44% of Small Business Owners Are Not Financially Literate
Modern day entrepreneurs and small business owners are touted as the new Renaissance men.
For one, Examiner.com hailed Elon Musk as the next Leonardo da Vinci. Meanwhile, serial entrepreneur Creel Price, considered one of the most brilliant business minds of our times, founded what he referred to as the Entreprenaissance movement. He believes that we are in the throes of a similar renaissance or revival of the entrepreneurial spirit, with small businesses thriving more than their corporate counterparts.
The unfortunate reality is that many of these modern Renaissance men have a flimsy foundation in terms of financial literacy.
Weak Financial Literacy Among Entrepreneurs
Small business owners and solopreneurs of the 21st century may have the most profitable idea or even the grit to persist after multiple setbacks and failure. Yet, weak financial literacy is one of the top reasons why small businesses don’t make it during the first couple of years.
Last year, The Financial Post reported the findings of an Intuit Canada survey on small business owners and their knowledge of financial basics. Below are the main points of the survey:
- 44% of small business owners have below average financial literacy skills and only 18% could be considered above average.
- Statistics Canada data shows that 85% of startups make it through their first year but only 51% survived for five years.
- 8% of entrepreneurs make their debut with less than $5,000, mostly funded out of their own pocket in the form of personal savings, credit cards, and lines of credit.
In the same vein, the Association of Chartered Certified Accountants have the following key findings in their 2014 report on financial literacy among entrepreneurs worldwide:
- Small and medium sized enterprises (SMEs), and particularly informal businesses or SMEs in emerging markets, face significant financing constraints that undermine their contribution to employment, productivity growth and innovation.
- At 8–14% per annum, business mortality rates are substantial even in the developed world and were still on the rise until recently (OECD 2013b). An entrepreneur’s’ lack of financial capability is often portrayed as part of the reason for the substantial churn in the sector (New Vision 2011), even though many business exits are arguably not ‘failures.’
- After controlling for other relevant variables, self-employed individuals in a sample of developing countries (Armenia, Colombia, Lebanon, Mexico, Nigeria, Turkey and Uruguay) performed worse than the general population on standardized assessments of their ability to monitor expenses, to budget, and to live within their means.
Expert — Approved Financial Advice for Small Business Owners
Sure, there are hundreds of financial tips out there to help small business owners navigate the treacherous financial waves.
In a recent study by IGF Invoice Finance, it was found out that a third of the businesses they surveyed rely solely on Google and social media for sound financial advice instead of talking to experts. “Without (expert) advice, SMEs simply cannot make an informed decisions, and in business an uninformed decision is often a wrong decision,” said Tracy Ewen, managing director of IGF Invoice Finance.
The main takeaway of the report is to seek guidance from organizations and licensed professionals who know exactly what they’re talking about when dispensing financial advice, such as investment tactics or how to identify permanent assets.
Once you have set up an appointment with a financial advisor, you can also count on the following practical and expert-approved tips that we have curated from highly reliable sources:
- Get to know the basics. Start with the basics to understand your accountant or financial advisor’s language. Learn how to read balance sheets, income statements, and inventories. Understand the cash flow and supply chain process.
- Stop treating your enterprise as your personal piggy bank. This is one of the most common pitfalls of new small business owners. Often, they overlook the fact that what they have in the bank has nothing to do with their own spending power. Several experts recommend paying yourself a fixed monthly salary and to learn to live within those figures.
- Have a separate business account. Aside from resisting the temptation to spend your business finances for personal matters, this will help prevent confusion once tax season kicks in.
- Practice the lean methodology. Here’s what financial advisor Barry Glassman has to say about it in The Forbes:
Companies like Starbucks or Proctor and Gamble test new concepts on smaller markets before launching their products worldwide. Small companies can learn from this approach. Develop a prototype to get the product out, launch it in smaller markets, test it, get feedback, pivot, and then refine it. By using this cost-effective process, you’ll have a refined product or service designed to the taste and needs of potential clients because they told you what they liked and wanted along the way.
- Determine your business priorities. Growth happens when you have direction. What do you want to accomplish in the next 12 months? Do you want to expand with franchises? Or maintain the existing company size but come up with new products? Identifying your specific goals will also help you set a clear-cut business budget.
- Embrace (rather than resist) technology. Financial management tools and payroll inventory software can make your life easier as a business owner. These technological advancements have even made it possible for both employees and employers to work effectively and be location-independent at the same time.
The aforementioned list is just the tip of the iceberg! We’re eager to hear your opinion and thoughts about advancing financial literacy among small business owners too.
Originally published at blog.payrollhero.com on October 14, 2015.