“’Tis skill, not strength, that governs a ship,” historian Thomas Fuller wrote centuries ago, yet the wisdom carries through today, especially in business. Just like a captain navigating unpredictable waters, your business success depends on the skills you master, not just the strength of your company’s offerings or the time you put in. Effective financial management is the helm of your “ship,” and therefore, developing and improving essential financial skills is crucial to navigating uncharted waters and challenging situations.
In this guide, we’ll walk you through the importance of building essential financial skills and key areas to focus on, plus provide actionable tips for getting started.
Why Developing Small Business Financial Management is Essential
Before we break down essential financial skills for business leaders, let’s take a quick look at some of the reasons upskilling must be a priority.
The Face of the Entrepreneur is Changing
Launching a new business has historically been a very mindful decision. It was the ultimate goal. Hopeful entrepreneurs would study as much as they could and take roles with other entrepreneurs as a way to build skills. In fact, nearly half of all Boomers running a business today launched it as their only initiative, Xero surveys show. Conversely, 67 percent of Gen Z entrepreneurs began their businesses as a side hustle. Although this allows more time to ensure the business is viable before going full force, it also means most new business owners are learning as they go. When it comes to financial management, there’s a big learning curve to overcome—one that can be difficult to address when you’re managing countless other aspects of running a business for the first time.
Financial Literacy is Declining
Financial literacy is fairly low in the U.S. The average person answered just 48 percent of questions correctly in the annual 3 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index). This marks a steady decline from the peak score of 52 percent in 2020. Business owners are in the same boat, with little more than half rating their financial literacy as “high,” per Xero.
Few Small Businesses work with Financial Planning Pros
Despite a lack of personal knowledge, just 15 percent work with an accountant or advisor, Xero reports. Nearly two in five still manage financial matters on their own. This, unfortunately, means that most business financial matters are managed by someone without the ability to do so effectively.
A Lack of Financial Literacy Damages Profitability
Roughly half of all small businesses are actively coping with fiscal challenges the business owner believes are tied to a lack of financial knowledge, Xero reports. Overall, a lack of financial literacy winds up costing small businesses an average of $118,121, according to QuickBooks.
10 Essential Financial Skills for Business Leaders
The case for building financial literacy as a business leader is clear. Next, let’s take a look at some of the areas people often struggle with and what to focus on if you’re ready to learn.
1. Tax Planning and Compliance
Optimizing tax strategies is the biggest challenge for small businesses, according to Xero surveys. Closing this gap is a tall order, considering less than half are even confident they’re paying taxes correctly, per QuickBooks.
Rounding out knowledge in this area starts with knowing the best business structures to for tax and legal purposes. Choosing the right structure for your business helps you limit tax liabilities. However, your structure also impacts how you get paid, how your business and personal taxes are paid, and special requirements for managing your business, which makes it foundational in everything you do. With this step addressed, you can move into more advanced tax optimization strategies, such as planning your expenses and maximizing your deductions.
2. Bookkeeping
Bookkeeping encompasses the day-to-day tracking of your financial transactions, including payables and receivables. Because of this, it has a trickle-down effect and influences many of the other areas outlined here.
Many businesses fall into common bookkeeping mistakes, such as failing to separate personal and business expenses or overlooking proper expense tracking. These errors create unnecessary stress and can hinder your ability to monitor cash flow and assess financial performance effectively. Conversely, developing bookkeeping skills allows you to understand your company’s financial health and make informed financial decisions. It also helps you ensure the accuracy of your books and compliance with regulatory requirements.
3. Forecasting
Many business owners take a relaxed approach to financial forecasting by ballparking cash flow in or coming up with seemingly plausible sales projections in their heads. These things can somewhat work when a business is very small, but the accuracy quickly diminishes once more than the first few customers are acquired.
True financial forecasting—the type that becomes increasingly essential and complex as a business grows—involves analyzing historical data, market trends, and external factors to create informed projections for revenue, expenses, and cash flow. These insights allow you to anticipate challenges, allocate resources effectively, and identify opportunities for sustainable growth.
4. Business Budgeting
Budgeting is a fundamental skill for managing business finances, yet it’s the second most common struggle for business owners, according to Xero surveys. While many small businesses start with informal spending plans, the lack of a structured approach can make it difficult to align financial decisions with long-term goals.
By developing a business budget, you can create a clear roadmap for managing resources, controlling expenses, and planning for growth. A well-crafted budget ensures that every dollar has a purpose, helping you avoid overspending while prioritizing key investments. It also serves as a benchmark, allowing you to measure progress and adjust strategies as needed.
5. Financial Statement Analysis
Interpreting financial metrics is one of the biggest challenges small business owners face, according to Xero surveys. While financial statements offer a snapshot of your business’s performance, understanding what those numbers mean—and how to act on them—requires a deeper level of analysis.
Financial statement analysis helps you evaluate key metrics like profitability, liquidity, and operational efficiency, giving you a clearer picture of your business’s financial health. This insight allows you to identify trends, address potential issues early, and make informed decisions to drive growth.
6. Credit and Debt Management
Managing credit and debt is a key skill for keeping your business financially healthy. Learning how to build business credit can open the door to better borrowing terms and even lower insurance rates. This often starts with simple strategies, like making early payments instead of just paying on time, to demonstrate financial responsibility and improve your credit score.
It’s also important to recognize the difference between good debt vs. bad debt. Debt that helps you grow, like investing in equipment or inventory, can be an asset, but relying on high-interest loans for everyday expenses can quickly become a liability. By managing credit mindfully, you can secure the resources your business needs while avoiding unnecessary financial strain.
7. Cash Flow Management
Effective cash flow management is essential for keeping your business running smoothly, but it’s also one of the top challenges for business owners, according to Xero surveys. Without it, even a profitable business can struggle to cover day-to-day expenses or plan for growth.
Avoiding common cash flow management mistakes, like failing to monitor cash inflows and outflows regularly, can help you maintain financial stability. Additionally, improving accounts receivable processes, such as by implementing clear payment terms or following up on overdue invoices, can keep your cash flow consistent and predictable.
8. Strategic Cost Management
Strategic cost management focuses on analyzing your spending to ensure it supports your business goals. Rather than simply cutting costs, the process involves identifying inefficiencies, eliminating waste, and redirecting resources toward areas that offer the greatest value.
This could include renegotiating supplier contracts, streamlining operations, or reallocating funds to initiatives that drive growth. By carefully managing costs, you can maintain financial stability while positioning your business for long-term success.
9. Risk Management
Just 38 percent of small businesses have a reserve fund, and 13 percent don’t have a plan for handling unexpected expenses, according to Xero surveys. While these may seem like obvious needs for a business, the lack of implementation highlights deeper issues. Misperceptions about risk, barriers to putting safeguards in place, or competing priorities often push risk management to the back burner, especially for smaller companies.
Risk management skills empower you to identify potential threats to your business, assess vulnerabilities, and create strategies to address them. By learning to anticipate challenges and prepare for them, you can build a more resilient business and reduce the impact of unexpected events.
10. Funding Option Assessment
Understanding your funding needs and finding the right solution can make all the difference in keeping your business moving forward. Yet, when tested on borrowing knowledge, the average American scores just 59 percent, according to the latest P-Fin Index.
Funding option assessment requires a clear view of when financing is necessary, what options are available, and how they align with your goals. Whereas traditional financing may work well for long-term investments, it’s not always ideal for short-term needs or speed. It’s also out of reach for many small businesses due to stringent qualifications. Plus, it can lead to loan stacking, which can create a financial hole that’s difficult to climb out of. Credit cards create similar issues. If the balance isn’t paid in full immediately, interest can eat away at your profitability.
Because of this, options like merchant cash advances (MCAs) and factoring are often favored for their accessibility and speed, though MCAs can have APRs that reach into the thousands and have unpredictable payback speeds. Conversely, factoring allows you to turn unpaid invoices into immediate cash, providing flexibility without debt.
By learning to evaluate funding options, you can confidently choose solutions that support your business’s growth while avoiding unnecessary financial strain.
5 Quick Tips for Building Essential Financial Skills
Now that we’ve covered what you should know, let’s explore how to build up your acumen.
1. Leverage Business Accounting Software
While it’s important to understand the logic behind your financial metrics and know how to perform calculations, that doesn’t necessarily mean you need to do everything manually. In fact, automating processes helps ensure accuracy and speeds up processes so you can focus on strategies to improve your numbers.
Use accounting software to simplify financial management and keep your records organized. Tools like QuickBooks, Xero, and Wave help with tasks such as expense tracking, invoicing, and generating financial reports. They can also be great resources for learning more about your company’s financial health.
2. Work with a Pro
Pros can handle complex issues, like financial forecasting or navigating compliance, and even basic tasks, like bookkeeping, for you. If you don’t have experience in a certain area, working with a pro will allow you to ensure the job is done right and help you understand how things should be done. Consider hiring a CPA, bookkeeper, or tax expert, or financial consultant when something is outside your area of expertise or simply commands more of your time than you have to give. A good advisor will save you time, ensure you’re complaint, and help you avoid costly mistakes, which often more than covers any associated costs.
3. Map Out Priorities and Focus on One Area at a Time
Focus on one financial skill at a time instead of trying to learn everything at once. Start by identifying where your business needs the most improvement, such as cash flow, budgeting, or forecasting, and dedicate your energy there first. This approach makes learning feel manageable and helps you build confidence. As you improve, you’ll see the impact in your business and feel more prepared to move on to the next area.
4. Learn in the Way That’s Best for You
Find learning methods that suit your style. Hands-on learners might prefer workshops or online courses, while others may enjoy books, blogs, videos, or podcasts for quick insights. Audiobooks are perfect for busy schedules, too. You can listen during your commute or while exercising.
5. Fit Lifelong Learning into Your Routine
Turn financial education into a habit by working it into your schedule. Listen to a podcast while walking the dog, read a blog post over your morning coffee, or set quarterly goals to tackle new financial topics. The key is consistency. Small efforts add up over time. Keep learning part of your routine to ensure you’re always sharpening your skills and staying ready to tackle new challenges.
Improve Your Small Business Financial Management with Invoice Factoring
Virtually all businesses require capital at times. Shortfalls can happen due to seasonality, rapid growth, and unplanned expenses. A gap isn’t always a sign that your business is unstable, but how you handle that gap can make a world of difference in your company’s stability and growth.
Invoice factoring closes those gaps by providing instant payment on your B2B invoices, so you get immediate working capital and are freed from tedious tasks like chasing invoices. Plus, you can set up your factoring account and not factor any invoices until the need arises, ensuring your business is prepared even in uncharted waters or challenging situations. To take the next step, request a free Charter Capital rate quote.
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