need to know more about is finance, and there are several reasons why this should be your top priority. Here are five of them.

Businessman working on finances.

1. Knowing what drives your costs can save you money

The most important aspect of business is understanding what drives your costs. Whether you’re driving a car or running a business, paying attention to how you spend money will save you lots in overall spending. Understanding what drives your costs will also show you areas where you can cut expenses and save money.

Reducing expenses is key when it comes to saving money, because saving $100 per month translates into $1,200 per year—or even more if that amount compounds over time. That extra $1,200 could be invested in savings or used as a monthly profit check. Either way, cutting unnecessary expenses is an easy way for anyone who’s working for themselves to make sure they’re operating their business as efficiently as possible. It’s not enough to just know what your expenses are; you need to understand why those numbers are what they are so you can adjust them accordingly.

The difference between good debt and bad debt, for example, is something you can only understand with basic financial knowledge. Every type of debt has its own unique characteristics, which means each one carries its own risks and rewards. Debt isn't inherently good or bad; it's all about knowing how to use it properly. There's a big difference between borrowing money for something with high returns versus something with low returns. But, it would ultimately depend on your business, the type of financing you're looking for, and how you'll use it.

2. Keeping on top of cash flow will keep you profitable

Although it’s easy to lose sight of cash flow when you’re trying to make payroll, there are actually five main reasons why business owners need a basic knowledge of finance.

  • The first reason is simple: Cash is your lifeline—it pays for your employees, electricity, and supplies.

  • The second reason is that understanding how much cash you have in hand will help you decide whether or not it’s a good time to take on debt.

  • Thirdly, learning about finance can help you figure out how much money an acquisition may cost or how much financing will be required for a new office space or project—and those factors matter even if you’re running a smaller operation.

  • Fourth, knowing how to read financial statements can give you an insight into what your business is worth (if you ever decide to sell).

  • And finally, keeping track of your expenses and revenue helps ensure that everything adds up correctly at tax time.

3. Understanding financial statements will help you make better decisions

If you don’t know how your business is performing, you can’t make informed decisions. It doesn’t matter if it’s revenue or profit—you won’t be able to maximise either unless you understand exactly what they are.

That's why understanding financial statements is critical for small-business owners; in fact, some studies show that only one in four small businesses claim to have excellent financial literacy. Although there's more than one type of financial statement, most small businesses should understand income statements and balance sheets. Let's take a look at both so you can figure out which will benefit your company most.

An income statement is a document that lists all of your revenue and expenses during an accounting period (which could be as short as one month). Expenses on an income statement include things like payroll costs, cost of goods sold and advertising expenses. Any remaining amount from revenues would represent your net income or profit for the period under review.

Similarly, balance sheets also list all assets and liabilities on either side of a specific point in time. The difference between them comes from when each includes certain categories. An accounting year may match up with another fiscal year for some companies, while others might choose to align their periods with seasons or quarters instead.

4. Get ahead by following best practices

The best way to get ahead in business is simple: Follow best practices. The most successful businesses (Apple, Microsoft, etc.) in recent history have not been creative or different from their competitors – they’ve just done what works consistently and well.

For example, Apple and Microsoft are both famous for returning excess cash to shareholders through dividends and share buybacks. There’s nothing revolutionary about either of these strategies but they help attract investors and bolster stock prices.

As a business owner, you want every edge you can get so following best practices is a smart way to stay competitive while also protecting your long-term interests. You should be aware that following best practices doesn’t necessarily mean you do everything other companies do. Instead, it means you understand why companies do certain things and then choose whether or not those actions make sense for your company. This might seem like an obvious point, but many entrepreneurs don't really think about why they're doing something until after they've done it; then it's too late. Think before you act.

In addition to being able to identify best practices, being able to spot trends will also help any entrepreneur better understand his industry and prepare accordingly. Remember: A trend today could be common practice tomorrow.

5. Don’t be afraid to ask for help

In business, you can’t do it all yourself. Even if you try, you’ll likely fail.

Successful business owners know that building a team is essential for their success, but that takes time and money. Until then, these entrepreneurs are putting in work themselves. That doesn’t mean they aren’t smart about it: people with technical or business skills can offer advice pro bono on platforms like Clarity.fm or Fiverr (start offering your services early; even $5 can be useful).

While raising funds might seem like an intimidating process—especially if you don’t have a track record of doing so—using a site like Seedrs can also provide capital for growth when you're unable to fund projects on your own. Asking for help isn't easy, but it's better than not asking at all.

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About the Author

Craig Lebrau is the CMO of Media Insider, a Wyoming-based PR company that aims to disrupt the way companies communicate their brand in the digital era.