Experienced yogis know that one way to increase the difficulty of a pose is to close your eyes. This simple trick challenges balance, stability, and coordination. Its practice also improves your proprioception — your perception of where your body is in space. Running a business with no financial knowledge is akin to practicing yoga with your eyes closed: although you may learn as you go along, there is a risk you will fall.Data from the Bureau of Labor Statistics shows that nearly half of all startups fail within the first five years. What’s more, a US bank study by Jessie Hagan found that 82% of businesses fail due to cash flow problems. The root cause of failure can range from a lack of funding and poor planning to budgeting and inventory management issues. Given the critical importance of sound financial management in the success of a business, it might be surprising to hear that 43% of small business owners consider themselves financially illiterate.An Opportunity for CFIsAs trusted partners to small and medium businesses (SMBs), community financial institutions (CFIs) can help fill this skills and knowledge gap and empower their customers to manage their businesses more successfully. Running workshops and seminars, providing easy access to online resources, embedding educational tools in their online banking services, offering individual financial health assessments and tailored advice, or simply partnering with providers of financial education are just some of the ways in which CFIs can support their customers. CFIs offering a comprehensive financial literacy program for their business customers may want to include sessions on the following topics:
- Financial statements. Understanding and interpreting income statements, balance sheets, and cash flow statements is critical to monitoring business performance and complying with regulations.
- Budgeting and cash flow management. Proactively creating and maintaining a budget and using cash flow forecasts to help anticipate potential shortfalls can enable owners to take corrective action when necessary. Helping businesses understand the importance of establishing cash reserves is key to them weathering challenging situations.
- Key performance metrics. Understanding and keeping track of metrics such as debt-to-equity ratio, gross profit margin, and ROI can allow SMBs to monitor the financial health of their business and identify areas that need special attention or a change in direction.
- Financing options. Business owners should be aware of the different types of financing options available to them, such as loans, lines of credit, and alternative funding sources, and how each may suit their individual circumstances. They should also know how to read a credit report and how to manage debt responsibly.
- Tax planning. Understanding their tax obligations — income tax, self-employment tax, employment tax, and excise tax — and knowing how to comply with tax regulations can help businesses minimize tax liabilities and avoid costly penalties.
A Peek at Your PeersAlthough many financial institutions offer some form of financial wellness product for individual consumers, the same cannot be said for business customers. Here are examples from some of the larger financial institutions that are running effective financial education programs for businesses:
- A national bank with $366B in assets provides SMBs with guides, interactive tools, calculators, checklists, and resources on key financial topics. These include business planning, marketing, budgeting and cash flow management, financing strategies, and risk management.
- An MA-based institution with $20B in assets has a wealth of online resources to support business owners as they plan, establish, and grow their businesses.
- Another MA institution with $6B in assets offers training workshops for SMBs focusing on a wide range of topics including marketing, cash flow, credit, financing options, and retirement.
The importance of financial literacy for businesses cannot be overstated. It enables business owners to make better decisions, mitigate risk, access capital more easily, and comply with financial regulations and reporting standards. CFIs have an opportunity to better support their SMB customers by bolstering their offering in this area — a strategy that could not only secure a long-term customer, but also deepen their relationships and earn them increased loyalty.
