Almost half of Canadian entrepreneurs have encountered challenges due to a lack of financial literacy, how can advisors help them?
Canada’s entrepreneurs may not be as financially literate as their advisors might assume. According to a study released today by Xero, Canadian entrepreneurs and small business owners scored remarkably low on financial literacy metrics. Only one third of Canadian small business owners reported having an emergency fund. 10 per cent of small business owners have no plan in place for unexpected expenses. Perhaps most glaring, 43 per cent of Canadians have encountered challenges in their business due to a lack of financial literacy. That number rises to 52 per cent for millennials and 63 per cent for Gen Z.
While the numbers may appear shocking, David Emmerman explains what he sees as some of the core underlying reasons. The head of enterprise sales at Xero unpacked the survey results, noting some of the gaps that entrepreneurs have in their services, their own knowledge, and their levels of advisory service. He emphasized some of the ways Canadian financial advisors can help their entrepreneur clients close these gaps.
“When you think bout how and why small business owners get into business, it’s usually because they’re really good at what they do,” Emmerman says. “The financial component is something that gets pulled into it. Understanding their financials then becomes a secondary priority to what it is that these entrepreneurs are in business to do.”
It’s notable that the survey found 53 per cent of Canadian small businesses were launched as side gigs. Originating from that point means that growth, transitions, and the development of a plan likely happened more piecemeal and sporadically, with a chance that key pieces of financial information got missed along the way. Many of these businesses emerged out of startups or the gig economy, and a run by entrepreneurs who never went to business school or got a formal financial education. That has translated into a number of financial literacy gaps.
Looking at the results Emmerman says he was quite surprised by some of the major cashflow concerns the survey highlighted. The lack of emergency funds, the high reliance on credit cards, and the lack of capacity to manage debt all proved somewhat surprising.
Looking at the state of financial literacy, Emmerman highlights the need for education. He advocates for better organization and storage of entrepreneurs’ financial data, allowing them to better see and grasp the state of their finances. He argues that advisors can play a key role too in creating an understanding of cash flow, liabilities, and debts as well as when an entrepreneur might need to access capital and the means out there for them to do so.
Key for advisors to understand is the fact that 73 per cent of the entrepreneurs surveyed used their own cash to start their business. Helping these entrepreneurs grasp other forms of financing as their businesses grow and expenses mount can be crucial in determining their long-term success.
Emmerman believes that when advisors come to work with entrepreneurs they need to begin from a point of curiosity. Advisors need to grasp where these clients came from, who they are, what their backgrounds are, and how their business came to be in the place it’s at. Sometimes those clients will have backgrounds in finance or a strong knowledge base. Often they won’t, so leading with simple questions about how they feel about finances, their anxiety around financial statements, and the things they wish they knew can open the door to better overall understanding.
In this process, Emmerman believes it’s important for advisors to understand their clients’ fears. They could be afraid of not making payroll, of overstocking inventory, or of an unforeseen disaster. Understanding those fears can help an advisor work with their entrepreneur client to plan for those fears. It can create a space where making adjustments to behaviour can feel constructive and not confrontational.
Emmerman says he hopes the data provided in this survey empowers advisors and business owners to better collaborate openly and honestly with one another.
“We’ve seen small businesses struggling a bit more over the past few years, and we think that this information can help them as they make their day to day decisions,” Emmerman says. “It will help break down barriers for folks who don’t want to share or aren’t as open to advice and will ultimately help them become more comfortable. The best client for an advisor is somebody who’s always willing to grow.”
