Are you one of those people who balance your checkbook down to the penny or somebody who thinks “in the ballpark” is close enough? Do you want to know where every single penny went, or do you only track the big expenses?
Before you tell me that these questions are crazy –that all business owners must be the “down to the last penny” type — consider this.
According to a survey conducted by Intuit, 40% of small business owners consider themselves to be financially illiterate. Pretty amazing, isn’t it?
What’s even more surprising is that, at the same time, 81% of them are doing their business’ finances themselves.
Something just doesn’t add up.
And it makes you understand why roughly one-third of all small businesses fail within the first two years. Sure, the climate is tough, and competition is high, but a great many of these failures are the result of poor financial literacy.
Janet Attard of Zen Business says that small business owners who are not as financially savvy as they should be most frequently make these mistakes:
- Maintaining insufficient cash reserves – Many small business owners underestimate how long it will take to achieve positive cash flow or what the impact of a large unanticipated success will be. Cash is essential to keeping a business running, so make sure you always have adequate reserves.
- Waiting too long to seek credit – The best time to seek credit is, ironically, when you don’t need it. If you wait until the situation is desperate, lenders are not likely to see your business as a good risk. Any credit that is available may come with less than favorable terms or interest rates.
- Underpricing their good or services – In a competitive climate, it can be tempting to think that low pricing will lead to more customers. While this may be true in the short term, if your low-price strategy does not take the cost of goods or services into consideration, it can be a losing proposition over time.
- Mixing business and personal finances – This can be especially hazardous for solo business owners. It’s essential to make a clear distinction between personal and business expenses and to have separate accounts to handle each one. That way, there is no question when it comes time to pay taxes and reconcile business accounts.
During Financial Literacy Month, conduct an audit of your financial practices as well as of your bank balance. Make sure you avoid making the mistakes that can land you in hot water so that you can keep your business afloat beyond the time when most businesses fail.
Want to be more successful in business? Improve your financial literacy.
It all adds up.