Raising financial literacy in small business

Experts agree: Relationships are key when it comes to improving a business owner’s financial knowledge

Tami Nesburg

Entrepreneurship is a dream that many have, but it’s not an easy journey to embark on. Business owners have a lot to juggle, and when it comes to financial literacy for small business, there’s usually room for improvement. Fortunately, experts say, with the right relationships and tools, entrepreneurs can improve.

Instead of seeing financial literacy as a challenge for small business owners, Buck Heidrick prefers to look at it as an opportunity. Heidrick has worked out of the Washington Small Business Development Center’s Vancouver office for five years, and says that he can quickly identify finance-related issues that small business owners should remedy.

Buck Heidrick“A lot of small business owners manage to get by [with basic financial literacy],” Heidrick said. “When they come in, while reviewing their profit and loss and balance sheets, I can usually identify issues quickly – maybe expenses are too high, the margins are inappropriate and owners who have been in business don’t want to increase their prices, afraid they will lose customers. What I’ve seen when they raise prices is that they usually gain clients, or keep the ones they already have.”

“Small business owners typically have a wide range of education as well as experience from working at other companies,” offered Bryan Dent, vice president and commercial banking officer for Pacific Continental Bank. “The entrepreneurial spirit is strong, but the business owner’s capabilities aren’t always up to the level needed for proper management of [a] new business. It is common to see a business owner who is strong in some areas of their business, but weaker in others, such as financial management.”

Where to begin

In order to understand a company’s financial health, experts say there are a few documents that business owners should understand, and relationships that they should cultivate.

At Vancouver’s Regent’s Bank, Executive Vice President Tami Nesburg says that one key to small business success and financial literacy as a business owner is to develop a relationship with a banker.

“Start with the banker,” she said. “Every bank has similar products, but the relationship with a responsive banker can make a big difference. The banker is the differentiating factor [that sets one institution apart from another]. The banker is practically free. They are an important part of a business owner’s advisory board, but they don’t charge you by the hour.”

For example, Nesburg explains, a banker can help a small business owner to ensure that they are using the appropriate cash management system and the appropriate products offered by their bank. They also have the knowledge that comes from working with businesses of all sizes, at all stages.

“Small business owners are comfortable in limited areas of their financial systems,” added Dent. “The income statement is typically the easiest to understand in both its logic and purpose, [but] most business owners need assistance to better understand the balance sheet and changes to cash flow over time. Cash flow is one of the largest challenges businesses owners face, no matter the size of the company.”

For some small business owners who have yet to walk the cash flow gauntlet, Dent said, growing sales or revenues may seem to be the obvious answer, but it won’t always help your cash flow. In fact, growth can make it worse.

“This is counterintuitive to what small business owners may think is true, and a big point of confusion and stress,” he said. “Short of an accounting class or reading books, this is where a good CPA and banker can not only educate you on the basic principles of financial management, but both of these professionals will happily walk you through your financial statements discussing trends and help formulate a plan. I would recommend developing key performance indicators to help regularly measure performance.”

Heidrick suggests that business owners make sure they find a CPA who is willing to spend a bit of time educating the business owner and helping them to understand how the business is doing.

“I often see business owners who practice ‘shoebox accounting,’ and don’t have a good handle on where they are from week-to-week or month-to-month,” said Heidrick. “I like to see a business owner stay on top of it, especially in retail – and to understand where they are financially and how business is tracking.”

He also suggests that they find a bookkeeper to help keep them in line.

“I say it’s important to be financially literate, but that doesn’t mean spending all your time with the financials. It’s important to understand how to read the reports and interpret them, but it makes a lot of sense to subcontract out the bookkeeping and payroll,” Heidrick said.

Having a team of individuals who understand the needs and desires of a business owner is important, but there’s more to success than a trusted team of experts, according to Dent.

“In addition to developing your own trusted team of expert, it still comes down to adapting to the environment, working hard and sticking to your strategic plan,” he said.

Resources for small business owners

On the credit side of things, Nesburg suggests that business owners look into the Small Business Administration (SBA) and the loans they can provide. In particular, the 7A loan program is designed for startups and existing small businesses, and can be used for working capital, construction, renovation, equipment or real estate. The Certified Development Company (CDC)/504 loan program is available for qualifying businesses to finance fixed assets.

“These SBA Loans are great for business owners because they don’t have to put up as much money,” Nesburg explained. “The 504 program interest rate is fixed for 20 years.”

When it comes to cash flow and investing, Nesburg says business owners should work with their group of trusted advisors to take any potential discounts they can. Additionally, she suggests that business owners create a rainy day fund or obtain a line of credit.

At the end of the day, Dent says that it is also the responsibility of the financial industry to articulate its strengths, to better serve business owners and to help them understand their resources.