During the pandemic, spending came to a screeching halt. The housing market surged. Interest rates plummeted, product scarcity led to crazy fluc
tuations on everyday items. The Fed, in an attempt to stabilize the economy and reduce inflation raised interest rates. The housing market went crazy again, with prices rising even more thanks to lowered inventory.
As 2024 winds down, the United State’s economic circumstances are generally considered stable.
For business owners, things look alright. Still, the pandemic does prove how radically things can change. An economic situation that began an entire presidency ago is still playing out.
Financial literacy skills can help your business survive a recession. Read on to learn more.
What is Financial Literacy?
Financial literacy, at its most basic level, is the ability to understand and manage your own finances. This is easier at a personal level than it is in a business context, where goals and expectations are different and the stakes can be higher.
Still, there is overlap. The financially literate business owner will, at minimum:
- Understand their company’s budget.
- Be able to set financial goals, and
- Regularly check to see that they are on track to meet said goals.
You probably won’t need a degree in finance to accomplish this much. There are many online courses—or even classes you can take at traditional universities—that will help you understand the basics in a few months, rather than a few years.
Why Does it Matter?
For new businesses, several people may wind up doing many jobs. It is possible that none of them will have a finance background. Unfortunately, without some competency with money management, it is difficult to become profitable.
New business owners at least need to understand their margins, know if they can take a salary, etc. Here’s an example of how financial literacy can influence your decision-making.
You want to put some money into product development. You’re thinking about financing this with a small business loan. Up until now, your margins have been pretty thin but as of recently, your business has kicked up a little bit. You feel confident you can handle the principal and interest on this loan and still coast. In fact, you know you can. You’ve looked at the numbers.
So you take the loan, and for a while, everything is as you thought. You’re making payments. The product development is coming along smoothly.
Then, you hit a snag. Your production line equipment, aged to begin with, has gone to the great assembly line in the sky. It’s toast. Expensive toast, mid-five figures to replace. The problem? Your cash is tied up in this product development, and with your newly recalibrated debt ratio, you’re having trouble getting a new loan to fund the repairs.
With financial literacy, this may have been a possibility that you would have noticed on the front end. As it stands, you are in a pickle.
Even if your business is past the “startup” stage, and has a finance department in place, it helps to have broader financial literacy throughout the company. You want to be able to contribute actively to financial conversations. These are the situations that will ultimately shape the direction of your entire business.
Financial Literacy and Recession Management
Recessions happen every few years. They are a normal part of the market, but they can also be brutal for businesses of every size. When they happen, a great product and a sound business model aren’t always enough to survive the storm. You need to know how to button down the hatches.
Financial literacy can:
- Help you prepare well before the recession. You don’t really want to be preparing for a recession as it is happening. Ideally, you’ll have a strategy that you can pivot into seamlessly. Something that you came up with well in advance.
- Give you an exit strategy. Keep in mind that, while surviving the recession is great, your actual goal as a business is to continue growing. In competitive industries, like tech, businesses that can’t report growth even during a recession fold. Financial literacy can help you prepare for financial downtimes while also working on your exit strategy. What moves can we make now that will allow us to transition back into usual operations?
Of course, financial literacy is valuable always, even when the economy is in great shape. Training your staff is a worthwhile investment of time and resources that may deliver many long-term benefits.
How Do You Build Financial Literacy Within Your Business?
We mentioned earlier that there is always the potential to take classes, either online or in-person, to develop money management skills. This is a great way to grow personally in financial literacy but is somewhat less sustainable at a company-wide level.
If you are interested in encouraging financial literacy skills with all of your employees as a way of building a greater sense of collaboration, consider paying for seminars or “skill boot camps,” that your team members can participate in to develop their knowledge.
Just make sure to incentivize participation. Even when upskilling events are scheduled during the work week, they can be disruptive. That’s a day of productivity lost. You can improve enthusiasm for the experience by offering small financial or experiential rewards for participation.
Conclusion
Good business isn’t just about having an awesome product. It’s also about understanding how to time your moves so that they have the greatest impact. Whether that means waiting to make an investment or moving aggressively to launch a new product before a competitor, financial literacy gives your team the skills they need to better anticipate and understand your business’s natural financial rhythms.
You don’t need to start looking for finance courses at the local community college. There are cheaper and faster ways to train your staff on financial literacy. Consider upskilling seminars or other short-term training opportunities that will help your staff get the base level understanding that they need to become financially literate.
