How partners' lack of financial literacy can affect your firm
While this may sound obvious, there is a clear relationship between lack of financial literacy by the owners and financial difficulties they experience, and adequate financial education can partially decrease those challenges
It goes without saying that financial literacy is a prerequisite for running a practice, since you must make routine financial decisions daily that have a bearing on your business success and growth. Thus, to operate efficiently and attain your financial success for your practice you need to be equipped with the necessary skills to undertake effective financial decisions. As you know there are serious penalties that come with each inappropriate financial decision you take.
Just think of it, you probably play a sport such as golf. There is literally no way you can be a player to reckon with even among social players if you don’t understand the basic rules of the game like the etiquette, filling in the scorecard, taking a bunker shot etc. the same with understanding the rules of running a business. The level of your understanding now depends on the level at which you want to play.
In a practice where the Managing Partner for instance has poor financial literacy levels the records of business transactions are non-existent and, where they do, these are often times incomplete. This makes it difficult for you to access funds from the established financial institutions, due to the lack of the ability to write convincing business proposals which stifle growth and often leads to business failure.
While business failure can be explained by several economic and social factors, financial illiteracy has a fair share to the mishaps.
By financial literacy, I am talking of someone who makes sound financial decisions at various stages of the business and shows an ability to secure correct financial products. It is that ability to make informed judgments and to take effective decisions regarding the use and management of money. It is also the ability to interact confidently with your banker, your prospective investor, your board members, your vendors etc. It is having the ability when dealing with each one of these to make informed judgments and to take effective decisions regarding the use and management of money.
If you are to achieve your business’ competitive advantage and realise its full economic value then you need to be financially literate. Making sound financial decisions will ultimately help you achieve your individual and business financial wellbeing.
As a businessowner you must be able to evaluate the information needed to make decisions that have financial ramifications or consequences on the business. You must have the ability to read and understand fundamental financial statements, as well as the ability with numbers, in order to make informed judgments.
You also need to master the ability to understand and use business financial statements to generate key financial ratios to evaluate and manage a business.
Avoid the risk of most small businesses where its common to find its owner as an employee or technician, mainly focusing on the operational area of the business, forgetting the strategy and planning of the business activity, and where financial education could make the difference, by improving the Managing Partner’ financial skills.
In conclusion, I would like to emphasize that possession of financial skills is one of the most critical skills you need as a business owner. It does not matter the type of business because all businesses need professionally managed finances.