As challenges loom, small businesses rely on financial literacy to thrive

Data from vcita points to high levels of financial literacy in what is a highly promising indicator of small business resilience.

All companies routinely face unexpected challenges, but the smaller the business, the harder it can be to persevere. Often, it’s the business’s financial management skill – and the availability of cash – which form the most effective buffers against these hurdles.

Many of us might think of small business owners as perennially strapped for cash, struggling to cover costs, especially amid today’s economic uncertainties. However, a new study suggests that this image is far from the truth.

 A recent financial literacy-themed survey of small business owners by vcita paints a promising picture. According to data shared by the small business management software company, this sector of entrepreneurs manages their finances without any help from dedicated experts, with 80% going at it alone. A further 41.3% of respondents said they don’t need a financial advisor’s help in managing business finances.

 Here are a few other interesting data points from the survey – and what they say about the current state of small business resilience.

Tax reports are not a problem

Government tax codes often resemble labyrinths, and most people find them close to impossible to navigate. Technology has simplified filing taxes these days, but to many, the tax code remains a black box, shrouded in mystery. Small business owners, however, seem to view things differently from most private households.

 Some 64% of vcita’s respondents indicated that in their experience, preparing tax returns is relatively straightforward. They even revealed that they see spotting errors as an easy task. This high percentage indicates that small business owners are deeply involved in their tax preparation and can figure out the various incentives that the government offers them.

What’s more, over 50% of vcita’s respondents feel that they understand their business taxes, indicating a higher than average state of financial literacy.

These results might come as a surprise, but they do make sense. The average small business owner has to wear several hats, from sales and staffing to inventory and payments. While they might not be experts in accounting or bookkeeping, small business owners understand how to read financial statements.

They must also decipher what those statements say about the health of the business, and reading tax filings and figuring out their implications is an extension of financial skills.

Budgeting and securing a future

Budgeting and expense controls are important to businesses of all sizes. Small business owners indicated they understand the importance of these tasks, with 70% of respondents claiming that they maintain a budget. However, just 40% of them revealed their budgets are highly detailed.

Why the gap? If you operate under a budget, why not break it down into itemized categories? Familiarity with a business’s costs is one possible explanation. An experienced business owner will understand their expenses inside and out and won’t need to refer to their budget all the time. 

Expense management is a habit for these business owners, and maintaining a high-level check is more than enough. Given the workload they face, the average small business owner cannot afford to spend time manually entering expenses and creating pivot tables to project cash flow on spreadsheets.

 Most respondents to vcita’s survey indicated that they own a business checking and savings account. Many also have investments, credit cards, and retirement plans in place. About 55% of respondents also said they have long-term and short-term goals in place. The remainder mentioned having goals that they were working to achieve.

These results prove the forward-thinking nature of small business owners. Fiscal responsibility combined with a long-term plan will help them navigate unexpected situations that often arise in the markets.

Credit remains a challenge

While expense management and taxes are a breeze, credit scores are another story. Most business owners, 54% to be precise, admitted to not knowing their business credit scores. The majority of respondents also indicated they have trouble keeping pace with changes to their credit scores.

The opaqueness of the credit reporting system is partly to blame. However, business owners must stay abreast of changes to their credit scores, since they affect funding and equity decisions. A business owner who is confident with a high credit score can seek debt funding instead of selling equity to an investor.

Despite a lack of credit score knowledge, most respondents aren’t letting it deter them from using credit lines. Some 53% admitted to having one or two business credit cards and using them frequently during the course of business. 

This decision may seem risky on the surface. However, the majority of respondents indicated their debt levels were manageable, with only 10% admitting to not covering expenses. About 46% of respondents admitted to carrying some degree of debt, indicating surprisingly strong balance sheets.

When your bank balance is stable, assuming more debt through credit is not a huge issue. What’s more, these low debt levels have a side-effect in that they make projecting cash flow simple. 61% of respondents claimed to understand their cash flow thoroughly.

The importance of financial literacy

In a result that should offer no surprise, 97% of respondents revealed that they believe financial literacy is important. Also, 68% admitted to actively working on improving their financial literacy, despite the survey indicating they have cash flow largely under control.