Financial Literacy and the Success of Small Businesses: An Observation from a Small Business Development Center

Abstract

Small business is the backbone of the U.S. economy; when the financial literacy skills of entrepreneurs fall short of those needed to operate a successful business, it is more than the individual business at risk. In 2012, 14 small businesses requesting growth-acceleration consulting services from the Florida Small Business Development Center at the University of South Florida were assessed financially as part of the service provided by the Center. Financial ratios were used to analyze the business’s financial condition. While performing the financial analysis of these firms, we also surveyed the business owners to determine their level of financial understanding and their use of financial statements in making management decisions. We found a strong association between the small businesses' financial strength and the business owners’ habits of mind with regard to their financial statements: for 7/14 of the businesses, the business owner did not regularly review financial statements, and 6/7 of those businesses were experiencing financial difficulties; conversely, 7/14 of the businesses in the study were experiencing financial difficulties, and for 6/7 of them, the business owner did not regularly review the financial statements.

Keywords

• Small business
• entrepreneurship
• financial literacy
• financial statements
• financial ratios
• quantitative literacy