Improve Your Financial Literacy as a Small Business Owner

Running a healthy business means keeping a close eye on your money and using simple tools to grow your company. 

• Master the Core Pillars: Balance your cash flow, set pricing structures, and manage your inventory to keep daily operations running smoothly.
• Understand Essential Reports: Decode basic financial statements — like your balance sheet and profit and loss report — to gauge your business health.
• Build a Support System: Create a monthly budget and put together a trusted team of financial experts to help guide your decisions.

There are many reasons why some small businesses succeed and some fail. When starting a small business, it’s vital that you have a good understanding of the financial aspects of your business. Making financial literacy a priority will help you start — and build — a profitable and sustainable small business.

Every business is a little different, but there are a few financial literacy concepts that are important for every business owner to know and understand in order to successfully run a business.

Core Pillars of Financial Literacy for Small Business

To keep your small business running smoothly, you need to focus on these three main operational pillars.

Cash Flow Management

Cash flow is just what it sounds like: It’s the flow of money moving in and out of your business every month. If you have more money coming into your business than going out, you have a positive cash flow. If you have more money going out, your business has a negative cash flow. Learning how to track cash flow is critical because having a healthy cash reserve helps your business stay stable during slow sales months. 

Strategic Pricing Structures

Understanding how to price your product or service in order to create a profit is another important aspect of owning a successful small business. To create a profitable pricing structure, you need to project how much your revenue will be and what your expenses will be. Once you determine the price that allows your business to be profitable, the next question to ask is, “Will I attract customers at that price level?” Your pricing should protect your bottom line while covering your everyday bills.

Smart Product Inventory Management

Product inventory is a valuable business asset when managed correctly. If your small business sells a product, you need to track how much inventory you have and know how much it’s worth. If you have too much product on hand, your profit margin will suffer. And if you have too little product, you might not be able to meet customer demand.

Decoding Your Business Financial Statement

To properly handle your small business finances, you must become comfortable reading standard financial reports. You do not need to be a professional accountant, but you should confidently understand these key pages in a business financial statement:

Balance Sheet

A balance sheet is a summary of the financial balances of a business. The balance sheet is like a snapshot of a business’s financial condition at a certain point in time. A typical balance sheet has two sides: assets and liabilities/expenses. Your business’s balance sheet goes hand in hand with your profit and loss statement.

Profit and Loss Statement

A profit and loss statement shows the total revenue, the itemized expenses and the bottom line (how much money your business made or lost) every month. Small business owners must understand how to put together and read a profit and loss statement.

Equity

Having sufficient equity infused into your business in the startup phase is critical. Equity is related to what your business is worth. For example, if your business is valued at $1 million and you have $600,000 of debt, your business has $400,000 of equity. Having positive equity helps your business and can support future plans for growth.

Practical Small Business Budgeting Tips

You can learn more about how to manage small business finances by building a clear financial roadmap. Here are a few essential small business budgeting tips to keep your company on track:

• Overestimate Expenses: Unexpected costs will come up, especially in the first few years. Budgeting a 10% to 15% safety buffer for extra expenses can save you from a cash crunch and put your mind at ease.
• Pay Yourself a Fixed Salary: Avoid treating your business account like a personal piggy bank. Pay yourself a regular, market-rate salary to keep your financial forecasting clean and organized.
• Review and Adjust Monthly: A budget is a living document. Compare your actual profit and loss numbers against your budget every month to catch errors early and discover new ways to save.

Building Your Financial Advisory Team

As you learn how to financially manage a small business, remember that you don’t have to do it alone. It's important to create strong partnerships with a commercial banker, CPA, attorney and insurance provider.

Look for partners who care about your success but aren’t afraid to share an opposing viewpoint and push you to think holistically about important business decisions. By creating strong relationships with people you trust and respect, it will be a lot easier to create positive outcomes in your first couple years of business and beyond.

Invest in Your Financial Literacy Today

Financial literacy is the backbone of every small business and can mean the difference between success and failure. Business owners need to be knowledgeable and quick on their feet to make decisions. Take the time to gain the financial knowledge needed to get your business started off on the right foot.

To learn more about how Northwest Bank can provide financial support for your small business, contact one of our commercial bankers today.