What is the connection between financial literacy and entrepreneurship?

Introduction 

 Financial literacy for entrepreneurs plays a great role. That’s because when launching a company, entrepreneurs juggle many money issues – funding, budgeting, taxes, and more. However, many budding business owners start companies with heart, but no financial grounding. When funds run low, dreams can fizzle. Those armed with financial literacy, however, can handle such bumps and make wise choices that keep their companies afloat.

Let’s dive into understanding the connection between financial literacy and entrepreneurial success. First, let’s start with the current situation of financial literacy in India.

State of financial literacy in India

Financial habits and nuances change with geography. It is no surprise that business strategies that work in the US won’t work in India, given the cultural and legal divides. 

The educational landscape in India has become much more inclusive and modernized in recent times; developing soft skills, health education, and vocational training for job readiness have all been included in college curriculums. However, if there’s one aspect that has continually taken a backseat in India, it’s Financial Literacy.

Only around 27% of Indians are financially literate, according to a study conducted by the National Centre for Financial Education. Financial awareness is not even very common among the privileged class. What results for millions of Indians is financial stress and instability, poor financial decisions, and debt. A TransUnion CIBIL report from 2022 states that the average Indian consumer is in a debt of ₹54,200, with overspending being a significant contributor to this amount.

Indians are in desperate need of basic awareness of financial concepts to be able to utilise money and resources effectively. Underprivileged people with extremely limited financial literacy are not even aware of the benefits of opening bank accounts.

People frequently miss out on government assistance and special programmes like the Stand Up India Scheme and the Pradhan Mantri Jan Dhan Yojana (PMJDY) due to their ignorance and lack of any financial awareness. 

Even the well-to-do folks in business suits are prone to huge financial losses due to their lack of a deep understanding of financial services. That is why financial education and business success is so important.

Financial literacy is a cornerstone of entrepreneurship as well. Businesses and leaders are prone to lose big amounts of money if they are not financially aware and adept enough to ride the up-and-down waves of the market.

Also read: How can financial education boost India’s economic potential?

Aspects of financial literacy that make an ideal entrepreneur

Financial literacy is a stepping stone to entrepreneurial success factors. However, it is often overshadowed by the excitement of launching a venture. In the pursuit of innovation and market disruption, as an entrepreneur, you must not overlook the fundamental skill of managing finances effectively. 

1. Understand the financial health of business

Businesses require many choices on costs, loans, turnover, and returns. Entrepreneurial financial planning enables owners to navigate through their finances with ease. 

As Rakesh Jhunjhunwala, investor and founder of India’s Rare Enterprises said, “An entrepreneur needs to understand finance even if he employs specialists.” 

This underscores the need for financial empowerment for business owners. Whether pricing a new product, funding equipment or entering a new market, financial literacy supports informed choices. 

2. Making better business decisions

A good business must know how to handle money. Business owners should be adept at entrepreneurial skills and finances which includes budgeting, anticipating spending needs, and handling cash flow and their gains. This will allow the company to bear the translation between spending and income so that it can stabilize profits.

The financial literacy impact on entrepreneurship cannot be overstated. Finance guru Dave Ramsey rightly puts it, “Control your finances or they will forever control you.” Quickly picking up financial literacy empowers business owners to efficiently steer their company’s financial direction. 

Sound financial literacy vests entrepreneurs with the ability to make informed decisions grounded in financial analysis and data. 

3. Practising efficient resource allocation

Financial intelligence in entrepreneurship is crucial. Effective resource allocation, especially for startups with limited resources, is imperative. What Financial literacy does is it enables entrepreneurs to allocate funds judiciously and teaches them to optimize investments to achieve business objectives. 

It does not matter if it’s product development, marketing initiatives or talent acquisition; financially literate entrepreneurs habitually prioritize resources for maximum returns. Money management for entrepreneurs is important. 

4. Assessing growth and expansion opportunities

It is obvious that expanding businesses will have to encounter diverse growth opportunities. This, however, necessitates a clear financial evaluation. Financial literacy, again, facilitates the assessment of expansion prospects. 

Awareness of one’s financial situation ensures alignment with financial capabilities and long-term goals. Through financial projections and risk assessments, entrepreneurs can pursue growth initiatives both strategically and sustainably.

5. Steering through financial challenges

Financial challenges are inevitable in business journeys and they require constant steering around. Financial literacy empowers entrepreneurs to tackle issues with cash flow fluctuations, debt management, and unforeseen expenses quickly and easily. 

Financial empowerment for business owners is not just about survival but about thriving in a changing business world. Armed with financial knowledge, entrepreneurs develop contingency plans, negotiate favourable terms and maintain financial resilience during the worst of situations.

6. Obtain funding

Funding is important for entrepreneurs. That’s because securing growth and expansion in business is capital support. Financially literate entrepreneurs are better at spotting and closing financing opportunities. 

They can develop persuasive business plans, interpret the products of financial arrangements and select the most favourable financing options. According to a report by the Small Industries Development Bank of India (SIDBI), a lack of financial literacy is a significant barrier to accessing financial opportunities for many Indian business owners. 

Financially literate entrepreneurs are able to engage investors confidently and instil a sense of trust; it bolsters the chances of securing funding tenfold. 

Also read: How can financial literacy month help you achieve your money goals?

A real-world story of financial literacy on entrepreneurial success

Deepinder Goyal, co-founder and CEO of Zomato, clearly shows how vital grasping money matters for business triumph. His shift from consulting to running one of the world’s biggest food delivery platforms proves financial smarts are key in the fierce modern marketplace. 

Zomato’s growth relies heavily on Goyal’s financial skills – the need for robust cash flow control, investment and efficient expansion. “Grasping your cash flow is crucial. Measure it to better it,” he once said, underlining how monitoring money flow allows informed choices and growth.

Early on, Zomato lacked funds and met stiff competition. But Goyal’s financial planning and execution saw it through. “Financial literacy brings independence and security,” he believes. This mindset secured financing, budgeting, and Zomato’s eventual public listing.

Equally, customer value and brand building also shape Goyal’s financial thinking: “Every money choice should ultimately lift customer value and the brand.” This customer focus was the recipe for Zomato’s success. Its gross revenue jumped 68.9% to Rs 7079 crore in the fiscal year ending March 2023, up from Rs 4192 crore in FY22. 

Conclusion 

Financial literacy is important for any business to thrive and as a result, entrepreneurs need to adapt their finance game. They need to develop an entrepreneurial mindset and financial skills in this rapidly changing world and constantly implement the same in their business to achieve success. To learn more, join StockGro!