Canadian Small Business Owners: "Lacking in Financial Literacy"

There is both good news and bad news when it comes to the level of small business financial literacy possessed by the average Canadian small business owner. The results of a recent small business financial literacy quiz conducted by Intuit Canada show that more than 8 out of 10 respondents failed to achieve a score of “good or basic knowledge” or better. Nearly half of these respondents revealed “well below basic knowledge.” 

Put another way, only 17 percent of respondents achieved a score of “very good knowledge” or better, and only 2% said they have “great knowledge.” The quiz consisted of 10 questions about business financial fundamentals, such as what is the role of the balance sheet and how can short-term cash flow be improved?

What’s the Good News?

That’s the bad news. The good news is that a majority of the respondents said they understand that financial management is important to the success of their business and they need to start closing the “knowledge gap.” Specifically:

• 42 percent said they wanted to spend more time with an accountant.
• 24 percent said they would benefit from information sessions with other small business owners.
• 22 percent said they would benefit from online tutorials.

The study indicates that small business owners’ use of financial literacy tools and resources increases their financial management confidence. Three-quarters of respondents who use financial software are confident that they have a good knowledge of accounting principles. Only 16 percent of respondents who rely on their own financial knowledge expressed this same level of confidence.

Up Close and Personal

In our position as small business financial consultants, we see the reality of these statistics up close and personal every day. Most entrepreneurs start businesses because they have particular talents or skills when it comes to manufacturing and delivering a product or providing a professional service — not because they are financial experts. However, they quickly learn that a good level of financial knowledge is very important to achieving success. 

It’s not uncommon for an entrepreneur to have a great business idea or product, a strong distribution system and/or sales force, a crack customer service team and raving customer reviews — only to fail because it suffered from poor cash flow.

You’ve probably heard it said before that “cash flow is the lifeblood of a business” and it’s true. Companies can often withstand short-term periods of slow sales, and even unprofitability, but a lack of cash flow can prove fatal — even to companies with strong sales and high profits.

Cash Flow Solutions

If your company is suffering from poor cash flow, you owe it to yourself to speak with a small business financial consultant willing to sit down with you and help analyze your situation and suggest solutions. Often, these involve asset-based lending (ABL) solutions like factoring and accounts receivable (A/R) financing.

A full-service factoring company will purchase selected receivables on an ongoing basis for a small discount to provide immediate cash flow for your business. This form of financing is widely used around the world — credit card companies are essentially doing the same thing. The elimination of a “receivables lag” can mean the difference between success and failure for businesses with a lack of working capital, or those that are operating with long or unreliable cash conversion cycles.

An A/R financing company will lend to a business based on the total value of its eligible receivables. There is a subtle but important difference between this and factoring receivables outright: With A/R financing, the receivables become the primary collateral, a workable advance rate is established, and the company is able to call upon funds based on the “borrowing base” of eligible receivables.

Many business owners fail to seriously consider these two options because they are unaware of how they work. They don’t realize how quick and easy it is to qualify, or the many advantages of these options over traditional financing. And many think they are simply too expensive but fail to ask themselves, “Compared to what?” The result of doing nothing is sometimes the loss of the business or bankruptcy.

Don’t Be a Statistic

Statistics indicate how hard it is to be a successful Canadian small business: While 85 percent of Canadian small businesses make it through the first year, only 51 percent are still around after five years. How many of these failures could have been prevented with a bit of knowledge and a stronger grasp of business financial management?

If you own a business or know someone who does, you are in a position to alter the statistics directly. Start by learning about or improving your knowledge of alternative financing solutions. The success or failure of many Canadian small businesses may depend on it.