Starting a small business is one of the most empowering journeys one can take, but it’s also marked by an unrelenting series of obstacles – from understanding tax requirements to juggling inventory to managing payroll. In order to succeed, small businesses must have the financial literacy skills needed to navigate these obstacles. Unfortunately, the majority do not.
In November, Intuit asked 500 small-business owners from across Canada to take a 10-question financial literacy quiz. The quiz included basic questions, such as, “What is the role of the balance sheet?” “What is the definition of ‘accruals’?” and “How can short-term cash flow be improved?”
The results show that there is a deep financial literacy gap among Canadian small businesses:
- Only two per cent scored great (with nine or 10 correct answers);
- 16 per cent had a good score (with seven or eight correct answers);
- 39 per cent received a passing grade (with five or six correct answers); and
- 44 per cent failed (with fewer than five correct answers)
The study also uncovered a likely root cause of this gap in financial literacy skills. While half of small businesses surveyed realized that they needed to spend time on financial management, very few of them had sought professional help and resources.
It is not, however, all doom and gloom.
The study uncovered some very encouraging signs that small-business owners see the value of boosting their skills. In fact, small-business owners have clear ideas about what they want to see in their financial literacy toolbox. The three tools of choice are:
- Time with an accountant – 42%
- Information sessions with other small-businesses owners – 24%
- Online tutorials – 22%
Even more encouraging is the fact that small-business owners see a direct payoff from leveraging financial literacy tools, resources, and supports.
The study found that small-business owners who identify as having an advanced understanding of financial management are five times more likely to use software or a solution provided by an accountant than manual methods, such as pen and paper:
- 76 per cent of small businesses using financial software, or a solution provided by their accountant, feel confident managing their finances.
- By contrast, only 16 per cent of small businesses using outdated manual methods, like pen and paper, have that same confidence.
So, how can we do a better job of supporting our small-business owners so that more of them succeed, more great ideas come to life, and more good Canadian jobs are created?
We can start by understanding where they are coming from. For example, while it may be assumed that small businesses have access to more resources and know-how than the average consumer, the data shows that this isn’t the case. A recent Statistics Canada study found that the vast majority (73 per cent) of start-ups are financed using personal savings. Moreover, Intuit research found that not spending time on financial literacy is the No. 1 regret for small-business owners looking back on their first year in business.
Significant attention is devoted to ensuring that Canadian consumers are armed with the financial literacy skills they need to navigate the big financial challenges that are a part of their lives. Equal attention must be given to ensuring that Canada’s small businesses have tools and resources to manage the financial risks and rewards that accompany the entrepreneurial journey.
Note: Research conducted from Nov. 27-29, 2012 by Angus Reid Public Opinion. A national sample of 501 small-business owners completed the survey. All respondents were small-business owners with 100 or fewer employees and had been in business for at least one year.
Read the full report here: Bridging the Gap