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5 Reasons Financial Literacy Matters for Every Business Leader

How confident do you feel in your financial knowledge? For business leaders, this question is central to long-term success. Whether you’re a CEO or a department manager, a good grasp of financial principles helps you advocate for your goals, plan strategically, and stay on course when the unexpected happens. 

Let’s take a look at 5 reasons to accelerate your financial learning curve.

5 Reasons to Prioritize Financial Literacy

Poor financial literacy negatively impacts overall business performance, financial decision-making, fundraising, M&A, and much more. Ultimately, lack of financial know-how can leave you unprepared for shifting economic conditions that could undermine revenue and growth.

On the positive side, developing a deeper understanding of financial metrics and trends empowers you to make smarter, more strategic financial decisions, assess pros and cons of various financial details, interact more effectively with investors, and pivot quickly when the financial winds change. 

Here’s why financial literacy should be at the top of your to-do list.

1. Understand Foundational Finance Principles – Strong financial positioning is the foundation for business success and growth. Whether you are a growth company looking for funding, a larger firm ready to pursue M&A, or somewhere in between, a good grasp of key finance principles ensures that you don’t overextend yourself or miscalculate.
   • • Earn – Keep your finger on the pulse of overall business performance by monitoring your earnings before interest, taxes, depreciation, and amortization (EBITDA). EBITDA measures operational earnings (not capital investments), and it is often a better profitability benchmark than net income. Because EBITDA is not impacted by the tax environment or your debt profile, it can give you a more accurate picture of how revenue flows into your business.
       
     • Spend – Do you have a well-developed budget that directs your spending every month? Effective budgeting requires you to get cozy with key data points like year-over-year trends, fixed and variable expenses, profit margins, cash flow data, sales numbers, and departmental needs. A well-planned budget should support your long-term goals as well as zeroing in on granular details.
       
     • Save – Financial best practices recommend that businesses keep three to six months of operating expenses on hand to support the company through low revenue periods. This ensures that a drop in revenue doesn’t leave you with a financial crisis. 
     • Invest – Beyond your savings, you’ll also want to invest in key areas like talent, technology, and marketing so that you can scale. Your business is your most important investment, so take time to direct your investments for growth.
     • Borrow – In business, borrowing can be an important strategy for accessing working capital to take advantage of opportunities. The key is to right-size your borrowing to give you the financial leverage you need without overextending.
2. Prevent Financial Missteps – Once you understand these key finance principles, you can use them to track the impact your actions have on your financial standing. With this information, you can identify risks and prevent problems before they happen. For example, when you know how to read a balance sheet, you can quickly assess whether you have enough cash on hand or whether you have overborrowed.
3. Build Financial Confidence  – Better financial decision-making leads to increased stability for your business. For example, a 13-week cash flow strategy will give you the foresight to plan more effectively, make course corrections quickly, and ensure that you don’t find yourself strapped for cash if revenue drops. You’ll be able to make financial decisions with confidence, knowing that you are operating from a strong financial position.
4. Plan for Growth – Accurate, well-supported financial forecasts support every department of your company as you plan for growth. With clear, accurate financial data, department leaders can:
   
   • Budget more effectively
   • Plan for capacity needs 
   • Plan sales targets
   • Managing inventory
   • Predict revenue
   • Contextualize current financial performance
   • Evaluate the impact of market changes on your business strategy
   • Make course corrections
   • Evaluate and manage risk 
   • Identify where cost cuts are needed
5. Prepare for Funding or M&A – Your grasp of key financial concepts and analytics can make or break a merger, acquisition, or private equity investment deal. Investors and buyers will be looking for details on your financial positioning, profitability, cash flow strategy, and financial statements. They will also consider EBITDA to determine valuation and assess the financial health of your company. To close the deal, you need to understand how to present accurate financial data to demonstrate long-term viability.

Ensure Stress-Free Finance

Financial leadership is critical for a successful business, but not every business owner has the internal resources they need. That’s where Atlantix can help. We help you sharpen your vision, get more from your data, and plan for the future so you get better results. Contact us today!