Testing Financial Literacy

In the early 2000s, university researchers around the world became very active in financial literacy research. In one early study, three very basic questions about interest, inflation and risk were developed. Most international studies have used the same questions because: a) they appear to be effective, and b) for comparison purposes. Originally, the researchers thought the questions would be too easy and would prove nothing. However, researchers are still shocked by the results.

In Canada, only 42 per cent of people can answer the three questions correctly. People also tend to be overconfident in their knowledge. In one of the studies, 70 per cent of people self-assessed themselves as having basic financial literacy, but only 30 per cent of participants actually answered the three questions right.

So what do these results mean for you and your small business?

Managing Business Finances

Considering the skewed results of the financial literacy study, it’s especially important for you to honestly assess your financial knowledge. Because managing a business’ finances is far more complex than the three question test, small business owners need to upgrade their skills, so they can make the most of their potential.

A small business owner who’s knowledgeable about finance will be prepared to take on challenges that come their way. They’re able to manage their cash efficiently, prepare for taxes and possible audits, balance their books, predict profits and plan their future accordingly. It’s no surprise that financial literacy and positive business performance are associated with each other.

Engage Employees with Spheres of Financial Literacy

It’s great to understand finance, but it’s even better to have the support of employees knowledgeable about finance. Financially literate employees tend to be happier and more engaged at work, increasing their productivity.

Employees who understand the detailed aspects of business finance know the reality of profit and costs, and that net profit is not always as high as it seems. They’re more likely to see your business, their workload and their salary in a favourable light.

To promote a positive workplace that will engage your employees, create spheres of financial literacy. Mandate training and education on the principles of finance for all your employees. These seminars and workshops will improve their performance at work.

And the best business owners know that starting and growing a business is about more than just making money. They are trying to impact their community and their employees’ quality of life, and helping them understand their finances will do just that. In fact, in “The Economic Importance of Financial Literacy: Theory and Evidence”, Annamaria Lusardi and Olivia S. Mitchell’s financial models predict that basic financial literacy skills given to a youth before they enter the workforce can improve their financial wellbeing by up to 82%. With those types of numbers, it would make sense that these skills learned at any age would help employees.

The result of educating your employees will be a better business supported by a team with substantially better attitudes and decision-making skills.

Promote Financially Literacy

The great news is that financial literacy is on the social radar. Finance training is available and easily accessible for small businesses. One resource is Small Business BC, which has partnered with the CPA to provide a series of finance seminars and webinars specifically designed for small businesses owners and employees.

The goal isn’t to turn everyone into accountants and financial planners. Financial experts are always available if you have complex financial issues, tax questions, strategy questions or need help with the numbers in general. Instead, financial literacy is about raising the bar on simple, foundational skills that have a huge impact on your bottom line.

Postscript

Here are the 3 basic questions that are being used to test individual financial literacy across the globe:

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?
   1. More than $102
   2. Exactly $102
   3. Less than $102
2. Imagine that the interest rate on your savings account was 1 per cent per year and inflation was 2 per cent per year. After one year, how much would you be able to buy with the money in this account?
   1. More than today
   2. Exactly the same
   3. Less than today
3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a mutual fund.”
   1. True
   2. False

Correct answers are:

1. a
2. c
3. False

Learn More

Are you taking advantage of Small Business BC’s wide selection of seminars for entrepreneurs and small to medium-sized business owners? Space is limited, so don’t miss your chance to register today.

And if you want specific questions answered for your business, make an appointment to meet with a Small Business BC Business Advisor or Small Business BC Business Plan Advisor now.

Plus, check out our TaxSense™ – Accounting and Tax Kit for New Ventures for the fundamentals of finance for your business.