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The Importance of Financial Literacy in Running a Business

The tedious process of going through the finances of a business is not something many entrepreneurs look forward to. It is necessary but also time-consuming and complicated. As such, many business owners tend to throw caution to the wind, looking into their finances only once a year during tax season. Even then, they usually focus on just two things: whether they made a profit or a loss, and how much their taxes for the year are.

Some even operate solely on how much money is in their bank account without considering the mathematics that went into their operations. This is a dangerous practice that can put your business at risk. Making major financial decisions without knowing your business’s true financial position can expose it to devastating financial mistakes and losses.

The statistics: Australia’s love affair with entrepreneurship

In 2019, over 93.8 per cent of the nearly 900,000 operating businesses in Australia were small and micro-businesses. Small businesses employ 44 per cent of the Australian workforce and account for over 35 per cent of Australia’s gross domestic product. In 2020, many new businesses started in the field of e-commerce.

The country is clearly in love with entrepreneurship, but over three out of four businesses started in Australia fail by their fourth year of operation. There is obviously something wrong with the way Australians do business, and the lack of financial understanding needed to run an enterprise seems to be the likely cause—along with the hesitation to hire an ECommerce accountant.

Amazing ideas are not enough

More often than not, these businesses are meant to be vehicles to deliver a creative person’s wonderful ideas. However, the best ideas won’t go far if you don’t know how to keep the vehicle running. Proper management of your finances and patience are the keys to solving this problem.

While you might think that you are at a disadvantage for having neither a business degree nor an accounting degree, you do not need one to enjoy success. The concepts can be complicated at times, but you can learn them if you take the time to do so. Even then, it always helps to enlist the help of an ECommerce accountant to help you understand and handle the things you cannot.

What you need to learn

Having better financial judgment begins with understanding the related terms and concepts. Some of the most important terms for you to remember are as follows:

  • Revenue. This is the total amount of money earned from sales and is the baseline for a lot of financial computations.

  • Gross profit. This is the total amount of profit you make after subtracting the cost of goods from your revenue.

  • Gross margin. This is the percentage of your revenue that counts as profit. It is calculated by dividing the gross profit by the revenue and then multiplying that result by a hundred.

  • Net income. The net income is the total money you make after subtracting the following from your revenue: costs, taxes, depreciation, interest, and so on.

  • Profit margin. This percentage is calculated similarly to gross margins: taking the net income, dividing it by the revenue, and then multiplying that result by 100. This is one of the most important figures, as it indicates how much you actually make after paying for all the costs to run your business.

There are plenty more terms and concepts that you need to learn, but with the right research and enough time, you can master these concepts as well as any other successful entrepreneur.

In conclusion

One of the most important pathways to the success of any endeavour is preparation. What better way to prepare yourself for the intricacies of running a business than learning to understand and manage its finances? Doing so lets you protect yourself from making costly financial mistakes and design your operations to maximise profits and keep it alive.

If you’re looking for the top ECommerce accountant in Australia to help manage your business’s finances, send us a message at The ECommerce Accountant. We have what it takes to help you gain control of the destiny of your enterprise.

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