For small businesses, financial literacy is not just a buzzword; it’s a critical component of success. Today, we take a look at some revealing statistics from 2024 that reinforce the importance of financial literacy for small business owners and explore the impact of its absence.
Research by QuickBooks indicates that financial literacy levels among small business owners are far from ideal. Over half (54%) of small business owners claimed to have a good understanding of financial management before embarking on their entrepreneurial journey. However, a startling 28% admitted to a lack of confidence in their financial acumen, and 14% reported having limited or no financial literacy.
Interestingly, self-learning emerged as a key driver of financial literacy among small business owners. About one in five attributed their “high” financial literacy to self-led learning, and another 20% learned through prior entrepreneurial experience. Alarmingly, only 13% had learned about financial literacy in school, pointing to a potential gap in formal education.
The lack of financial literacy can be costly. Small businesses with low initial financial literacy reported losing an average of $118,121 in profit, with 45% attributing a loss of at least $10,000 to this shortfall. Furthermore, 32% of small business owners believed that better financial literacy would enhance their budgeting and cash flow management abilities.
Taxation emerged as another area of concern, with less than half (48%) of small business owners expressing confidence in their tax compliance. The figure improved to 69% for those who engaged an accounting professional, underscoring the value of professional financial advice.
Despite these challenges, the majority (71%) of small business owners reported improved financial security since starting their business. Further, they saw entrepreneurship as a pathway to wealth creation, with 48% planning to grow their personal wealth through business expansion.
However, stability rather than growth was the long-term goal for 45% of small business owners. This preference for stability was evident in the 49% reporting that their business was stable but not growing, and only 10% expressing a desire for rapid expansion.
Cash flow was a significant concern for 43% of small business owners, with 74% reporting unchanged or worsened cash flow issues over the previous year. When cash flow ran dry, 38% dipped into personal funds or used credit cards to sustain their business.
Credit card usage was widespread among entrepreneurs, with 85% using them for business purposes. However, the usage of personal credit cards for business-related costs was problematic, potentially impacting their personal credit score and complicating the separation of business and personal transactions for tax purposes.
On a positive note, 71% used accounting software or apps to manage their finances, although the same percentage also admitted to using traditional methods, exposing them to the risk of human error.
The role of accounting professionals in boosting business confidence was evident, with 98% of small business owners agreeing that their accountant boosted their business confidence, and 90% attributing their business growth to their accountant’s contributions.
In summary, these statistics underscore the critical role of financial literacy in small business success. They also highlight the need for financial education and professional financial advice to help small business owners navigate the complex financial landscape, manage risks, and optimize their financial performance.