The Importance Of Making Friends With Your Finances As A Leader

Marian Evans, Managing Director at Elevate BC Ltd

getty

Awkwardness around money is common. In the U.K., many people prefer to talk about almost anything other than money matters, including politics, health and relationships, according to a survey of 1,000 U.K. respondents by Lowell. But a lack of financial literacy can prevent individuals from meeting their business potential.

Understanding money develops the skills, habits and information required to stay on top of finances effectively. Not only is it important for young people to understand their finances in order to gain independence, but also if you are looking to go into business, I would argue that financial literacy is critical.

As a business consultant with a background in financial services, I often have clients who are initially embarrassed to admit they aren’t totally at ease with their financials, confident to challenge figures or question management information. This is more common than you might think, and as a confidant to many leaders, I can assure you you’re not alone if you need support with your financial literacy.

Getting to grips with the following terms is a good place to start:

• Debt

• Budgets

• Saving and investing

• Credit and interest rates

For me, there are few things more frustrating than missed opportunities in business. But equally, while you need to be savvy enough to take calculated risks as you grow a business, you also need to be on a sound footing to make those calculated risks. Approximately 20% of small businesses fail in their first year, 50% fail within five years and 33% make it to 10 years and further. Time and time again, a common reason businesses fail comes down to poor financial management. In my experience, many fail due to a lack of funding or working capital, over-estimating their financial forecast and poor financial understanding and management.

Steps To Improving Your Financial Literacy

It pays to make friends with your finances, keep them close and talk about them often. You can’t manage what you don’t monitor, and if you don’t understand your numbers, you don’t understand your business. As such, here are a few of my tips for improving your financial literacy:

1. Extinguish your ego and avoid the trap of turnover vanity. Focus on key metrics such as gross margin, operating margin, stock, and creditor and debtor days to enable you to control your cash flow.

2. Don’t bury your head in the sand. Provide your financier (banker or investors) with early warning signs. Don’t wait until the final hour.

3. Practice healthy financial fitness and build those muscles with consistent habits, such as having daily or weekly reviews so you can spot issues early and take action.

4. Don’t be afraid to talk about your business finances openly and to professionals frequently. Find a confidant; they are worth their weight in gold.

5. Don’t be too risk-averse to seek investments to grow. Just do it with your eyes open.

6. Don’t cut corners when it comes to financial staff. If you can’t do it yourself, employ someone who can. Even if you own a part-time business, this is key to longevity and substantiated success.

7. Use free systems and support online. Some solutions offer customer relationship management systems and financial budget spreadsheets.

8. Improve your financial hygiene. Keep things clean, clear and updated, and ensure your accountant is kept up to date.

9. Study a simple business financial management course to understand the language of your financial director and financial partners. Or, get a tutor who is credible and qualified.

10. Make decisions for the financial longevity of the business, rather than people-pleasing.

Why Understanding Your Business’s Finances Is So Important

Figures show the growth of “being your own boss” is not slowing down anytime soon. According to the University of London, “In the U.K. alone, more than 400,000 start-ups were formed in 2020.” The U.S. Bureau of Labor Statistics reported that “2020 was a record year for new business formation.” However, coupled with the rise in becoming your own boss has come a rise in insolvent companies.

The best business leaders are intimately aware of their company’s figures and can state them confidently without checking. They make it their primary business to know much money is needed to keep operations running on a day-to-day basis, including funding payroll, overhead expenses (fixed or varied) rent and utilities. Having robust financial controls ensures suppliers are paid on time and that leaders know how much is needed to invest in the business.

In my experience, it is often owners who are less in tune with how much revenue is generated by sales of products and services and the value of return needed for people’s salaries. I’ve also seen some businesses over-extend by believing their own hype in a fast-growth and high-risk strategy. With persona-led business press, media and pitches to investors, they ultimately can’t meet the financial demands when a deeper dive is needed into the management accounts.

Owners can lose sight of the financials, and, often, an entrepreneur has the vision and leadership skills needed to run the company, but they have less interest in the financials. To an extent, this risk can be navigated as a business grows if the owner has sufficient capital to employ that expertise (i.e., when the business gets to the scale of requiring a chief financial officer, for example). This doesn’t mean founders can wash their hands of financials, but it does mean there is a check-and-balance system in place.

Making Friends With Your Finances

The red-flag signs that a business is failing is often poor cash flow management, which is often fueled by overdependence on a few big customers and an unclear business strategy. But even if you don’t succeed at first, remember that a lot of successful business leaders have experienced failures, including the likes of Steve Jobs, Reed Hastings and Walt Disney.

I hope this article inspires you to make friends with your business finances so that you can realize your true potential. My advice is to stay level-headed and always build on strong foundations.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?