Why levelling up your financial literacy can be a game-changer for your business
The fact that a large proportion of startup businesses in South Africa fail within their first five years of operation has been well-documented. Many of the reasons that experts have attributed to this high rate of failure relate to lack of proper financial management.
The long-term solution to building a small business ecosystem that is resilient enough to withstand market volatility and tough economic circumstances, therefore, lies in fostering greater levels of financial literacy.
This is the opinion of Kevan Govender, regional investment manager at specialist small- to medium-sized enterprise (SME) financier, Business Partners Limited. As he explains: “As a business, we are deeply invested in understanding the challenges that local entrepreneurs face and tailoring our offering to meeting those needs.
“Since the launch of our quarterly survey, the SME Confidence Index, we have found that the main challenges facing SMEs involve finances, with cashflow and access to finance consistently occupying the top positions. These findings highlight how important it is for entrepreneurs to invest time, effort and resources into honing their financial management skills, regardless of whether they have a financial background.
“By applying a few simple but effective best practices in terms of saving, debt management, budgeting, spending and investing, any aspiring business owner can charter their way toward a profitable future,” he states.
The correlation between financial literacy and SME performance
The need for SME owners to be financially literate is fairly self-apparent. In order to run profitable operations, spending needs to be optimised, investments need to be made wisely and debt should be managed responsibly. Apart from the importance of understanding these basic financial concepts and developing the relevant skills, financial literacy also involves being able to make smart, informed decisions.
A research paper published in the WSEAS Transactions on Business and Economics journal explored another dimension, referred to as the “moderating relationship between access to debt finance and the performance of SMEs”. The findings suggest that high levels of financial literacy are linked to a higher probability of business loan approval.
Likewise, the paper concluded that financially literate entrepreneurs have a better understanding of traditional and alternative financing sources, giving them access to more options for funding their launch or growth. Furthermore, financial literacy was found to play a key role in helping business owners select, use and manage their financial assets and make sound decisions. Ultimately, financial literacy was linked to higher levels of profitability and long-term success for SMEs.
These results reflect the findings of the Business Partners Limited SME Index, in which access to funding has been identified as one of the most important factors needed by local SMEs to survive and thrive beyond their formative first years.
“In a rapidly changing economic environment, being financially literate is crucial for adapting to new challenges and seizing opportunities, ultimately ensuring long-term sustainability and commercial viability,” says Govender.
3 ways to get financially fit
As a starting point, he recommends the following three tips for entrepreneurs:
Training and skills development
Entrepreneurs should enrol in part-time short courses on topics and themes related to financial management. Not only will investing in professional development serve as a valuable learning opportunity but the experience will also shed light on the more specific areas in which the individual needs to improve. This can, in turn, inform further education and training endeavours as entrepreneurs work toward becoming more holistically informed.
Study and review financial reports
Another way to boost financial literacy is to gain a better understanding of the business’ financial standing by analysing reports and balance sheets. Fortunately, entrepreneurs now have access to a wide range of tools and cost-effective software packages like Xero, which can simplify and automate accounting tasks. Investing in this kind of technology can help business owners save time and money, while gaining access to the information they need to understand their overall financial performance.
As a best practice, business owners should regularly review these financial statements and performance metrics and measure their progress toward achieving their short- and long-term objectives. By making regular financial reviews a healthy habit, business owners can identify trends, flag any problems before they escalate and adjust their strategies accordingly.
Mentorship support
Lastly, Govender recommends finding a mentor who can offer advice, guidance and a second opinion. “Mentorship is one of our key programmes at Business Partners Limited, simply because financial literacy is not only about being able to crunch the numbers. It’s also about being able to understand the market and the economy, and the risks that face your business from the micro- and macro-economic fronts.”
Mentors can offer practical advice on managing finances, optimising cashflow and making strategic financial decisions, drawing from their own experiences and expertise.
“A mentor can also help you avoid common pitfalls by sharing lessons learnt from their own successes and failures. This firsthand knowledge can be more insightful and applicable than theoretical learning, as it is grounded in real-world scenarios. In general, partnerships with other industry professionals can be immensely beneficial in providing a clearer roadmap to success,” he says.
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