Financial Literacy: A Costly Knowledge Gap for Many Small Business Entrepreneurs

During the past year, Women’s Business Development Center, a Foundation grantee, administered over $225 million in emergency grants to over 8000 local small businesses. One of the organization’s key lessons learned was that a significant number of business owners in low and moderate-income neighborhoods lack the financial literacy required to access capital or apply for grants and loans.

Some entrepreneurs operate without a business license, never filed with the secretary of state, or don’t have a designated bank account. Others are hindered by unfiled taxes, poor cash management, or incomplete record-keeping. These insufficiencies can be harmful, if not terminal, during critical times. Businesses need solid accounting in order to evaluate a new opportunity, borrow money to grow, or if it hits a crisis as many did in 2020. Both new and experienced business owners often prioritize making products, marketing, and sales while spending less time on properly accounting for financial transactions and managing financial resources.

“When you say financial literacy, many business owners immediately think of taxes, city fees, permits, and licensing,” says Tina James of Greater Southwest Development Corporation, which supports entrepreneurs in the Chicago Lawn neighborhood. “It doesn’t mean profits versus revenue. Even the definition of expenses is not commonly understood.”

“I remember when I went to my accountant,” said Erika Gonzalez, a former restaurant owner who created Greater Southwest’s Basic Financials for Business course. “They said ‘This is your balance sheet. This is the money you owe for this and this and this.’ The words weren’t getting inside my head. They were sliding off to the side. They were talking to me in another language.”

In Analysis of Entrepreneurship Training Curricula in Chicago Community Organizations, Coleman Foundation Chair of Entrepreneurship at DePaul University Dr. Maija Renko led a team that evaluated 16 entrepreneurship training programs across Chicago’s low and moderate-income neighborhoods. The November 2020 study notes the strengths and content of these programs and recommends improvements.

The study highlights the widespread prevalence of financial content in the programs, revealing that most of the courses either featured or focused solely on financial management topics like budgeting, understanding financial statements, and analyzing cash flow. While community-based entrepreneurship training organizations are working to fill the knowledge gap, many entrepreneurs are unaware of the programs or their own need for them.

The Coleman Foundation provided funding to Greater Southwest to establish its Chicago Lawn Business Academy and to develop and market a four-session Basic Financials for Business course, which is offered in both English and Spanish. Through 90-minute workshops, participants learn hands-on how to develop a cost of labor grid, an inventory management system, a product pricing worksheet, and a profit and loss statement. Funding both the program and outreach to entrepreneurs is a difference-maker.

Outreach to entrepreneurs is about building trust and relationships according to James. “We have the whole team here (at Greater Southwest) getting the word out because everyone has different relationships. We can leverage what we know about the business owner’s goals. For example, if we know that they want to redo the interior of their store or succeed the business to their son, we’ll say, look, in order for you to achieve this specific dream, you need to understand X or Y and have Z documentation. And we think you should start with these financial classes.” The Basic Financials for Business class at Greater Southwest currently has a waiting list of 50.

Despite the availability of programs like Greater Southwest, many small business owners are not aware of the value of financial literacy or haven’t made it a priority, leaving critical grant and loan money on the table. This is not just a problem for Black, Latinx, or women-owned small businesses and the communities they serve, but it impacts our entire regional economy.