Amazingly almost 25% of small businesses owners were unable to identify the costs they needed to control in order to succeed, a 2009 survey showed. Given that more than half of business start-ups fail within five years this comes as no great surprise.
So how financially literate are you? Where do you sit on a scale of 1 to 5? You:
1 – don’t even have monthly financial management reports; (shame on
2 –glance at them as you pick them up from your bookkeeper; (At least
you have them…right)
3 – occasionally review them with your bookkeeper but are too
busy/embarrassed to ask what they really mean; (Well done you are now in the
majority…don’t you want to rise above the crowd?)
4 – review them monthly and act accordingly to control your cash flow, chase
up old debt and make sure you have money available to pay your HST and taxes on
time; (Awesome, you’ll be around for some time!)
5 – have meaningful budgets in place, compare your financials and follow up
on variances every month (differences between budget and actual). You use daily
cash reporting to maximize the interest you receive on your cash surplus.
(Fantastic, are you an accountant by any chance?)
1 to 3 – You better get up to speed or be left behind.
4 to 5 – You are financially literate and well ahead of the pack.
All too often small businesses use their bookkeeping services to make sure they pay their HST and payroll deductions on time. The rest of the financial information is sent off to their accountants for corporation or personal tax calculations at the end of the year. Is this an indicator of financial literacy?
A quick Google search on financial literacy brings up an article “Financial Literacy
Linked To Poverty And Beyond” which showed:
Canadians are more comfortable talking about religion or politics than money
– BMO Survey);
Parents are more willing to talk about sex drugs and alcohol than money with
their children; (Angus-Reid Survey for ING);
Did you know that there is a government task force on financial literacy? A quick look on their website http://www.financialliteracyincanada.com/soon shows the “Men In Grey” hard at work looking bored. Whatever happened to Will Smith and Men In Black? In December 2010 the task force publish their recommendations. The executive summary alone is 11 pages and contains 30 recommendations.
So on a national level the government recognises that we are not well prepared to manage our own finances.
What about small business owners? You don’t have time to wait for the next generation of high school graduates to show you how to read your income statement. What would I recommend? Get a good book on basic accounting from your library. Go through it in the same way that you would a book on sales or marketing. Take notes about the important
concepts, ideas and principles you need to understand in order to run your
business effectively. Alternatively take time to sit down with a qualified bookkeeper or accountant and get them to explain to you how your income statement works. Which are the key performance indicators to watch for your business? Learn how to read your balance sheet but most importantly you need to get a firm grasp of cash management.
As a former chief financial officer I am shocked that so few business owners invest
the time and training to become financially literate.
If you would like to take part in a “Small business financial literacy” workshop let me know
and I will organize one in early Fall. Just click here! I’m interested.