Financial Illiteracy and the Alarming Costs it has on business

CPAs are not alarmists by nature, but when they encounter financially illiterate business owners, let’s say it’s a major cause for concern. 

It’s not that new business owners need a great deal of business financial literacy to get started. Starting at zero is okay. 

It’s just not safe to stay there. 

Today’s post will help move you to a better place by explaining why a lack of business financial literacy is dangerous and what you can do about it. 

Let’s go!

Poor cash flow management

A business owner needs to know how to manage cash flow like your body manages blood flow. 

It needs to be funneled to the right places at the right time. That’s basically what the term ‘capital allocation’ means. 

So, what happens if a CEO or business owner doesn’t have this skill set?  The same thing that happens if you have a break in a major artery. 

Cash flows to places where it isn’t needed, and the business needs capital infusions to keep from bleeding out. 

That was part of the problem for Blockbuster Video. It had the ability to compete with (and destroy) upstart NetFlix, but it never managed cash flows correctly. 

Missed opportunities

Gaining business financial literacy has a flywheel effect. The more you know, the better you can manage cashflows and the better you can take advantage of opportunities when they come. 

The opposite also holds true. 

For years, Toys R Us was the center of the toy-buying universe. 

The store experience was terrible, but it didn’t matter. People went to Toys R Us for convenience. They carried a huge inventory, so the toys people wanted were always on hand, especially at Christmas. 

 When Walmart and Amazon began to steal market share, Toys R Us needed to pivot by offering online shopping and making their brick-and-mortar stores a fun destination.  

Unfortunately, they couldn’t because they had buried so much cash in inventory that there wasn’t enough cash to upgrade stores.  

How to build financial literacy

If you are just starting to build financial literacy, some established online course brokers, like Coursera, Udemy, and Masterclass, can help you quickly build a foundation. 

And while that’s a start, the key to business success is to never stop learning. So, don’t be afraid to look into more traditional learning avenues, like university courses.  

An MBA might be worth researching if you already have a bachelor’s degree. Here’s a guide on how to do that. 

Of course, you can’t know everything, even if you are a dedicated lifelong learner. Building a network of like-minded entrepreneurs and hiring a bookkeeper or CPA will go a long way in helping you gain insight and knowledge, as well. 

The Bottom Line

Running a business is tough, but having a solid financial skillset can help smooth out the rough patches. By taking lessons from the stories mentioned earlier, committing to learning as much as possible, and getting a little help, you may just wind up being a case study for financial literacy success. 

Also, check out next week’s post, which offers five books to help you dive deeper into business financial literacy.