Author
LoansJagat Team
Read Time
4 Min
23 Jun 2025
The Importance Of Financial Literacy For Small Business Owners
Seema owns a home-based cake-making business in Kanpur. Recently, she received a bulk order worth ₹65,000. She has no clear idea about how to cost her products.
Therefore, she ended up underpricing her cakes and lost ₹15,000 on the deal.
However, her friend Shreya, who owns a similar business, makes ₹12,000 from a similar order using basic profit and expense calculations.
Financial literacy played a massive role in these different outcomes. You might be an expert in the products or services you offer, but feel uncomfortable with numbers.
A simple knowledge of finance will make a big difference for you. This blog will show how critical financial literacy is for you.
What Is Financial Literacy and How Can It Help You?
Financial literacy is about knowing your finances,, such as tracking income and expenses, understanding taxes, making borrowing decisions, and pricing products well.
If you are a business owner, it will help you in knowing how to grow profits, avoid money mistakes, and do financial planning.
The following are the main financial tasks you will handle as a small business owner:
Financial Area | Activity |
Budgeting | Planning monthly expenditures of the business |
Taxation | Filing GST and ITR |
Credit Management | Decide your borrowing needs |
Inventory | Managing stock and demand for the product |
Pricing | Setting the correct selling prices |
Cost Control | Eliminating unnecessary expenses |
Common Financial Errors You Might Make
Financial Mistake | Example | Possible Monthly Loss |
No tracking of expenses | Extra stock ordered, leading to waste of resources | ₹22,000 |
Pricing without checking of margin | Selling items with less or no profit | ₹10,000 |
Not separating finances | Using business money for personal needs | ₹17,000 |
Delayed GST filing | Late fee and penalty | ₹3,000 |
Borrowing without planning | Paying high interest | ₹5,000 |
Benefits Of Financial Literacy For You
If you know how to handle money properly, many things will fall into place. Let’s look at how financial awareness can help you and your business:
Advantages | Result For Your Business |
Improved Cash Flow | No issue related to liquidity in the business |
No overspending | |
Smarter Borrowing | Lower EMIs and timely repayment |
Efficient Tax Management | Timely payment of tax, avoiding penalties |
Correct Investment Choices | Help in business growth |
Effective Inventory Control | Stock doesn’t sit idle or go missing |
Better Cost Management | Profits increase without higher sales |
Budgeting Looks Easier
If you have financial knowledge then it becomes easier for you to plan your company’s budget. With a good monthly budget preparation, you are more likely to grow and less likely to fall into debt.
Read More – 5 Key Financial Metrics Every Business Owner Should Track
Let’s look at the monthly budget of Himanshi’s Cafe in Jaipur:
Category | Amount (₹) |
Rent | 15,000 |
Salary of the staff | 25,000 |
Raw materials | 42,000 |
Electricity | 5,500 |
Marketing | 6,700 |
Total Cost | 94,200 |
Monthly Income | 1,54,000 |
Net Profit (Monthly Income - Total Cost) | 59,800 |
Helps In Pricing Your Products
If you think that setting the right price is just about checking what others charge, then you are wrong. You need to consider all your own costs such as labour, electricity, and any more.
Let’s look at the cost of Reshma’s handcrafted candles business:
Type of Cost | Amount per Unit (₹) |
Raw Materials | 23 |
Labour | 14 |
Packaging | 7 |
Transport | 5 |
Total Cost | 49 |
Selling Price | 89 |
Profit (Selling Price - Total Cost) | 40 |
How Does Financial Literacy Help During Crises?
Your business might face setbacks from crises such as pandemics, sudden market shifts, or personal emergencies. Your effective
financial planning might help you in surviving such situations.
If you have savings, lower debt, and proper planning you will be able to manage shocks. Let’s have a look at the responses of business during lockdown:
Financial Readiness | Consequences | Impact on Business |
Good Planning | Kept operations going | Little slowdown |
No Savings | Shut down temporarily | Heavy income loss |
Poor Cash Management | Closed permanently | Permanent loss |
Saving On Taxes
With little financial literacy, you can easily claim legal deductions and file returns timely to avoid penalties. Let’s look at the common tax-related deductions available for your business:
Deductible Expense | Example | Maximum Benefit |
Rent | Rental payments of the business | Up to ₹1.8 Lakh per year |
Depreciation | Purchase of equipment | Up to 15% per year |
Utility Bills | Bills such as internet, electricity, etc. | Full claimable |
Staff Salary | Monthly wages | Full claimable |
Travelling | Travelling for business | Full claimable |
Use Of Easy Digital Tools
There are various free or low-cost tools available online for your business. You can easily manage your daily business finances on mobile apps, Excel sheets, or calculators.
Kartik is the owner of an electricity store in Nagpur. To better manage his finances he started maintaining a daily income-expense diary.
Within 3 months, he found products that provided better margins and saved ₹8,500 each month.
Also Read - How to Calculate Company Valuation – Step-by-Step Guide
Final Thoughts
If you understand how to properly use money in your business then you will be able to maximize profits for your business.
If you think that financial literacy is all about preparing financial accounts of your business then you are completely wrong.
It is much more than that. It helps you control costs, prepare a budget, set correct prices, and grow profits of your business.
The difference between a successful business and struggling one often lies in how as an owner you manage your business’s finance.
FAQs
1. Do I need a degree to learn finance for my small business?
No, you do not need a degree. Simple resources and free workshops are enough to start.
2. How can I decrease the GST penalty of my business?
You can easily reduce it by filing returns on time and keeping records.
3. Do I need an accountant or CA to understand the profit of my business?
Not always. You can use basic maths and tracking to calculate profit.
4. Is it okay to mix personal and business money?
It is best to keep them separate. As it will lead to confusion and poor tracking.
About the Author
LoansJagat Team
We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?
Quick Apply Loan
Subscribe Now
Related Blog Post
