As a small business owner in Australia, it’s crucial to have a good understanding of financial management. Financial literacy is not just about knowing how to balance your books; it’s about making informed decisions that will help your business thrive in the long term. Unfortunately, many small business owners in Australia lack the necessary financial knowledge to run their businesses effectively. That’s why in this blog, we’ll be exploring ways to improve your financial literacy as a small business owner in Australia. From understanding financial statements to managing cash flow, we’ll equip you with the knowledge and skills you need to make informed financial decisions for your business. So, let’s dive in!
What is financial literacy?
Financial literacy is the ability to understand and effectively manage one’s financial resources. In Australia, financial literacy has become an increasingly important topic for small businesses as they face a variety of financial challenges. Achieving financial literacy requires a combination of knowledge, skills, and habits that enable individuals to make informed financial decisions throughout their lives.
Keep Accurate Records
One of the first steps you can take in understanding your finances is accurate record-keeping, this is essential for improving your financial literacy as a small business owner. It is important to keep track of all your income and expenses, as well as any assets and liabilities.
Keeping accurate records also makes it easier to prepare your financial statements and tax returns. It can help you identify any errors or discrepancies in your financial statements and take corrective action.
There are many accounting software programs available that can help you keep track of your finances. Our personal favourite is Xero, a cloud-based accounting software that helps small business owners streamline their financial processes, save time, and gain insights into their financial health. You can easily manage your finances, track income and expenses, and generate reports to make informed decisions.
Xero also offers over 1000+ app integrations, allowing business owners to connect to a range of third-party tools to automate tasks and further streamline their financial processes. Plus, with their mobile app, business owners can access their financial data on the go and manage their finances from anywhere. Overall, Xero’s user-friendly interface, flexibility, and robust features make it a popular choice among small business owners looking to take control of their finances.
Understanding financial statements is crucial to your financial literacy. These statements provide you with valuable information about your business, including your income, expenses, assets, liabilities, and equity. By understanding your financial statements, you can identify areas where you can cut costs, increase revenue, and make better financial decisions.
The three main financial statements you need to understand are:
Profit and Loss Statement: This statement shows your business’s revenue (income coming in), expenses (money going out), and net profit/loss over a specific period of time. It can help you identify areas where you are spending too much money and areas where you need to increase your revenue.
Balance Sheet: This statement provides an overview of your business’s assets, liabilities, and equity at a specific point in time. It can help you understand your business’s financial position and make informed decisions about financing and investing.
Cash Flow Statement: This statement shows the inflows and outflows of cash in your business over a specific period of time. It can help you manage your cash flow more effectively and identify any potential cash flow problems.
Develop a Budget
A budget can help you plan your spending, track your expenses, and identify areas where you can cut costs. It can also help you make informed decisions about investing in your business. It is really important that business owners create a personal budget and business budget, as this will give them the understanding of knowing how much money they can have as a wage or drawing from the business and know that their personal budget is covered.
When developing a budget, it is important to include all your income and expenses, including fixed and variable costs. You should also review your budget regularly and adjust it as necessary based on your business’s performance and changing market conditions.
Here are two personal budgeting apps that connect through to your finances and make budgeting that little bit easier:
YNAB – This app is designed so that users plan ahead for their financial decisions, rather than track past transactions. YNAB follows the zero-based budgeting system, which has you make a plan for every dollar you earn.
As soon as you get paid, you tell YNAB how much of your income should go toward various categories, including expenses, goals and savings. The idea is that you become more intentional with your money when you’re prompted to actively decide what to do with it.
WeMoney– A fintech startup based in Australia that offers a personal finance management app. The app allows users to connect all their bank accounts and credit cards in one place, providing a clear overview of their finances. One of the standout features of
WeMoney is its ability to categorise and analyse users’ spending, allowing them to track their expenses in real-time and identify areas where they can cut back. The app also offers personalised recommendations to help users save money, such as suggesting cheaper alternatives for recurring expenses like insurance or utilities.
Business budgeting tools can be found in your financial software like Xero or Quickbooks, but here are some apps that can give you more than just your budget:
Budgeto – A cloud-based budgeting and forecasting software designed for small to medium-sized businesses. The software provides users with a comprehensive overview of their financial position, allowing them to make informed decisions and plan for the future.
Users can create a budget from scratch or import data from their accounting software, and customise their budget categories to fit their business needs. The software also offers forecasting tools that help users project their financial performance based on different scenarios, such as increased revenue or decreased expenses.
Their collaboration capabilities mean multiple users can access the software simultaneously and work together on creating and managing budgets.
Budgeto also offers financial analysis tools that allow users to analyse their financial statements and identify areas for improvement. Users can generate reports that show their financial performance over time, compare their actual results to their budget, and identify trends that may impact their future performance.
Float– Helping users manage their finances by providing a real-time overview of their spending and savings. The app allows users to connect all their bank accounts and credit cards in one place, making it easy to track their transactions and categorise their expenses.
One of the standout features of Float is its ability to forecast users’ future cash flow based on their historical data, allowing them to plan and budget accordingly. Users can set up custom budgets for different categories, such as groceries or entertainment, and receive alerts when they are close to exceeding their limit.
Float also offers a savings goal feature, which allows users to set a target amount and track their progress towards it. The app will suggest a monthly savings amount based on the user’s goal and spending patterns, helping them stay on track and achieve their financial goals.
Manage Your Cash Flow
Cash flow is one of the most important financial metrics to keep track of. It is important to manage your cash flow effectively to ensure that you have enough cash to cover your expenses and invest in your business. Managing your cash flow effectively also helps you avoid cash flow problems, such as late payments and overdraft fees.
To manage your cash flow effectively, it is important to:
Monitor your cash flow regularly: Review your cash flow statement regularly to identify any potential cash flow problems.
Invoice promptly: Send invoices as soon as possible to ensure that you receive payment on time.
Follow up on overdue invoices: Follow up on any overdue invoices to ensure that you receive payment as soon as possible.
Negotiate payment terms: Negotiate payment terms with your customers and suppliers to ensure that you have enough time to pay your bills.
Keep cash reserves: Keep cash reserves to cover unexpected expenses and cash flow problems.
As a small business owner, it is important to have a good understanding of the taxation system in Australia. This includes understanding the various taxes that you may be liable for, such as income tax, goods and services tax (GST), pay as you go withholding (PAYG) payroll tax, and fringe benefits tax (FBT).
To ensure that you are meeting your tax obligations, it is important to keep accurate financial records and prepare your tax returns on time. We recommend that you seek the advice of a qualified tax accountant to ensure that you are meeting your tax obligations and taking advantage of any tax concessions or deductions that may be available to you.
Investing in financial education is a great way to improve your financial literacy as a small business owner. There are many courses and workshops available that can teach you the skills and knowledge you need to manage your finances effectively.
You can find a range of certificates and diplomas in finance: Here
You may want to consider joining a business networking group or association, as these groups can provide you with access to resources and information about financial management and other business-related topics.
Also, reading books like “The Barefoot Investor” by Scott Pape, “The Intelligent Investor” by Benjamin Graham, or “Profit First” by Mike Michalowicz can help you develop a deeper understanding of money and how to manage it effectively.
We can’t forget Podcasts, below is a personal favourite of ours, ICB news channel which is hosted by the team at The Institute of Bookkeepers and the second is a list of the top 20 finance podcasts in 2023, if you want to stay informed about any legislation changes and learn new financial skills, these podcasts are for you:
By monitoring your performance, you can identify areas where you need to make improvements and make informed decisions about your business’s future.
Some key metrics that you may want to monitor include:
Revenue: Your business’s total income over a specific period of time.
Profit margin: The percentage of revenue that is profit.
Gross profit: Your business’s total revenue minus the cost of goods sold.
Customer acquisition cost (CAC): The cost of acquiring a new customer.
Return on investment (ROI): The percentage of profit generated by your business compared to the amount of money invested.
By monitoring these metrics, you can identify areas where you can make improvements, such as reducing costs or increasing revenue, and make informed decisions about your business’s future.
Seek Professional Advice
As a small business owner, it is important to recognise your strengths and weaknesses when it comes to financial management. If you are not confident in your ability to manage your finances effectively, it may be a good idea to seek professional advice.
There are many financial professionals available who can help you manage your finances, including the team here at Gecko Bookkeeping, our bookkeepers will aid you in getting your business finances under control. With our accurate reports and highly motivated work ethic, you will have a clear idea of your business position and condition. These are important inputs for creating budgets, forecasting, and making gainful financial decisions. You can reach out for a free 15 minute discovery call: Here
In conclusion, financial literacy is essential for small business owners who want to take control of their finances and work towards a brighter financial future. By using Australian government resources, reading finance books, and using accounting software like Xero, you can gain the knowledge and skills needed to manage your finances effectively. Taking the time to invest in your financial literacy can help you make better financial decisions and achieve your business goals.
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