New research from global cloud-based small business platform Xero reveals a significant financial literacy gap among small business owners in the U.S. Although 55% of small business owners rate their financial literacy as “high,” half (50%) are actively facing financial challenges due to a lack of financial literacy in their business; 15% of these respondents have not yet recovered.

What you need to get started

Many small businesses start as side jobs, a trend that is becoming more pronounced among younger generations: More than two-thirds (67%) of Gen Z respondents said they started their business as a side job, compared to less than half of Baby Boomers (48%). The top reasons for switching to full-time employment are:

• The part-time job is financially more lucrative than full-time employment (35%)
• Entrepreneurial calling or dissatisfaction with previous career (30%)
• Increased demand for products/services (22%)

Of course, making the leap from a side hustle to a full-time job can be daunting, especially when personal savings are at stake. Most (61%) said they had to initially rely on their own funds and savings, and cited emotional hurdles – including overcoming self-doubt and fear of failure (49%) – as some of the most debilitating.

Overcoming financial challenges after launch

While many of the owners surveyed did not consider financial concerns a top priority when starting their business, they actually found it a problem after launching. Exactly half of them experienced financial problems due to a lack of financial literacy, and a staggering 15% said they still haven’t recovered. In this case, financial literacy (or lack thereof) covers a wide spectrum: optimizing tax strategies (18%), implementing and sticking to budgets (16%), interpreting financial metrics (16%), and implementing cash flow management (16%) are cited as the top challenges. And if all else fails, only 38% of small business owners have an emergency fund in place, and 13% have no plan for unexpected expenses.

The importance of advice

While 39% of small business owners prefer to manage their finances themselves, this approach may miss valuable insights from financial advisors who can provide concrete analysis and advice on topics such as tax optimization, budgeting and cash flow management. With only 16% of respondents actively using an accountant or advisor, many are missing out on the opportunity for sustained, comprehensive growth and organizational resilience. Working with accountants and advisors improves financial decision-making and enables small business owners to effectively navigate challenges and capitalize on opportunities in today’s evolving business landscape.

“Financial literacy is critical to the health and growth of small businesses, enabling owners to make informed decisions and navigate complex external and internal environments,” said Ben Richmond, Managing Director of North America at Xero. “Using tools like Xero and the support of an accountant or advisor can help small business owners significantly improve their financial literacy so they can overcome challenges and build a solid foundation for future success.”