Financial Literacy 101: What they don’t teach you

Sometimes, the key to learning the right skills is knowing how and when to ask the right questions.

Whether you are a multi-million dollar earner or someone just starting to get your first profitable venture off the ground, the following ten questions and subsequent answers will help you to be more financially literate.

Keep reading and make sure you are considering each of these areas as you expand your business and build your brand:

  1. What is your tolerance for financial risk?

Everyone wants to be a millionaire. Everyone wants to be rich. Not everyone is prepared to shoulder the real burdens and financial risk at the heart of nearly every extremely profitable endeavor.

It is up to you to decide if you can live with going into debt, possibly having to sell assets, take out loans or call on your friends and family to get your ideas off the ground. Now if you are starting with excesses of capital already maybe this is less a concern but regardless, as the stakes increase, so do the risks. Even the best laid plans often run into unforeseen challenges.

From market fluctuations, changes in consumer appetite, supply chain issues, to the human dramas often so central to business relationships, it would be hard to plan for every potentiality even if you stayed awake 24 hours a day in troubleshooting mode looking for and repairing any leaks you notice in your ship.

You might be a single person without financial responsibility over others and if so, great. Then you alone will be shouldering the burden of your financial investments. If however you happen to be in a relationship or a part of a family, then it is important to remember that as you risk it all, you are also risking the success of your relationship and the livelihood of your family. Things can and often do go wrong.

Does your family have what it takes to pull together and get through tough times together?

It is very important to know upfront just how risky any new business investment can be. Some people are built to handle these risks and others are not. Knowing yourself and your ability to handle adversity is the first step to being a successful and financially literate investor.

  1. Do you understand the legal and regulatory landscapes as they relate to your investments?

Every year, businesses of all sizes are impacted by changing regulatory and legal demands in the states, countries or global territories they operate in.

Right in the beginning of a new venture, steps like hiring professional legal and accounting assistance may seem excessive but they could really help you in the long run.

Financial literacy goes hand in hand with a cultivating a thorough knowledge of the laws governing your business’ accounting, procurement, supply chain logistics practices as well as  many other areas of local and federal law. Taking the time to understand these things on a deeper level will help you to form your business with the right formal structure whether it  be:

  • Sole Proprietorship
    • A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for its assets and liabilities. Learn more about the sole proprietor structure.
  • Limited Liability Company
    • An LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Learn more about how LLCs are structured.
  • Cooperative
    • People form cooperatives to meet a collective need or to provide a service that benefits all member-owners. Learn more about how cooperatives are structured.
  • Corporation
    • A corporation is more complex and generally suggested for larger, established companies with multiple employees. Learn more about how Corporations are structured.
  • Partnership
    • There are several different types of partnerships, which depend on the nature of the arrangement and partner responsibility for the business. Learn more about how these are structured.
  • S Corporation
    • An S corporation is similar to a C corporation but you are taxed only on the personal level. Learn more about how S corporations are structured.
  • L3C
    • L3C is a relatively new business structure which combines a nonprofit and for profit model around the need for the business to fulfill a specific charitable or educational purpose.

The structure your business takes on and the unique regulatory and legal requirements of where you operate can really impact the profits you take in as well as the risk you are exposed to in any business endeavor. Get smart about understanding the ever changing nature of these as they relate to your ideas and you will be better prepared for the future.

  1. Do you understand how much capital you will really need to invest?

Business intelligence is having a full 360 degree view of your market, the key demographics of your customer base, the challenges you will face as well as the advantages you will secure.

It can be very easy to take an overly optimistic view of a what seems like a successful investment opportunity by falling into the trap of thinking you know everything and have considered every angle. Even expectations of cost when considered in the lens of the best market research and analysis can be off track due to unforeseen and unanticipated outcomes.

This is precisely why the business intelligence gathering phase should never be truly “complete”. Decisions must be made and outcomes accepted but it is essential to continue to see insights which can help you prepare for unexpected costs.

When you plan to take on new investments, take whatever you expect to make in the first year or two, and make sure you can cover losses that double or triple that number. Consider what your costs could be and do the same. Plan for the worst and make sure you have stable cash flows to support against what could be even heroic losses in the first year.

It is essential to know that success can take time and you need to make sure you have enough capital invested to be able to protect yourself against initial losses which are often the launching pads for later success.

If you can’t learn from your mistakes and pivot, you might lose it all. That is why you need to gather the best business intel you can, constantly expand upon it and act accordingly but make sure you are ready to cover your short, medium and long term needs. If you cannot, you might need to scale back your investments.

It is better to wait for the right opportunity than to risk it all on the wrong one!

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