Financial literacy is vital for entrepreneurs to succeed

GLOBALLY, small, medium and micro-sized enterprises are recognised as one of the key drivers of economic growth and job creation, and the small business sector has led the world out of several global recessions. But in South Africa, the sector is under-performing.

Recent data from the Global Entrepreneurship Monitor shows that South African entrepreneurship lags behind that in similar economies.

And for every 1.5 people who were engaged in early-stage entrepreneurial activity in South Africa in 2016, one was exiting a business.

According to Mark Graham, associate professor in accounting at the University of Cape Town, typical reasons for business failure include insufficient startup funding, incorrect pricing for products or services, growing too quickly or prematurely, and inadequate cash flow.

“We need entrepreneurs to run their businesses successfully so that they can be sustainable,” he says. “Most of these issues can be addressed through a proper understanding of financial and accounting principles and concepts to help entrepreneurs run their businesses better.”

Graham, who runs the Finance for Non-financial Managers programme at the

UCT Graduate School of

Business, says finance and accounting terms are a language that uses numbers to tell a story about a business.

“If you understand the fundamentals of financial principles, you will be able to analyse what is happening in any organisation,” says Graham. “Concepts such as profit and cash flow are basic to business. People are often surprised to find that, while a business can be extremely profitable, there may be a cashflow problem that will soon bring it to its knees.

“Most people don’t know the basics of financial reports, or what the right mix of debt and equity should be. By getting to grips with concepts such as working capital management and cash flow versus profit, business owners and managers can give themselves the best chance of success,” Graham says.

Jannie Rossouw, the head of Sanlam’s Business Market, agrees that financial literacy is key to entrepreneurial success and has argued that it should be integrated into the school curriculum so that future business owners can understand concepts such as the time value of money.

“It is imperative that South Africa starts to spend significant time and resources to address the need for access to quality education aimed at those who want to pursue entrepreneurship and business ownership,” Rossouw says.

It is not only entrepreneurs who would benefit from a better grasp of the basics of finance, says Graham. All businesses should invest in developing their employees’ financial skills, particularly those in managerial roles. – Staff Reporter