Why Entrepreneurs Must Invest in Better Financial Literacy

If you looking for advice on starting business, most of the featured content is mainly focusing on product development, marketing, web design, and other topics. Certainly, these are important business areas, however what matters more is the financial advice.  

There’s simply not much coverage on financial literacy, geared towards newbie entrepreneurs.  That’s disappointing, because so many people encounter business issues that could either be prevented or better handled with additional financial knowledge. The recent Netherlands’ Chamber of Commerce report features some staggering tendencies: 

• 52% of entrepreneurs have dealt with negative reversals in their financial situations in the past three years.
• 62% of business people in SMEs were more likely than others to experience financial issues.
• 25% of sole proprietorships and SMEs have had to use personal funds to cover financial shortfalls.

 Too many of entrepreneurs are launching their first business without having enough financial knowledge, even the basic ones like handling online payment. Here’s another frightening statistic: 40% of people who own small businesses describe themselves as being financially illiterate. What’s worse, 81% of the surveyed entrepreneurs are handling their own business finances nonetheless.

Clearly there is a knowledge gap here. And a rather painful one as the lack of financial knowledge directly leads to the following issues. Frustratingly, many entrepreneurs appear to know what they need to understand in terms of business finance. 

Here are some tips about financial literacy that can help entrepreneurs learn more, and reasons why all of this is so important.

 Lack of Financial Literacy Can Lead to Increased Debt

 There is no shortage of organizations that advertise lending services to small businesses. Many even target specific demographics such as women entrepreneurs or business owners with less than stellar credit. As with anything else, the reputation and trustworthiness of these lenders can vary widely. 

 Choosing the wrong lender can be disastrous, and there are several scams that are quite common. You can pay higher interest rates than you need. You may even be hit with hidden fees and penalties. Worse, you could pay processing fees only to never receive your money at all. This is where financial literacy can help.

 First, research interest rates. Know what other entrepreneurs are paying. Next, research any organization that offers to lend you money. Are they highly rated by other customers? Have they been properly registered and licensed? Have there been complaints filed with your local prosecuting attorney’s office or other government entities?

Learning The Ins And Outs of Small Business Finances From The Start is the Key to Long-Term Success 

The Netherlands’ Chamber of Commerce report further indicates that 86% of sole proprietors and 94% of people who own SMBs understand that they should know about profit and loss accounts. Also 86% and 87% of the same understand that learning bookkeeping is important.

 At the same time, 82% state that they have not taken additional training in business finance. A barely miniscule amount have any sort of formal education in retail finance, understanding crowdfunding, or banking and accountancy. In spite of this lack of education, only 14% of small business owners employ the services of a professional accountant. This means the rest are attempting to handle things themselves.

 Learning the basis of business finance helps business owners to get a better handle on daily financial operations and avoid the pitiful financial scenarios mentioned earlier. This includes handling tasks such reporting, filling out balance sheets, budgeting, payroll, and expense tracking.  The SME toolkit, designed by International Finance Corporation, is a good starting point. Further, you can always look into the local community college programs, workshops and training programs tackling various areas of business finances. 

 Entrepreneurs need passion, quality products, motivation, and an understanding of marketing among other things. In addition to this, financial literacy is absolutely key to ensuring long term success. Small business owners can use the tips above to get started on right track.