Financial literacy for small business owners

If you own a small business, there are plenty of free resources available to help you keep your head above financial waters.
4 7 22 Financial Tips Panel

April is Financial Literacy Month, and while we tend to think of financial literacy in terms of teaching young adults how to manage their money, there’s a lot that small business owners can learn too.

According to a survey conducted by Intuit, 40% of small business owners consider themselves to be financially illiterate. At the same time, 81% of them are doing their business’ finances themselves. This means there’s a significant number of small business owners who are handling their own finances but are ill-equipped to do so.

Unless you’ve started a financial services firm, accounting probably isn’t your strongest skill. And, yet, understanding finances — cash flow, budget projections, profit and loss, etc. — is essential to understanding the overall health of your business. That’s why every business owner should make financial literacy a priority in their continuing education.

Bruce Berndt, managing partner of Berndt CPA in Madison, says many new business owners think record keeping is just writing checks and making deposits. The issue of complete separation of business and personal finances is something most do not fully understand and therefore do not do.

Berndt says these are the top five financial mistakes he sees small business owners make most often:

  • Attempting to do everything: In most cases, not searching out the correct team of advisors upfront is not done — until they run into problems.
  • Not understanding finances and regulatory requirements: There are so many and understanding how to comply is easier than asking how to remedy problems.
  • Spreading themselves too thin: Look for lifelines to get to market quicker and the right way.
  • Not managing risk: This is both business and personal risk, and this does not only mean through insurance.
  • Having the family agree on goals (and sacrifices): “I would say more than 50% of potential new business owners that I talk with do not have honest discussions with their spouse/significant other to fully explore if a business fits with the family quality of life/risk profile.”

However, Berndt says the single worst financial mistake a small business owner can make is not fully understanding the financial risks that owning a business has on all personal assets. “Many believe setting up an LLC is all that is needed. This is far from the truth. If they prepare a business plan, they will be forced to understand this and address [it early].”

Berndt recommends first-time small business owners completely separate all banking and credit card transactions between business and personal. This should start from day one, although most want to wait to do this because it takes a bunch of time.

Because small business owners can’t be expected to be financial experts, Berndt notes it’s important for them to surround themselves with great bankers, insurance professionals, and legal advisors. “The UW Small Business Development Center has many great one-day seminars on everything a business owner will need. Look for trade associations or local chamber of commerce presentations as well.

“And meet with [your bankers] quarterly to let them know your thoughts and what your plans are,” Berndt adds. “These meetings are free and only require the investment of time. This also helps business owner understand the avenues to finance growth.”

There are many other free financial literacy resources small business owners can take advantage of to up their game. Here are a few:

FDIC Money Smart for Small Business

FDIC Money Smart is a complete financial education course created by the Federal Deposit Insurance Corp. (FDIC) to help low- and moderate-income individuals improve their financial skills. The program is comprised of 13 training modules that cover nearly all facets of small business finance. Topics include business planning, managing cash flow, insurance, credit reporting, tax planning, and business banking. Participants in the program can download the course material for free on the FDIC website.

SCORE Association

SCORE is a nonprofit organization that counsels, trains, and provides mentors for entrepreneurs and future small business owners. SCORE’s website features online tools and information that cover a wide array of topics on starting and running a small business. The Finance and Money section of the website contains articles and help on finance and financial planning. Local workshops and mentors are also available from the Madison SCORE chapter.

360 Degrees of Financial Literacy

360 Degrees of Financial Literacy is a free resource provided by the American Institute of Certified Public Accountants (AICPA), with the goal of providing financial information to individuals. The website contains a section for small business owners that includes topics such as budgeting, business formation, and debt and business valuation. Financial tools and calculators are also available.

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