According to research by the think tank ‘IPPR’, British people love going it alone. They estimate that over 14% of us now work for ourselves.
There’s clearly a huge attraction to working independently (not least being able to manage your own holidays and working times) but the realities of being a sole worker without the backing of all the functions that typically support a larger business can be tough.
Not only does the individual need to excel professionally within their chosen specialism but they also need to be adept at marketing, sales, administration systems and processes, website management, IT, HR and finance. Arguably, financial literacy is one of the most critical assets as, without it, the success of the enterprise becomes at best compromised. Poor financial literacy is, without doubt, one of the major reasons that so many self-employed enterprises fail within the first few years.
Take for example an individual who has excellent turnover. They assume everything is ok because their sales ledger tells them it is but this individual has an insufficient understanding of cash flow. Despite successful sales, they have not forecast creditor needs and general expenditure such as annual tax payments, and their business starts to suffer.
Although financial literacy is an essential skill, most schools don't teach it and neither do the majority of parents. As such, an individual may leave academia with a praiseworthy understanding of their chosen specialty and establish their own enterprise but the inability to understand and reconcile their P&L, decipher assets from liabilities, and truly understand their Balance Sheet jeopardises the potential of their business.
Financial training is therefore one of the most important investments that self-employed individuals should make if they are to successfully drive their enterprise. Self-Study via internet sites is better than nothing and there are some great resources out there that will at least equip you with a basic understanding. Operating in the absence of detailed knowledge and pressing ahead regardless could be something that the individual regrets later down the line when financial poor management catches up with them.
If you are yet to embark upon financial training or study, then here are some practical frameworks in the meantime:
• Ensure you have excellent record keeping, including fully comprehensive sales and purchase ledgers. Absolutely everything connected to the business and bought on behalf of the business should be tracked in detail (with receipts where necessary) and equally all sales made on behalf of the business should also be tracked. Reconcile these ledgers weekly if not daily to ensure that income is meeting outgoings.
• Prepare a budget – what out of the ordinary expenditure will be due? This may include for example annual insurances, tax payments, IT renewals, professional membership renewals. Review against purchase and sales ledgers. Has enough money been put aside for these payments?
• Consider the credit terms you offer to clients; does the speed at which you collect payments allow you to meet creditor demands? If you are giving credit to clients then always reference their creditworthiness. There are plenty of companies online providing this service. Where possible take payments in advance.
• Avoid taking on debt. Where possible defer large purchases until such a time as you’ve generated sufficient net profits to make the payments. Debt is a sure way to burden your business – often unnecessarily.
• Consider how best to develop your financial skills – whether this be via online research, online courses, mentoring from someone within your network or face-to-face training, it is essential that you put a development plan in place. At the very least develop a detailed understanding of terms such as cash flow, profit margins, assets, liabilities, net profit, gross profit, balance sheet, expenses, operating costs and depreciation.
By prioritising the need for financial literacy you have already increased the chances of your business succeeding. Get this fundamental skill under your belt and you give yourself a significant competitive advantage.
Training South West supply business training to companies across the South West, including Dorset, Devon, Cornwall, Somerset and Wiltshire. Courses may be tailored specifically and delivered in-house, or, via open settings. Financial courses include 'Introduction to Finance Management' and 'Advanced Financial Skills'.