As Challenges Loom, Small Businesses Count on Financial Literacy to Thrive –

vcita’s data indicates high levels of financial literacy in what is a very promising indicator of small business resilience.

vcita’s data indicates high levels of financial literacy in what is a very promising indicator of small business resilience.

All businesses face unexpected challenges on a regular basis, but the smaller the business, the harder it can be to persevere. Often, it is the company’s financial management skills – and the availability of cash – that provide the most effective defense against these obstacles.

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

A recent study on the subject of financial literacy 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 manage their finances without the help of dedicated experts, with 80% doing it on their own. Another 41.3% of respondents said they did not need the help of a financial advisor to manage their business finances.

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

Tax declarations are not a problem

Government tax codes often look like maze, and most people find them nearly impossible to navigate. Technology has simplified tax filing these days, but for many the tax code remains a black box, shrouded in mystery. Small business owners, however, seem to see things differently than most private households.

Some 64% of vcita respondents indicated that, in their experience, preparing tax returns is relatively straightforward. They even revealed that they consider error detection to be an easy task. This high percentage indicates that small business owners are deeply involved in preparing their tax returns and can understand the various incentives the government offers them.

Additionally, more than 50% of vcita respondents believe they understand their business taxes, indicating an above-average level of financial literacy.

These results may surprise, but they make sense. The average small business owner has to wear many hats, from sales and personnel to inventory and payments. Although they may not be accounting or bookkeeping experts, small business owners know how to read financial statements.

They also need to decipher what those statements say about the health of the business, and reading tax returns and understanding their implications is an extension of financial literacy.

Budgeting and securing a future

Budgeting and expense control are important for businesses of all sizes. Small business owners indicated they understand the importance of these tasks, with 70% of respondents saying they maintain a budget. However, only 40% of them revealed that their budgets were very detailed.

Why the gap? If you’re working on a budget, why not break it down into detailed categories? Knowledge of a firm’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 high-level control 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 had a business checking account and savings account. Many also have investments, credit cards and retirement plans in place. About 55% of respondents also said they had long-term and short-term goals in place. The rest mentioned having goals they were striving to achieve.

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

Credit remains a challenge

While expense management and taxes are a snap, credit scores are another story. Most business owners, 54% to be precise, admitted not knowing their credit scores. The majority of respondents also indicated having difficulty keeping pace with changes in their credit ratings.

The opacity of the credit reporting system is partly responsible. However, business owners need to stay abreast of changes to their credit ratings as they affect financing and equity decisions. A business owner who is confident in their high credit rating can apply for debt financing instead of selling shares to an investor.

Despite a lack of credit score knowledge, most respondents are not deterred from using lines of credit. Some 53% admitted to having one or two business credit cards and using them frequently for business.

This decision may seem risky at first glance. However, the majority of respondents indicated that their level of debt was manageable, with only 10% admitting to not covering expenses. About 46% of respondents admitted to having some degree of debt, indicating surprisingly strong balance sheets.

When your bank balance is stable, taking on more debt through credit isn’t a big deal. In addition, these low levels of debt have the side effect of simplifying the projection of cash flows. 61% of respondents said they have a deep understanding of their cash flow.

The importance of financial literacy

In a finding that should come as no surprise, 97% of respondents revealed that they believe financial literacy is important. Additionally, 68% admitted to actively working to improve their financial literacy, despite the survey indicating that they have cash flow largely under control.