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Importance of Financial Literacy

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Importance of Financial Literacy essay
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Financial tools – financial literacy

Financial tools can be understood only when entrepreneurs are financially literate. By understanding the important five elements of finance an entrepreneur can be succeed which can be achieved only through financial literacy.

Understanding the fundamentals of the financial tools that enable businesses to operate successfully helps entrepreneurs not only with formulating their overall strategy and balancing long-term investment with quarterly budgetary decisions, but also with staying on top of nitty-gritty details like customers who haven’t paid up, suppliers who have billed too much, or numbers that used to be black starting to slip into the red.

When the time comes to talk to private equity firms, banks or investors – all of whom could potentially become stakeholders in a growing business – the ability to be able to talk the talk (financially speaking) will undoubtedly prove to be invaluable. All entrepreneurs need adequate financing to launch and subsequently grow their businesses. Access to loans or credit lines is a key factor in the process of expansion for small enterprises.

Scalability

A financially literate business owner is more likely to be fully in control of their business. Gaining an understanding of what balance sheets and profit and loss statements mean provides a clear view of the financial state of your enterprise and subsequently facilitates smarter business decisions. As a small business owner you don’t have to run all of the financial side of things, but gaining a degree of financial acumen means that you will be able to manage some of the business’s finances, and in the process give yourself the best chance of building a business that can thrive.

Control

Like it was stated above, monitoring the outcome of what company money is spent on helps an entrepreneur(s) make better decisions going forward. Such that any profitable venture attracts more funding while the unprofitable ones are abandoned in order to keep the business afloat.

Informs Decision Making

Financial literacy also involves studying and analysing data and results. For instance, if a company pays for marketing or adverts, it should be able to track how much sales has come in through that channel.This way, the business owners can know if it was money well spent in the event of a profit or money wrongly spent in the case of a loss.

Track Growth

When spending is properly thought out this way at the startup phase, it gives the business some stability and discourages playing to the gallery. From times past and even up till now, money has always been a major problem for start-up companies. So for founders who have taken prudence as their watchword, doing business gets a little bit easier and less difficult. For every start-up business, every rupee the company spends has to be on the best option available to influence the growth of the business.

Stability

Financial ignorance carries significant costs. Entrepreneurs who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less money. Meanwhile, the potential benefits of financial literacy are manifold. Financially savvy investors are more likely to diversify risk by spreading funds across several ventures. Without an understanding of basic financial concepts, people are not well equipped to make decisions related to financial management. People who are financially literate have the ability to make informed financial choices regarding saving, investing, borrowing, and more.So, below are some reasons why financial literacy is an important aspect of entrepreneurship.

Financial literacy enables entrepreneurs to take responsibility for every rupee, and to maintain a sharp focus on costs and the simple measures of cash flow, all of which are critical in maximizing a small business’s chance of survival. Throughout their business journey, entrepreneurs face complex decisions. Equipping them with financial literacy skills is therefore believed to contribute to an improved understanding of financing options and the availability of financial support services. Every year, thousands of entrepreneurs set up and establish small businesses. The real challenge facing these entrepreneurs is to subsequently gain scale. All small businesses need to grow profitably in order to succeed. The ability to scale a business in a profitable and sustainable way requires financial literacy.

In contrast, in the major emerging economies—the so-called BRICS (Brazil, the Russian Federation, India, China, and South Africa)—on average, 28 percent of adults are financially literate. Disparities exist among these countries, too, with rates ranging from 24 percent in India to 42 percent in South Africa Financial literacy rates differ enormously between the major advanced and emerging economies in the world. On average, 55 percent of adults in the major advanced economies–Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States–are financially literate (Figure 1). But even across these countries, financial literacy rates range widely, from 37 percent in Italy to 68 percent in Canada.

Financial literacy rates differ in important ways when it comes to characteristics such as gender, education level, income, and age. Worldwide, 35 percent of men are financially literate, compared with 30 percent of women Women have weaker financial skills than men even considering variations in age, country, education, and income. There is also a gap in financial literacy when looking at relative income.

They are less prepared to take critical steps like saving for retirement, buying a house, or thriving in the aftermath of divorce. Without access to basic information, it’s hard to be an equal partner within a relationship or effectively manage one’s own financial details. What’s more, many victims of the financial literacy gender gap may be ashamed that they lack education. As a result, they may be reluctant to seek help or educational resources. Studies show that, on average, women are less financially literate than men. A wide range of factors contribute to this disparity

The Gender Gap in Financial Literacy

It is a combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decision and ultimately achieve individual financing wellbeing (Organization of Economic Co-operation and Development). Other definition by President Advisory Council on Financial literacy, financial literacy consist of ability to use knowledge and skill to manage financial resources effective for lifetime (Pailella, 2016). Financial literacy as the ability to collect important information, and also differentiating between diverse financial option, discussing financial issues, planning and proficiently answer that affect financial decision making. Economic issues related to the understanding about economic issues in a country or worldwide. Financial services related to the knowledge about the current product and service. Investing related to the knowledge in investment and risk of the investment. Gender, age, education level, marital status, family income, financial decision-making process, budgeting and expenditure as influence factor in financial literacy.

Financial Literacy

Thus, a woman entrepreneur is one who starts business and manages it independently and tactfully, takes all the risks, faces the challenges boldly with an iron will to succeed. Women entrepreneurship is an economic activity of those women who think of a business enterprise, initiate it, organise and combine the factors of production, operate the enterprise and undertake risks and handle economic uncertainty involved in running a business enterprise. Women entrepreneurship means the whole process of organising factors of production, finance and human resource management are carried out by women. No one can define women entrepreneurship but can be differentiated on the basis of gender. Entrepreneurship is an economic activity which is undertaken by an individual or group of individuals. Entrepreneurship can be defined as the making of a “new combination” of already existing materials and forces; that entrepreneurship throws up as innovations, as opposed to inventions and that no one is entrepreneur forever, only when he or she is actually doing the innovative activity.

Conceptual Framework of Women entrepreneurship

  1. Cash Management When looking at a cash management which have three main breakdowns that show where cash is coming from and going to:
    • Financing activities include the borrowing and repayment of long-term liabilities.
    • Investing activities include the purchase and sale of your long-term fixed assets, such as property, plant and equipment.
    • Operating activities include your day-to-day operations.

    Increases and decreases in receivables and payables are accounted for on your cash flow statement, as are other activities from operating your business and selling your products and services. The operating section is where your main cash flow should be generated. Long-term business health comes from having a good net profit and positive cash flow from your operating activities.

  2. Budgeting Basics
  3. Budgeting is the most effective way to control your cash flow, allowing you to invest in new opportunities at the appropriate time. A budget is a plan to:

    • ensure you have enough money for your future projects.
    • enable you to make confident financial decisions and meet your objectives
    • ensure you can continue to fund your current commitments
    • control your finances
  4. Banking and Financial Services
  5. Our values based banking model calls on us to not only provide savvy financial products and services but to look at all the ways we can build our members wealth and well-being. Financial literacy is one of the first steps on the road to economic strength and independence. We have developed a number of initiatives and continue to work with community partners to provide programs for both individuals, businesses and organizations

  6. The Impact of Interest Understanding the ins and outs of interest can impact your finances more than you likely realize, so it’s an important concept to gain a better understand of early on in life.
  7. While you may touch upon the concepts within a mathematics course, it’s important to understand different aspects, like compound interest. Why? Not only can it help you save even more, but it can make the difference between borrowing a small amount and paying back much more than you need to for years to come.

  8. The Credit-Debt Roller-coaster
  9. Maybe roller-coaster isn’t the right term – perhaps, downward spiral is more accurate. Meaning: it’s much easier to lose credit than gain it and many students don’t realize how easy it is to ruin their credit – and how difficult it can be to regain credit – before it’s too late. That’s why it’s crucial to provide knowledge on debt earlier than later. Credit can be an extremely useful tool – if it’s managed correctly. Making rash decisions when you’re young can end up costing you throughout adulthood so it’s important to grasp the concepts and tools behind responsible credit practices as early on as possible.

From this it is very clear that Financial literacy will be gateway to get success in women entrepreneurship. Providing greater confidence, security, and ease of use for women using financial services, including overcoming issues related to finance.

Hence, in this context only, Financial regulators in India—Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA)—have created a joint charter called ‘National Strategy for Financial Education’, detailing initiatives taken by them and also other market participants like banks, stock exchanges, broking houses, mutual funds and insurers. What is required is a joint effort by all the banking, financial services and insurance companies as well to be able to achieve noticeable changes in the perceptions that an average Indian has about financial management. It’s time to bring individual efforts under one framework to ensure better outcomes. The recent mammoth exercise of demonetization should help bring many more people into the organized sector, thereby opening up possibilities for financial inclusion and literacy by providing an affordable platform for the delivery of multiple financial product.

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Importance of Financial Literacy. (2018, December 03). GradesFixer. Retrieved August 5, 2022, from https://gradesfixer.com/free-essay-examples/importance-of-financial-literacy/
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