Founders’ poor financial literacy is hitting growth

A study of SMEs across the UK has revealed that many founders are struggling with financial literacy – and it may even be impacting their cash flow.

The data – published by the global small business platform, Xero – revealed that 38% of SME owners were unaware if their business was profitable last month, while more than half (55%) admitted that they avoid dealing with finances.

The survey results suggest an alarming lack of confidence among founders when it comes to their finances, and have given strength to calls for financial literacy to be taught in schools.

“Not a numbers person”

The survey, which took place this past summer, saw both business owners and accountants quizzed. It revealed a “widespread lack of financial confidence among entrepreneurs” that is directly resulting in “mistakes and missed opportunities, with significant implications for individual businesses and the broader economy”.

Among the findings was that more than half of respondents struggle with cash flow management. One in four (28%) business owners don’t think of themselves as “a numbers person”. That figure rises to 32% among women and 38% for those aged 18-34.

Blissful ignorance

The survey also uncovered that many business owners are either blithely unaware of their financial literacy shortcomings or choose to ignore them.

Only 24% of small business owners believed that they lack necessary financial skills, but the survey results from accountants and bookkeepers suggest otherwise.

Nearly half of these financial professionals talked about how misinformation heard in social places like pubs or on social media by ‘finfluencers’ had often been taken as the truth by their clients, leading to financial mistakes.

Half of the professionals surveyed said that they had clients who believed the government would reimburse their expenses. Meanwhile, one third had clients who didn’t realise that dividends are taxable.

The most shocking statistic, though, was that one in ten of the smallest businesses (up to nine employees) incorrectly believe that they don’t need to declare all their income to tax authorities. 51% also wrongly believe HMRC will contact them if a tax return is due.

Financial implications

The Xero team reports that the holes in the participants’ knowledge had already led to serious financial consequences. This is because they were getting even the basics wrong.

39% of small businesses are failing to claim all eligible expenses, while 59% of the sole traders were operating without a separate business bank account.

The results also revealed that more than half have been caught off guard by unexpected costs, while just over a quarter were not setting aside enough money for tax or submitting a late tax or VAT return.

For some financial tasks, such as calculating payroll, entrepreneurs can use DIY accounting or payroll software. But more intricate processes can often require specialist knowledge or education.

Social stigma

The researchers are pointing to the social stigma of admitting a gap in knowledge as one reason why business owners are pushing on without addressing the issue.

Kate Hayward, the UK Managing Director of Xero explains: “Culturally, there’s a stigma around not knowing our numbers. There’s no shame in it when nobody is teaching us about it, but businesses deserve more.”

The data uncovered that 22% admitted that they are too afraid to ask financial questions, because “they feel that they should already know the answers”.

Xero has launched a free programme for business owners but Hayward adds that the Government needs to rethink education to “train our children to think and behave like entrepreneurs”.

Wider problem

The findings reflect a wider lack of financial knowledge across our society, says experts. In a piece published by Professional Adviser, Dan Russell, founder of the education platform, Funkled, says that poor financial literacy and understanding was “the single biggest challenge facing financial services”.

The London Foundation for Banking & Finance CEO Shelley Doorey-Williams added in the article: “Rather embarrassingly, we [the UK] are very low when it comes to levels of financial literacy. One of our biggest exports is financial services but individuals who live here are struggling. When compared to other nations we do score rather low.”

The data suggests that founders need to take proactive steps immediately to take stock of their knowledge, not least because financial literacy ensures they are compliant, financially prepared and making the right decisions for their businesses.