Financial literacy gaps create fiscal challenges for half of business owners

While a modest 55 percent majority of small business owners in the US rate themselves as high on the financial literacy scale, one in two entrepreneurs have actively faced fiscal challenges that arise from a lack of it, including 15 percent who say they haven't gotten back on their feet.

That's according to new survey research from Xero, which looked into financial challenges and self-perceptions business owners have of their financial savvy.

“Financial literacy is vital for the health and growth of small businesses, as it empowers owners to make informed decisions and navigate complex external and internal landscapes,” Ben Richmond, managing director for North America at Xero said in a statement.

Among several key findings, Xero’s research exposed generational differences in how businesses get started. More than two-thirds, or 67 percent, of Gen Z respondents reported starting their businesses as side hustles, compared to less than half, or 48 percent, of Boomers. For many, transitioning from a side gig to a full-time operation is a huge bet on themselves, with 61 percent of respondents tapping their personal savings for seed money.

Many respondents said they didn't consider financial concerns a top priority at first, as those issues took a back seat to other considerations like dissatisfaction with their previous careers and increased demand for their products and services.

But as time went on, they said financial challenges became an urgent concern, particularly as they found themselves falling short on issues including tax optimization (18 percent), budgeting (16 percent), understanding financial metrics (16 percent), and cash flow management (16 percent).

Compounding the pain, the survey found many small businesses are flying without a financial safety net, with only 38 percent of respondents saying they have an emergency fund, and 13 percent admitting they don't have any plan in place to address unexpected costs.

Contributing to these challenges, only one-sixth (16 percent) of business owners said they use an accountant or advisor, with most opting to manage finances independently. While this DIY approach may appeal to some, it can mean missing out on valuable financial insights.

"Using tools ... and seeking the support of an accountant or advisor can help small business owners significantly enhance their financial literacy, enabling them to overcome challenges and build a strong foundation for future success,” Richmond said.