Finance is not only the ultimate resource but also the ultimate outcome for any business. Yet majority of entrepreneurs lack the understanding of finance and completely rely upon their accountants. Although many entrepreneurs have gotten away with this, today with the evolving market dynamics that comprise increasing competition and shrining margins, this understanding is the difference between survival, failure and success. And if you want to know more about changing dynamics read our blog on Entrepreneurship in 2020.
To summarise the why in simple terms, I will let you answer the following questions:
Do you know whether your business is making profit or loss?
If you are losing money, do you know where is the money coming from? or who is financing your losses?
If you are making profits, do you know how to leverage the surplus money or at least manage it efficiently?
Do you know any more details about stocks, bonds, mutual funds, insurances and saving schemes other than what was mentioned on the marketing brochure or described the the agent?
Do you have a retirement plan? or rainy day reserves?
Do you know your net worth?
Although this needs to be taught in school, perhaps they leave it for us to learn it the hard way as some lessons are under appreciated when served on a platter. And finance is a vast topic, it has so many sub topics I feel that even a one year full-time degree is insufficient to truly grasp the depths of the subject. There are too many sub topics but what I mean by financial literacy is the basic understanding of financial mechanisms of market, stock market and investments, personal finance, management finance, and accounting.
So finance is not merely excel spreadsheets depicting inflow and outflow. This ignorance has dire consequences as once the figures are shifted from improvised spreadsheets to financial statements prepared as per accounting principles the inferences can change drastically. And as your ultimate position is described by a balance sheet while your actual profit is derived by a profit and loss statement, you need structured understanding of finance.
Hence, as an entrepreneur you should know the basics of accounting and have an understanding of management finance. Moreover, you should also develop a certain psychology for money. In simple words, you should start to treat it as a resource to create greater wealth rather than a tool to achieve materialistic pleasures. This mindset is the difference between perennial mediocrity and ultimate peace.
And once you make money from business, you also need to start managing your personal finance. Although it is your business, the company and you as a person are two different entities, each with its own assets and liabilities along with its own ways to generate income. The key to personal finance is the right mindset, and I recommend that you read the book ‘Psychology of Money’ by Morgan Housel to develop the mindset at an early stage, and you can read our review to catch a glimpse of the mindset.
And finally when you start saving money, you should know where to invest. Although the stock market seems like no brainer, it is more complicated than you think. Do NOT get blinded by epic gains, as every gain has a corresponding loss. Similarly for other investment options, lack of understanding can be the differentiating factor between enjoyable holidays and sleepless nights.
On a side note, whether it is stock market or management finance, the law of conservation of energy also applies to money and finance works like the system of thermodynamics. The amount of money within any system including the stock market and your company’s balance sheet remains constant unless there is an exchange, basically a transaction, with a foreign entity.
So if your coffee cup is losing heat, the surrounding room is gaining heat, hence the temperature of your cup should drop while that of the small room should increase. And if the cup maintains temperature despite heat loss then there has to be a heat source such as a burner that compensates for the heat loss. Similarly the loss of money from your company is financed by a compensating source such as borrowing, supplier credit or investor infusion! And despite being tempted, I will not extrapolate this example to financial markets as we will then have to understand economics and complex financial instruments.
Well, I am not trying to talk you in to getting a CFA or an MBA in finance but just convincing you to undertake some basic courses that you can get on SkillShare, Udemy or Coursera for a few dollars. But as you might have comprehended by now, understanding of finance will change your entire perspective to life and business.
Because ultimately, your net worth reflects success in today’s world!
Header Image Photo by Kelly Sikkema on Unsplash
Savvy Munshi 
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