A lack of financial literacy among small business operators is putting many companies at risk.
Recent online research by Westpac Bank indicates 66 per cent of Kiwis don't like talking about money or financial planning and just 24 per cent spend time actively teaching their children about money. While the research was done as part of Westpac's Just Start Asking campaign to improve Kiwis' personal financial knowledge, the same reluctance to talk financial detail can put small business at risk.
Westpac Bank spokesman Greg Byrne says getting business owners talking, not just to financial advisers but to each other, is crucial in helping them survive tough financial environments. In recent months Westpac has started financial training workshops nationwide aimed at giving small business owners basic skills such as managing cashflow.
"What we've found is that networking these businesses get as much value out of talking to each other – comparing problems and issues – as they do talking with the experts."
Many people are much less intimidated by talking to a fellow business owner than talking to an accountant, he says. "The real answer is to just start talking about your finances; ask questions. Most small businesses want to grow, but often they just don't know where to start."
He says a lack of financial literacy among SME (small to medium enterprise) owners not only puts them at risk of failure, but means they are not unlocking potential in their business. The big picture of that for the wider economy is lost opportunities for jobs, profits and tax take, he says.
Philippa O'Mara, director of south Auckland accounting and business coaching company The Engine Room, says the majority of businesses fail, not because they have a bad idea for a business but because of a lack of cashflow, she says. Too many SME owners just hand their finances over to an accountant and only think about them at year-end.
"All businesses need to delegate some responsibilities, but too many are abdicating it entirely."
The danger of that is they are missing early warning signs of potential problems. "There are key markers that will show up if you are checking your accounts monthly. It means you can spot trends month on month or year on year, and make adjustments."
O'Mara says too many businesses ignore all accounts until the end of their financial year when it's too late to avoid oncoming disasters. "It's like trying to cook a cake with a smoke detector."
Businesses suddenly find they have no cashflow and can't pay the IRD. Their unwillingness to address financial issues means the problem feels too difficult to deal with and "the hole keeps getting deeper", she says.
Good financial literacy and management can also help SME owners future-proof, allowing them keep growing the business and marketing when times are tougher. There is a risk of ignoring finances in healthy economic environments because the money keeps rolling in. "Then when things go bad they get a rude wake-up call. And find they don't have the foundation to survive when the cashflow dries up."
There is also an onus on accountants to make sure their clients are properly informed. "You have to make sure you don't see their eyes glaze over when you're explaining something to them," says O'Mara. " Clients have a right to ask why something is happening and to have something explained that they don't understand."
KPMG's Andrew Hawkes agrees. "As accountants it's a matter of making sure clients understand the language. Accountancy isn't about numbers, it is a language. Once you understand it, it's not difficult."
He says any lack of financial literacy on the part of SME owners is often due to the fact they're in business for themselves because they have a specific skill – such as plumbing or software development or building. It doesn't automatically mean they have that financial knowledge.
"If you don't have the skill you either have to go out and get them, or find someone who has them to help."
And don't be afraid to ask questions. "You have to be willing to either upskill yourself or ask for help. And remember the financial experts aren't there to judge you. Often they'll admire what you've been able to achieve, let them help you," Hawkes says.
Westpac's Byrne says we also need to address personal financial management in schools. "A lot of people might come straight out of school, don't go to tertiary education, and start working in an SME, then go into business for themselves completely untrained in the business side of things."
If personal finance was incorporated into school curriculums, those same skills would translate when starting an SME, he says.
Westpac Just Start Asking survey results
The way Kiwis are raised to talk about money
66% did not talk about money or financial planning as a family when growing up
66% sometimes, most of the time, or all the time, experienced financial difficulties as a family growing up
50% do not talk about money and financial planning as a family now
43% feel New Zealanders need to get better at talking about money
Only 24% of parents actively spent time teaching their children about money growing up
Why Kiwis don't talk about money
57% believe finance is a private matter
44% believe people struggling with money will be too embarrassed to ask for help
Only 12% disagree that we would be happier if it was easier to talk about finances
Impact in adult/parenthood
43% believe Kiwis need to get better at talking about money
Only 32% of those surveyed feel confident dealing with money matters
64% experience financial difficulties on a monthly, weekly, or daily basis
69% felt financial security is simply being able to pay the bills
61% are not confident they have a good financial plan for the future
58% believe marriages failure because of money issues
Do you feel better off than at this time last year?