6 critical financial skills every business owner needs to succeed

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It doesn’t matter how brilliant your business ideas are, how well you connect with customers, or how experienced you are in your field. If you want to launch and scale a profitable operation in the business world, you need to have strong finance skills. 

April is National Financial Literacy Month, which means now is the perfect time to work on improving those financial skills. Whether you’re looking to brush up on data analysis or boost your financial planning knowledge we’ve got you covered. Here are six financial management skills to cultivate—whether you’re an aspiring entrepreneur writing your first business plan or an experienced business owner managing multiple operations.

1. Understanding and analyzing financial statements

Knowing how to read and analyze your business’s financial statements gives you a sharp understanding of your operation’s overall health, and helps you make smart decisions about what to improve upon. 

Here are the three business statements you should be familiar with: 

  • Balance sheets: Your balance sheet lists your business’s assets (what you have), liabilities (what you owe), and equity. It shows your overall debt ratio and gives you a clear idea of how easily you can cover short-term operating needs and repay future debts. 
  • Profit and loss statement: Also called an income statement, your profit and loss statement shows your business’s revenue, expenses, and net income over a specific period of time (like a month, quarter, or year). It’s a broad overview of how profitable your business is, so you can use it as a starting point to figure out how to boost revenue and profits. 

Cash flow statement: Your cash flow statement gives you a line-by-line breakdown of all the money that enters and leaves your business during a specific period. Cash flow management helps you to see how much money you have at any given time to pay bills and loans, maintain operational expenses, process payroll, and invest in growth activities. You can use cash flow management to figure out where to cut expenses and how to balance accounts receivable and payable for steadier cash flow.

2. Budgeting 

Budgeting is an essential finance skill for small business owners managing multiple financial transactions. Without a realistic, clear-cut budget, you risk spending money you don’t have or not spending enough to stand out in your market. Smart budgeting makes it easier to maximize your ROI, cut expenses, plan for seasonal changes and economic fluctuations, and build an emergency fund. 

Regardless of whether you already have a budgeting process in place, these finance skills can help you build a more effective budget. 

Review industry standards

Research average budget sizes for your industry and business model, so you know how much money your competitors are putting toward expenses and production costs. You can search recent online reports, talk to other small business owners in your community, join an organization  for accounting and finance professionals, or consult finance professionals that specialize in your field. 

Track and regularly review your expenses

When you record and review your expenses on a regular basis, you can use analytical thinking skills to identify areas where you can either cut back or double down. Your fixed expenses are the costs that stay the same from month to month, such as rent or mortgage payments, loan payments, payroll, internet bills, and insurance premiums. Variable expenses are the costs that fluctuate from month to month. Think: advertising and marketing costs, production costs, supplies and materials, utilities, and consultant fees. 

Rank your expenses by necessity and ROI

Assigning a numerical value to your various expenses gives you a better idea of which ones are critical to business operations, and which ones you can sacrifice if you’re in a cash crunch. With this strategy, you won’t have to review your expenses line by line when you’re trying to cut costs—you can group expenses by their value then reevaluate them. 

Put a “1” next to items that are non-negotiable and essential to your business’s day-to-day functioning (like rent for your storefront or your point-of-sale system), a “2” next to items that are important but have a little room to change month to month (like inventory or packaging materials), a “3” next to items that create value but can be tightened up (like marketing expenses), and a “4” next to items you enjoy but bring the least value to your bottom line (like subscriptions or office decor).  

Put a certain amount per month in an emergency fund

Make sure you’re setting aside a set portion of your business’s monthly budget to go to emergency savings. After all, you never know what can happen—economic downturns can slash your revenue in half, while local natural disasters could force your business to shut down temporarily. It’s a good idea to always have at least three to six months of operating expenses in an emergency fund. 

Balance long-term goals with immediate needs

The most successful budgets address your business’s immediate needs, while also leaving room to work toward long-term goals and invest in growth activities. Carve out time at the end of each quarter to review your budget and compare it to your income and cash flow statements. 

This will give you a better sense of what you were able to achieve with your budget. From there, you can make more informed decisions about how to rein in your budget or how to expand it to make room for investments with high ROI potential.

3. Improving your business credit

Having excellent business credit gives you more financial freedom and opportunities. That’s because everyone from business lenders and credit card companies to landlords and vendors review your credit when deciding whether to work with you. 

With a higher credit score, you have a greater chance of being approved for financing and getting more favorable terms, like lower interest rates and higher borrowing amounts. If you’re looking to improve your credit score, it can’t hurt to go back to the basics and review some fundamental finance skills. 

  • Update your credit information.
  • Pay bills on time.
  • Take out a new credit card or business line of credit and make payments on time. 
  • Maintain a low credit utilization ratio on your credit cards and lines of credit.

For more information on how your business credit score is determined and what finance skills can influence it, check out these five steps to raising your credit score. 

4. Managing your debt load 

Opening and growing a business requires capital—some of which you may need to borrow. A key part of financial management is figuring out how to manage your debt load so you get the most out of your investment and when it’s advantageous to take on new debt. 

Managing your debts comes down to these two vital finance skills:  organization and planning. In addition to automating your monthly repayments and closely tracking your credit utilization, it’s also smart to look ahead at your loan repayment schedule and cash flow forecast to see if you can increase your monthly payments to accrue less interest and pay off your loan sooner. 

Determining when to take on new debt or refinance current debt requires crunching some numbers. You can start by calculating your business’s debt-to-income ratio (DTI), which gives you a better idea of how much debt you have relative to how much income is coming in. 

Many lenders look at your DTI when deciding whether to give you a business loan. You can calculate it using this formula: (Monthly debt repayments / Monthly gross profits) x 100 = DTI%

For example, if you have $4,000 of monthly debt repayments and $15,000 in gross profits per month, your DTI would be 26.6%, which means nearly 27% of your monthly gross profits are going toward repaying your debts. Your DTI should be at least below 50% to qualify for a loan, but many business lenders like to see DTIs at 36% or below. 

Another way to calculate how much debt your business can afford is debt service coverage ratio (DSCR). Calculate your DSCR in just a couple steps with our free calculator. 

Once you have your updated numbers, use them to analyzeyour business goals, recent financial statements, and resources. Check out these six factors to consider before getting a business loan. It can also help to take a look at seven reasons to get a business loan when your operation is thriving. 

Want to estimate your business’s monthly payment for a potential business loan? Use our calculator here.

5. Assessing profit potential

Learning how to assess the  financial potential of a particular product, service, or investment is a finance skill that will set you up for success. In addition to conducting market research, there are some other helpful financial reporting metrics you can use to gain some insights. 

Cost of goods sold (COGS)

You can estimate your projected bottom line by subtracting COGS and other expenses from your revenue. Use this formula to calculate COGS: Starting inventory costs + additional inventory costs – ending inventory = COGS

As an example, let’s say your business’s inventory costs at the start of the year add up to $100,000. You make $400,000 worth of additional inventory purchases throughout the year and finish with $75,000 worth of inventory at the end of the year. Following the formula, your COGS would be $425,000.

Cash flow forecast

A cash flow forecast can help you budget and figure out which changes you need to make in order to increase revenue.You can make a forecast by reviewing your past cash flow statements and income statements. Choose a period of time you want to forecast for, like the next quarter, then estimate your incoming sales, incoming cash, and outgoing cash. Your cash flow will equal your cash revenue minus your cash disbursements

Break-even analysis

A break-even analysis indicates the point at which your revenue completely covers your expenses. You can use a break-even analysis to gauge whether or not you’re pricing products correctly, or use it to assess the money and effort that would go into developing a new product. 

The formula for the break-even point is: Fixed expenses / (Price per unit x variable cost per unit) = Break-even point.

Imagine, for example, that your pottery business has $20,000 worth of fixed costs per month, including rent, taxes, and payroll. It costs $15 in raw materials, packaging, and shipping to make each piece of pottery, and each item sells for roughly $25. Using the formula, that means you would have to make and sell 53 pieces of pottery each month to break even. However, you’d have to make and sell much more than that to make a profit and account for your variable expenses. 

6. Investing wisely

Investing is more of an art than a science, but savvy business owners know how to make strategic investments. This can take many forms, like investing in tools—a new delivery vehicle, for example, or inventory management software—to streamline your business. 

It might also mean investing in people, like a new marketing manager, or in research and development (R&D) activities, like making prototypes or testing new quality assurance processes. It can also include more traditional investing, such as putting money in stocks or small businesses you want equity in. 

Here are some questions to consider when making financial decisions on a potential investment: 

  • What does the investment call for monetarily? Do I have the cash right now to invest or would I need to obtain financing? 
  • What does the investment require  in terms of my time and resources?
  • What are the potential benefits of making the investment (e.g. more customers, greater monthly sales, more time back for your employees, etc.)? Have you done a risk analysis? 
  • How likely are you to see  ROI—and when?

How to improve your finance skills as a business owner 

You don’t need to have a career in the finance industry, to be a smart financial steward of your business. You can improve your finance skills with experience, intention, and persistence. Here are a few ways:

  • Take a course: Deepen your knowledge and financial skills by enrolling in a university or community college course on financial reporting skills, accounting skills, or enterprise resource planning.
  • Hire a CFO: If you want to learn about financial management from someone with more experience,  consider hiring a full-time or consultant-based CFO who can oversee your operation’s finances and advise you on growth strategies.

Take advantage of finance professionals in your network. If someone you know works in the finance industry, use them as a resource to ask questions and improve your finance skills.

How to support your employees’ financial skills 

Part of being a good business owner is making sure your employees are financially literate, too. You can empower your employees to make the right financial decisions for themselves by:

  • Clarifying your compensation policy: Consider creating a handbook for employees that explains finance skills, such as how they can earn tips, bonuses, or wage raises in your business. You may also want to hold an annual workplace meeting or one-on-ones to answer compensation questions. Keep in mind that part of having a clear compensation policy is abiding by your state’s laws around compensation transparency, whether that includes writing the wage range in your job description posts or giving employees a salary range for their role if they ask. 

Bring in financial professionals to talk with your employees about finance skills: Consider bringing a member of the finance industry to your workplace to give employees advice on personal budgeting, planning for retirement, financial planning tax prep e, and what to claim on their W-4s for tax withholdings. You can also work with finance professionals to create a 101 guide you can distribute to employees as well.

Invest in your financial health

Improving your financial skills has a direct effect on your business’s profitability and longevity. If you need extra capital to invest in a growth project or gain more stability, consider Funding Circle for small business financing. Our business term loans and business lines of credit have easy applications and fast, flexible funding. Apply today in just a few minutes. 

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