Financial Literacy for the Future Business Leader
Long gone are the days when a business owner is merely "the boss". They now have to be their own marketers, customer service representatives, data scientists, and, most importantly, finance and accounting managers.
Why do business leaders take on so many different roles and responsibilities? The answer is simple – they want to sustain their business and ensure good returns on investment. In order to keep a business running, meticulous planning and informed decision-making are needed, especially with regard to finances.
As of July 2022, close to 60 companies have filed for bankruptcy in Singapore within the past year.1 The Singapore Institute of Management (SIM) strives to improve the financial literacy and competency of future business leaders, so that they can help ensure their businesses remain healthy and solvent. Our Graduate Diploma in Business Management (E-Learning) trains students in financial prudence through Accounting and Finance for Managers, which is one of the programme’s six core modules.
Merely learning and understanding finance theories and concepts are no longer enough. Business leaders must be able to implement effective financial strategies to improve their companies. Here are some reasons why knowledge in accounting and finance is important for business owners:
1. Master your finances
It’s no secret that every business owner’s goal is to earn a profit. To ensure a consistent stream of revenue, one must have impeccable financial knowledge. Understanding the basics of accounting helps you learn to manage cash flow, track expenses, budget for taxes, and make sound investment decisions.
Take Diyaa Confectionary, a home-based Malaysian business, as an example. Sri Themudu, the owner of Diyaa Confectionary, used to give out free samples in offices to attract customers. But when the pandemic hit, that was no longer a feasible marketing option. So, he decided to invest USD 1,000 (SGD 1,405) to hire a photographer and videographer to improve his website and promote his products on Instagram.2 This financial decision proved to be fruitful as he managed to triple his revenue.
This goes to show that good financial management is key to business longevity and success, even when faced with unprecedented circumstances.
2. Collaborate with finance and accounting teams
Business managers who have an adequate understanding of accounting and finance are able to work better with internal and external finance teams, stakeholders, and auditors. This stems from the fact that all parties are able to communicate and comprehend their financial wins and losses.
Companies can boost their chances of success if business owners are able to communicate the financial problems at hand, develop unique solutions to remedy them, and comprehend the unit of economics of their offerings when the company is sub-scale and at-scale3. As a business leader with financial knowledge, you can work with accounting professionals to grow your business at a quicker pace.
3. Set appropriate performance metrics
Successful businesses are ones with leaders who practise a hands-on approach. A business leader with extensive experience and financial acumen can assess the company’s financial performance by analysing past and current records of assets and liabilities, profits, and overall expenditure.
In a study by the Imperial College Business School, it was found that companies led by executives who took financial courses or programmes saw higher returns on assets and invested capital because they had the know-how to seize valuable opportunities.4 Being able to understand your financial standing at any point in time helps you identify growth opportunities for improved performance via informed decision-making.
4. Develop realistic strategies
To ensure your business is profitable, good accounting and finance practices must be exercised. To do this, business owners need to have extensive knowledge of financial management to come up with strategies and business plans to achieve their bottom-line goals.
Without effective strategies, businesses could suffer the same fate as MISC Bhd, which lost RM19.1 million (SGD 5.8 million) in the second quarter of 2022, compared to their profit of RM538.8 million (SGD 165.5 million) in the second quarter of 2021.5 This was largely due to the impairment of ships, higher finance costs from loans, and a lower share of profit from joint ventures. However, the company’s services are still very much in demand, and with effective problem-solving, it has the potential to recoup what it had lost.
5. Adhere to business laws
Business leaders who actively work on improving their financial knowledge and literacy are able to keep up with the latest in business law. They know that overlooking a minor detail could have major consequences on a company’s performance.
In 2020, Amazon made a profit of EUR44 billion (SGD 61.5 billion) in Europe, but paid no corporate tax to the Grand Duke who rules Luxembourg. This is because its Luxembourg unit experienced a loss of EUR1.2 billion (SGD 1.67 billion), which exempted it from having to pay corporate tax.6 The unit was also granted EUR56 million (SGD 77.7 million) in tax credits that it can use to offset any future tax bills should it turn a profit.
Business owners are expected to be prepared for possible pitfalls, and engineer solutions and failsafes to manoeuvre their companies through troubling situations. A finance-centred approach to doing business equips future entrepreneurs with well-rounded skills to navigate and manage risks.
Lessons From Companies That Went Bankrupt
Despite having access to financial information almost anytime and anywhere, many businesses have filed for bankruptcy due to inadequate financial literacy. Let’s look at some well-known brands that have had to file for bankruptcy:
GNC
GNC was one of the world’s largest suppliers of vitamins and supplements. However, in 2020, the company filed for bankruptcy and planned to close over 1,000 outlets worldwide.7 Even during the vitamin sales boom, GNC could not compete with other business entities, such as Target, Walmart, and Amazon. GNC experienced a dip in sales, and with its growing debt and niche product offerings, the company found it difficult to expand into other products and services.
The biggest takeaway from this is that business owners must be smart when it comes to diversification of services. Business leaders with proper financial knowledge would know to leverage their expertise and financial resources to tackle other product segments and markets.
Toys“R”Us
Despite being a childhood favourite to many, Toys“R”Us couldn’t survive when other businesses started edging into its niche of children’s toys. To recoup its losses, Toys“R”Us received loans from multiple private equities that amounted to more than USD 5.2 billion (SGD 7.2 billion) in 2017.8 It ended up defaulting on these loans and was forced to file for bankruptcy.
One lesson that can be learnt from Toys“R”Us is to never fully rely on investments or loans from private equities. Being financed by private equities is beneficial in many ways, but businesses should exercise financial literacy and management by monitoring competitors, updating their products, and capturing new audiences at the same time. By doing so, a business will become self-sufficient with the ability to survive without loans from private companies.
Borders
In 2011, world-famous bookstore chain Borders filed for bankruptcy. Borders had multiple locations worldwide, but after losing USD 680.6 million (SGD 943 million) since the beginning of its 2007 fiscal year, it was forced to shutter over 200 outlets.9
As a business owner, with strong financial literacy comes knowledge on mitigating risks in new endeavours such as expansion. Many businesses, like Borders, have expanded too quickly, which can result in increased debt and decreased profitability.
Join the ranks of financially prudent business leaders by enrolling in SIM’s Graduate Diploma in Business Management (E-Learning) programme. To learn more, speak to our Student Advisors today!
References
1 https://tradingeconomics.com/singapore/bankruptcies
2 https://www.voanews.com/a/east-asia-pacific_malaysia-businesses-adapt-survive-covid/6198371.html
3 https://www.forbes.com/sites/forbesfinancecouncil/2022/08/03/15-essential-financial-goals-every-business-should-achieve-in-its-first-year/?sh=38ff064e3f5c
4 https://www.forbes.com/sites/imperialinsights/2021/07/09/is-a-financial-education-the-key-to-being-a-successful-manager/?sh=7caa55aa5bfc
5 https://www.freemalaysiatoday.com/category/business/local-business/2022/08/18/misc-posts-net-loss-in-q2-despite-higher-revenue/
6 https://www.theguardian.com/technology/2021/may/04/amazon-sales-income-europe-corporation-tax-luxembourg
7 https://www.cnbc.com/2020/09/17/why-amazon-and-walmart-will-benefit-from-gncs-bankruptcy-filing.html
8 https://www.linkedin.com/pulse/toys-r-us-files-bankruptcy-why-what-does-mean-deborah-weinswig
9 https://www.reuters.com/article/us-borders-idUSTRE71F2P220110217
