Get to Know Your Business and Avoid Wrong Financial Decisions

During the pandemic and lockdown, financial literacy has become more important than ever for survival in the business world, which, given the circumstances, is inherently uncertain for many entrepreneurs. Furthermore, due to the digitalization accelerated by the coronavirus pandemic, there are increasingly complex financial products and services in a market that is becoming more dynamic every day.

Large business systems often have entire armies of financial experts, both internal and external consultants; however, micro-entrepreneurs, small and medium-sized enterprises often find themselves in a situation where one person or a few make multiple decisions across various segments of the business, including finance. Unfortunately, they are not always successful in this. Many entrepreneurs lack the necessary financial knowledge and do not understand financial reports, financial planning, or budgeting. Due to wrong financial decisions, ineffective money management, and insufficient time for financial literacy, it is easy to fall into difficulties and ultimately fail.

Prerequisite for Successful Business

According to a 2019 financial literacy survey in Croatia conducted by the Organization for Economic Cooperation and Development (OECD), the average financial literacy score of Croatian citizens was 12.3 out of a total of 21 points (59 percent) compared to 11.7 points (56 percent) in 2015. The survey measured three basic categories: financial knowledge, financial behavior, and attitude towards money. The results indicate that citizens are increasingly aware of the necessity of financial literacy and understanding basic financial concepts. Money management has become indispensable in almost all significant life events, and financial literacy is a prerequisite for both life financial security and successful business operations, which in turn contributes to a more successful national economy, especially considering the importance and share of small and medium-sized enterprises in the Croatian economy and society.

Indeed, according to a study conducted by the Economic Institute of Zagreb as part of the Uplift.hr project, micro-enterprises, small and medium-sized enterprises generated 425 billion kuna in revenue, 12.9 billion kuna in net profit, 87 million kuna in exports, and 32 billion kuna in investments in 2020. Despite the crisis, 3,317 new small businesses were registered that year, more than in the pre-crisis year of 2019. A total of 137,786 micro-enterprises, small and medium-sized enterprises registered last year employed 609 thousand people, which is 76 percent of total employment in the corporate sector. All this points to the importance of financial literacy in the sector for even more efficient money management.

Collaboration with Štedopis

The institution that has proven to be the most agile and expert in financial literacy in Croatia is the Institute for Financial Education, Štedopis, which has made significant strides in educating children and teachers and has held numerous workshops for citizens from various social strata, from employed and unemployed individuals to retirees and students. Their youth literacy programs, approved by the Agency for Education and Training, are also supported by financial institutions. Banks, having learned from the financial crisis, realized that it is in their interest to increase understanding between their employees and users of their services, meaning that citizens’ financial literacy is beneficial for society as a whole. To help its clients make better business decisions, Addiko Bank, in collaboration with Štedopis, launched the financial literacy project ‘Get to Know Your Business’, thanks to which visitors to its financial literacy website have the opportunity to acquire fundamental financial knowledge and apply financial solutions in everyday business decision-making.

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– The project consists of five thematic cycles that deal with money management, understanding key financial statements and balances, and how to extract information about the company’s assets from them, cash flow reports and their importance, as well as the digital transformation of business. Financial statements are explained in simple language, entrepreneurs are introduced to basic accounting concepts and the differences between cash flow and profit, and what is necessary for better management of the company’s debtors and creditors. The project demystifies professional accounting and finance terms and enables their adoption – explained Nenad Mećava, Executive Director of Client Business at Addiko Bank.

‘Cheat Sheet’ for Entrepreneurs

In the practical part of the education, business events related to money are presented, and answers are offered to questions that companies face in their daily operations. In addition to enabling them to better understand accounting terminology and relationships with debtors and creditors, financial knowledge saves entrepreneurs valuable time spent on administrative tasks that can be automated.

Thus, Addiko Bank has designed a reminder, or a kind of cheat sheet for small and medium-sized entrepreneurs that can help them in making business decisions – five key things that every financially literate entrepreneur should know. The first relates to monitoring cash flow, as the main cause of the failure of most entrepreneurs is precisely cash shortages, so it is crucial to ensure the necessary liquidity for the survival of the business. The second rule emphasizes matching expenses with income and the importance of budgeting. The third rule stems from the second and seems very simple at first glance, prescribing adherence to the budget, which implies controlling spending and carefully choosing expenses. The most important lesson in personal and business finance is to live and operate within one’s means. The fourth key point is smart debt management, which means rational thinking and weighing risks before borrowing, and the fifth point advises saving for bad times under the motto ‘Hope for the best, expect the worst’.

– Addiko Bank’s strategy is focused on consumer lending, financing small and medium-sized enterprises, and payment services. Since we are an atypical bank that combines unconventionality and simplicity with security and stability, we are also atypical in the financing process. With us, it is possible to obtain a loan with minimal documentation and in record time, so in the first ten months of 2021, we approved about 65 percent more new loans to consumers and about 85 percent more new loans to businesses compared to the same period last year – emphasized Mećava, adding that small and medium-sized enterprises make up 99 percent of the Croatian economy and employ 77 percent of the total employed population.

Unfortunately, only 50 percent manage to exceed five years of business, and the cause is often wrong financial decisions and ineffective money management.

The Challenge of Digital Transformation

Companies also face a significant challenge in digital transformation, which everyone declaratively supports, but there are very few successful examples in practice. The project ‘Get to Know Your Business’ consists of educational articles and knowledge checks, and the fifth and final cycle on the current topic of digital transformation is currently underway. Mećava presented data from a recently published report by the Altimeter Group that 88 percent of surveyed companies state that they are trying to implement digital transformation; however, only 25 percent say they clearly understand the shift from old business models to new ones.

– From this, it can be concluded that most interviewees who claim to be implementing digital transformation are actually adapting existing processes instead of studying the real forces that are changing business in the market. Addiko Bank is one of the digital leaders in the Croatian market precisely due to the transformation of its business, which, in addition to transforming infrastructure and processes, included a change in corporate culture – concluded Nenad Mećava.

Although they closely monitor the operations of their businesses, entrepreneurs often do not understand common financial reporting terms, and it is extremely important to know how to read financial reports, understand what the numbers say, and speak the language of finance and accounting. Owners and entrepreneurs must understand the numbers because, in the end, their money stands behind them.