is the literacy of small business owners important … · reliance on small business however can be...

JournaloftheAustralasianTaxTeachersAssociation2018Vol.13No.1

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ISTHELITERACYOFSMALLBUSINESSOWNERSIMPORTANTFORCASHFLOWMANAGEMENT?:THEEXPERTS’PERSPECTIVE

MELISSABELLEISLE,BRETTFREUDENBERGANDTAPANSARKER*

ABSTRACT

Smallbusinessesplayacrucialrole in theAustralianeconomyintermsof incomeandemployment. Reliance on small business however can be concerning, as many smallbusinessesfailtosurviveforaperiodofmorethanfiveyears.Thishasbeenassociatedwith the difficulty that small businesses face in maintaining a consistent cash flow.Researchsuggeststhatthismayberelatedtofinancialandtaxationliteracyofthesmallbusinessowner(SBO).AlthoughSBOshavebeenidentifiedhashavingahigherdegreeoffinancialliteracythanindividuals,itisunclearwhethertheirlevelofliteracyisadequatetosupportthemanagementofthecashflowoftheirbusiness.AcontinuinglargeresearchprojectinvestigatestherequiredlevelofliteracythatSBOsshouldpossesstooperateasuccessfulbusiness,withparticularfocusoncashflowmanagement.Thisarticlereportsexpert perspectives of the degree of knowledge that is essential for SBOs in terms ofprofessionalfinancialliteracy,computeraccountingsoftware(CAS)literacyandbusinesstaxationliteracyinordertoimplementeffectivecashflowmanagementpractices.

Keywords:Smallbusiness;Cashflow;Taxliteracy;Financialliteracy;CASliteracy.

*DepartmentofAccounting,FinanceandEconomics,GriffithBusinessSchool,GriffithUniversity.Contact:[email protected].


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I INTRODUCTION

ThelifecycleofmanysmallbusinessesinAustraliaandthroughouttheworldislessthanfiveyears.1Thishasbeenattributedinparttotheirstruggletomaintainconsistentcashlevels.CashflowmanagementappearstobedifficultformanySBOs;however,itisunclearwhySBOsfinditsoproblematic.ItappearsthatfinancialliteracyofSBOsmayhavesomeimpactontheirabilitytomakesoundfinancialdecisions.2AnotherconcernforeffectivemanagementofcashflowbySBOsrelatestotheobligationto collect and settle tax liabilities. It has been suggested that taxationmay negativelyimpacttheabilityofSBOstomaintainconsistentcashlevels.Thecurrentresearchprojectseeks togainagreaterunderstandingas towhether cash flowdifficultiesareadirectresultoftaxationorwhetherthereareotherunderlyingissuesthatinfluencecashflow(and/orthetaxationrelationship).Considering that research has identified that the relationship between small businesscash flow and tax may be distorted by other business factors including individualcharacteristics of the SBO, it was deemed important to investigate areas of SBOcharacteristics not previously studied when analysing cash flow. In particular it wasdeterminedthatsomespecifictypesofSBOliteracymayhaveaneffectonthetaxandcashflowrelationship.3Whenidentifyingtheappropriateareasofliteracy,itwasnecessarytodeterminewhatinfluencesaSBOsabilitytounderstandcashflowandimplementeffectivecashflowmanagementstrategies.Thesestrategiescanbelinkedtoliteracyofbusinesstax systems as a number of business taxes require SBOs to understand the effects ofincurringtaxestodayandplanningforpaymentofthetaxliabilityinthefuture.RecentresearchsuggeststhattoalargeextentSBOsidentifythatincreasedliteracycouldbebeneficialtotheircashflowmanagement.4However,wheninvestigatingthelevelofliteracyhelditwasfoundthatonly12percentofSBOsimplementedsystematiccashflowmanagementpracticesintheirbusiness,andonlythoseeducatedinaccountingmadeuseoffinancialstatementstohelpthemtodeterminetheliquidityoftheirbusiness.Also,eventhoughSBOsrecognisedmanagerialbenefitsfromuseofcomputeraccountingsoftware(CAS)intheformofaccuraterecordkeepingitwasapparentthatCASwasnotbeingusedto support cash flowmanagement.More than half (56 per cent) of SBOs had limitedknowledgeonwhatfinancialreportscouldbeproducedintheirCAS,and12.5percentofSBOswere not aware that they couldprepare any financial reports in their CAS. ThissuggeststhatSBOswerenotrealisinganymanagerialbenefitsintheformofcashflow

1AustralianBureauofStatistics,8165.0–CountsofAustralianBusinesses, IncludingEntriesandExits, Jun2012 to Jun2016 (20February2017)<http://www.abs.gov.au/ausstats/[email protected]/mf/8165.0>;OlawaleFatoki, ‘The Financial Literacy of Micro Entrepreneurs in South Africa’ (2014) 40(2) Journal of SocialSciences151.Thesurvivalrateofsmallbusinessincreasesasannualturnoverincreases.ThosegeneratinglessthanAU$200000perannumhavealowerchanceofsurvivalthanthoseearningoverAU$200000.2Fatoki,aboven1,153.3MelissaBelleIsleandBrettFreudenberg,‘CalmWaters:GSTandCashFlowStabilityforSmallBusinessesinAustralia‘(2015)13(2)eJournalofTaxResearch492.4 Toni Chardon, Brett Freudenberg and Mark Brimble, ‘Tax Literacy in Australia: Not Knowing YourDeduction fromYourOffset‘ (2016)31(2)AustralianTaxForum321;BrettFreudenberg,ToniChardon,MarkBrimbleandMelissaBelleIsle,‘TaxLiteracyofAustralianSmallBusinesses‘(2017)18(2)JournalofAustralianTax21.


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managementfromuseofCAS.ItappearsthatliteracylevelsofSBOsintheresearchmaynotbeatalevelthatsupportscashflowoftheirbusiness.Furthermore,fromthefindingsitappearsthat25percentofSBOssawlittlebenefitinbeingtaxliterateandinsteadsawtaxationliteracytobetheroleoftheiraccountantoradvisor.Asa resultof these findings the current researchwasdesigned todeterminewhetherthere is a required level of literacy that SBOs should possess in order to adequatelysupport the cash flow management requirements of their business. Small businessexpertsfromvaryingprofessionsinthesmallbusinesslandscapewereengagedtoexploretheirviewsonthelevelofliteracyrequiredbySBOsforeffectivecashflowmanagement.Inparticulartheareasofliteracythatwereexaminedwhentakingcashflowmanagementandtaxationintoaccountforsmallbusinessincludedtwoparts(offour)ofprofessionalfinancialliteracy,5CASliteracyandbusinesstaxationliteracy.Thisarticlepresents theoutcomeof thedatacollected from23smallbusinessexpertsusingthefirststageofaDelphitechnique.6Thestructureofthisarticleisasfollows.First,relevant literature relating to cash flow concerns of Australian small businesses isdiscussed.Second,anoverviewofpriorknowledgerelatingtoSBOliteracy in termsofprofessional financial literacy,CAS literacyandbusinesstaxation literacy ispresented.Third,themethodologyemployedfortheresearchisoutlinedfollowedbythefindingsoftheresearch.Thearticleisfinalisedwithaconcludingsummaryandrecommendationsforfutureresearch.

II SMALLBUSINESSCASHFLOWCONCERNS

A critical issue for all businesses ismaintaining a consistent cash flow,which can beespeciallyacuteforsmallbusinessesduetorestrictedaccesstofinance.7Cashflowistheextentofcashornearcashassetsavailableforuse,alongwithanyinfloworoutflowofcashrelatedtotheseassets.8Therefore,cashflowisanybusinessactivitythataltersthebalance of the cash accounts. Previous research in Australia suggests that SBOs haverecognisedthatcashflowisofparticularimportancetotheirongoingsurvival,9althoughitcanbedifficultforthemtomanage.10Cash flowmanagementhasbeen identifiedasoneof themost importantproblemsforbusinessesintheUnitedKingdom,theUnitedStatesofAmericaandAustralia.11Effective

5SeeAndrewWorthington,‘TheDistributionofFinancialLiteracyinAustralia’(SchoolofEconomicsandFinanceDiscussionPapersandWorkingPapersSeries185,SchoolofEconomicsandFinance,QueenslandUniversityofTechnology,2004)6.6TheDelphitechniqueisdiscussedfurtherintheMethodologysectionofthisarticle.7BelleIsleandFreudenberg,aboven3,519.8ShawnCarraherandHowardvanAuken,‘TheUseofFinancialStatementsforDecisionMakingbySmallFirms‘ (2013) 26(3) Journal of Small Business & Entrepreneurship 323; Ignatius Ekanem, ‘LiquidityManagementinSmallFirms:ALearningPerspective‘(2010)17(1)JournalofSmallBusinessandEnterpriseDevelopment123.9MelissaBelleIsle,BrettFreudenbergandRichardCopp, ‘CashFlowBenefit fromGST:IsItRealisedbySmallBusinessesinAustralia?’(2014)29(3)AustralianTaxForum417;IanWallschutzkyandBrianGibson,‘SmallBusinessCostofTaxCompliance‘(1993)10(4)AustralianTaxForum511,527.10BelleIsleandFreudenberg,aboven3;Fatoki,aboven1.11ScottHolmesandDesNicholls, ‘AnAnalysisoftheUseofAccountingInformationbyAustralianSmallBusiness‘(1998)26(2)JournalofSmallBusinessManagement57,57;MichaelPeel,NicholasWilsonand


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cash management is important to business survival irrespective of the size of thebusiness.12 When assessing small business liquidity it has been suggested that smallbusinessesarelessliquidandexhibitmorevolatilitywithcashflowandprofitthantheirlargercompetitors.13IthasbeenobservedthatSBOsshouldtrytoavoidextendedcashshortages, assupply constraints canaffect theongoingoperationsof thebusinessandtherebymakesituationsworse.14Inordertoreducecashconstraintsandachievebettercontrolofcashflow,SBOsneedtoimplementeffectiveliquiditymanagementpractices.15Effective liquidity management consists of keeping financial accounts, maintaining abusinessplanandcashbudget,keepingrecordsofrevenueandexpenses,creditoranddebtorinvoicingandmaintaininganinventoryschedule.16PreviousresearchinAustraliaand the UK suggests that SBOs are not actively involved in systematic liquiditymanagementpractices.17Whileday-to-dayrecordingofactivities involvingcash inflowandoutflowmaybeundertaken,theprocessinvolvedinreceivingandmakingpaymentforthoseactivitiesormanagingcashoncereceivedmaynotbeactivelyconducted.18ThestrengthsofanSBOatcommencementoftheirbusinessrevolvearoundthetechnicalskillsetofthatowner.19ResearchsuggeststhatSBOsarelackingfinancialmanagementskillsatstart-upoftheirbusiness(withtheexceptionofbusinessesrelatedtofinanceoraccounting).20 Research proposes that liquidity management should be regarded asimportant at the start and throughout the growth of the business.21 Advances orprocurement of new liquiditymanagement skills are adoptedwith time and businessdevelopment.22ThisoftenoccursasaresultofexternaleventsorstakeholdersthatforceSBOs to learn new procedures and routines.23 For instance, if a SBO has never beenrequiredtoprepareacashbudgetorbusinessplanforanexternalparty,theymayneverbeawareoftherolethatthesedocumentscanplayinassistingwitheffectivecashflowmanagementpractices.24The level of proficiency of the SBO in relation to cash flowmanagement is not solelyreflectiveoftheowner’sabilitiesandcapacity.25Cashflowmanagementpracticescanbe

CaroleHoworth,‘LatePaymentandCreditManagementintheSmallFirmSector:SomeEmpiricalEvidence‘(2000)18(2)InternationalSmallBusinessJournal17,19.12 ArthurRDeThomasandWilliamBFredenberger, ‘AccountingNeeds of Very Small Business‘ (1985)55(10)TheCPAJournal14;Fatoki,aboven1.13Peel,WilsonandHoworth,aboven11,19.14Fatoki,aboven1;Ekanem,aboven8,124–5.15Peel,WilsonandHoworth,aboven11,19–24.16AlejandroDrexler,GregFischerandAntoinetteSchoar,‘KeepingItSimple:FinancialLiteracyandRulesofThumb‘(2014)6(2)AmericanEconomicJournal:AppliedEconomics1,13;Ekanem,aboven8,125.17BelleIsleandFreudenberg,aboven3,514;Freudenbergetal,aboven4,34;Peel,WilsonandHoworth,aboven11,19.18BelleIsleandFreudenberg,aboven3,514;Peel,WilsonandHoworth,aboven11,19.19DeThomasandFredenberger,aboven12;Freudenbergetal,aboven4,29.20Freudenbergetal,aboven4,30;Peel,WilsonandHoworth,aboven11,19.21Peel,WilsonandHoworth,aboven11,19.22DavidDeakins,AlanaMorrisonandLauraGalloway,‘Evolution,FinancialManagementandLearningintheSmallFirm‘(2002)9(1)JournalofSmallBusinessandEnterpriseDevelopment7,9.23Ibid15,16.24Ibid.25AbdelKHalabi,RowenaBarrettandRobynDyt, ‘UnderstandingFinancialInformationUsedtoAssessSmallFirmPerformance‘(2010)7(2)QualitativeResearchinAccounting&Management163,169.


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influencedbytheSBO’sattitudeorthevaluetheyplaceonhavingeffectiveprocedureswithintheirbusiness.26ResultsfrompreviousresearchadvocatesthatalargenumberofSBOsundervalue the importanceof cash flowmanagementpractices in theirbusinessdecision-making, with more value placed on information gathered from marketresearch.27 Management of cash and credit was rated second last of allmanagementfunctions,andonlyaminorityofbusinessownersidentifiedanybenefitfromacquiringany form of cashmanagement training.28 SBOs appear to adopt aminimum standardrather than attempting to achieve a level of best practicewhen it comes to cash flowmanagement.29 This may be a result of SBOs having low levels of literacy andunderstandingaboutthebenefitsofhavinganeffectivecashflowmanagementsysteminplaceandhowitcanbeachieved.30

III SMALLBUSINESSOWNERLITERACY

OfinteresttothecurrentstudyofcashflowaretheconceptsofSBOliteracyintermsofprofessionalfinancialliteracy,CASliteracyandbusinesstaxationliteracy.Theseareasofliteracyareexploredfurtherthroughoutthissectionandtheremainingsectionsof thearticle.

A ProfessionalfinancialliteracyFinancial literacy can be described as having the competence to successfully makeefficaciousdecisionsandcognitivejudgementsinfinancialcircumstancesthathavetheabilitytoinfluenceanindividual’sfinancialstatusorposition.31Anothertermoftenusedinplaceof financial literacy is ‘financialcapability’.Financialcapabilityhowever, takesintoconsiderationanindividual’spersonalfinancialskills,attitudesandcharacteristicswhenattemptingtodeterminetheirfinancialdecision-making.32Forthepurposeofthisarticlefinancialliteracyandfinancialcapabilitywillbeviewedasoneinthesame.Havingfinancialliteracyskillsisanessentialbasisforbothavoidingandsolvingfinancialproblems.33Businessownershavebeenidentifiedashavinggreaterfinancialliteracythanothergroupsof individuals.34This includesSBOs,whohaveahigher levelof financial

26Ibid.27HolmesandNicholls,aboven11,59;Peel,WilsonandHoworth,aboven11,24.28Peel,WilsonandHoworth,aboven11,31–2.29Deakins,MorrisonandGalloway,aboven22,9;Ekanem,aboven8,135.30Deakins,MorrisonandGalloway,aboven22,11.31 Sandra J Huston, ‘Measuring Financial Literacy’ (2010) 44(2) Journal of Consumer Affairs 296, 303;Freudenbergetal,aboven4,23;AnnamariaLusardiandOliviaSMitchell,‘TheEconomicImportanceofFinancialLiteracy:TheoryandEvidence‘(2013)52(1)SSRNElectronicJournal5;Worthington,aboven5,6.32ToniBrackin,TaxationasaComponentofFinancialLiteracy:HowLiterateAreAustraliansinRelationtoTaxation(PhDThesis,GriffithUniversity,2014)22;Freudenbergetal,aboven4,23.33Freudenbergetal,aboven4,23;SoniaMarcolinandAnneAbraham,‘FinancialLiteracyResearch:CurrentLiteratureandFutureOpportunities’inPBasu,GO’NeillandATravaglione(eds),Proceedingsofthe3rdInternationalConferenceonContemporaryBusiness(Leura,NSW,Australia,21–22September2006)3.34RevaBermanBrown,MarkNKSaundersandRichardBeresford,‘YouOweIttoYourself:TheFinanciallyLiterate Manager‘ (2006) 30(2) Accounting Forum 171, 188; Freudenberg et al, above n 4, 25. Other


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awarenessthanotherindividuals.35However,thefinancialliteracyrequiredtooperateasmallbusinessisgreater thanthatrequired for individualsuccess.36PreviousresearchsuggeststhatSBOslacktherequiredleveloffinancialliteracytomakeimportantfinancialdecisionsfortheirbusiness.37Theleveloffinancialliteracyrequiredcandependuponsomeone’srole.Forexample,thefinancial literacy expected of directors has been identified as professional financialliteracy and includes having an understanding of financial statements, cash flowmanagement, internal control mechanisms and corporate governance.38 Financialstatementsthatareofparticularimportancetoprofessionalfinancialliteracyincludethebalance sheet, income statement, cash flow statements and the preparation of a cashbudget.39ThisisduetotheirrelevancetocashflowmanagementandtheinfluencethatthesestatementscanhaveondeterminationofbusinesssolvencybytheSBO.40Solvency of small business is a critical part of small business management and isdependent on the level of professional financial literacy that the business ownerpossesses.41 Solvency is achieved through careful cash planning and control, whichrequires the owner to understand the financial position and activities of theorganisation.42 SBO professional financial literacy can influence firm growth andproductivity, and thosewithhigher levelsof financial literacyhavebeenknown tobemoreeffectivewhenusingfinancialproductsandaremoreengagedinusingandofferingtradecredit.43Ithasalsobeenfoundthatthosewithhighlevelsofliteracyaremorelikelytoimprovetheirliteracythroughusingprofessionaladvisorswhereasthosewithlowerlevelsofliteracyaremorelikelytorelyonfinancialadvicefromfriendsandfamily,whichcouldhavenegativeeffectsontheirimprovingtheirprofessionalfinancialliteracyinthelongterm.44

AdequatefinancialliteracyforSBOscanassistwitheverydayfunctionsinthebusiness.ThiscanenabletheSBOtoevaluatefinancialinformationinordertomakedecisionswhileunderstanding the consequencesof thosedecisions.45 Preparationanduseof financialstatementscanassistbusinessownerstomakemoreinformeddecisionsandcanfacilitateimproved performance. Information from financial statements can illustrate the

individuals with high levels of financial literacy include those with a tertiary education, professionaloccupationoramemberofacouplewithnochildren.35BermanBrown,SaundersandBeresford,aboven34,188.36Freudenbergetal,aboven4,25.37Drexler,FischerandSchoar,aboven16,1–2;Fatoki,aboven1;Freudenbergetal,aboven4,25.38Worthington,aboven5,5.39BermanBrown,SaundersandBeresford,aboven34,188.40Fatoki,aboven1,153.41BermanBrown,SaundersandBeresford,aboven34,179–80.42DeThomasandFredenberger,aboven12,21;Fatoki,aboven1.43MiriamBruhnandBilalZia,‘StimulatingManagerialCapitalinEmergingMarkets:TheImpactofBusinessTraining for YoungEntrepreneurs‘ (2013) 5(2) JournalofDevelopmentEffectiveness232, 234and238;Fatoki,aboven1,152.44TabeaBucher-Koenen,AnnamariaLusardi,RobAlessieandMaartenvanRooji,‘HowFinancialLiterateAreWomen?AnOverviewandNewInsights‘(NBERWorkingPaperNo20793,NationalBureauofEconomicResearch,December2014)13.45BermanBrown,SaundersandBeresford,aboven34,179–80;Fatoki,aboven1,152.


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consequences of the business operations.46 Financial statements can also be used tomeasureprofitability,performratioanalysis,andassistwithproviding information toexternal stakeholders including financial institutions and banks.47 An importantadvantageofsmallbusinessesusingfinancialstatementsisthatitcanprovidethemwithup-to-datecashflowinformation.Cashflowrecordscanhavegreaterusefulnesstosmallbusinesses than accrual information when determining solvency, as preparation ofreportsrelevanttocashflowprovidesamoreaccurateassessmentofthepresentstatusofthebusiness,andmayassistwithimplementingstrategiestoovercomeanycashflowproblems.48Regardlessoftheabundanceofresearchthatsuggeststhatuseoffinancialstatementsisvaluabletotheongoingsuccessofsmallbusinesses,itappearsthatsmallbusinessesinAustralia and overseas make limited use of financial statements to assist them inmanagingtheirbusiness.49AlthoughalargeproportionofSBOsbelievethatevaluationand use of financial statements is their responsibility, previous research in Australiasuggeststhatonly30percentusereportsfordecision-making,20percentperformanyformofratioanalysis,11percentusetheinformationtoevaluatebusinessperformanceand10percentusecurrentfinancialinformationforfutureplansorbudgets.50ResearchbothinAustraliaandoverseassuggeststhatlimiteduseoffinancialstatementscouldbeexplained by education levels of the SBO.51 More educated SBOs are deemed betterequippedatanalysingandinterpretingthefigurespresentedinthestatements.52Inadditiontoliteracy,SBOsindicatethatthelimiteduseoffinancialreportswasaresultofminimalsignificanceplacedontheinformationavailableinthestatement,especiallywith regard to income statements and balance sheets.53 SBOs believed that the mainpurposeofrecordkeepingandproducingreportswasfortaxcompliancerequirements,rather than being a worthwhile source of information and insight for managementdecisions.54Thatis,thereisalackofperceptionofanymanagerialbenefitreceivedfromaccounting records, other than for tax records/returns.55 This confusion about thebenefits of record keeping can be demonstrated in compliance cost research, where

46BruhnandZia,aboven43,234and248.47RobynDytandAbdelKHalabi,‘EmpiricalEvidenceExaminingtheAccountingInformationSystemsandAccountingReportsofSmallandMicroBusinessinAustralia‘(2007)15(2)SmallEnterpriseResearch1,5;Fatoki,aboven1,153;Halabi,BarrettandDyt,aboven25,167.48 Divesh S Sharma and Errol R Iselin, ‘The Decision Usefulness of Reported Cash Flow and AccrualInformationinaBehaviouralFieldExperiment‘(2003)33(2)AccountingandBusinessResearch123.49CarraherandvanAuken,aboven8;DeThomasandFredenberger,aboven12;DytandHalabi,aboven47;Halabi,BarrettandDyt,aboven25,163;Peel,WilsonandHoworth,aboven11;SharmaandIselin,aboven48.50DytandHalabi,aboven47,5;Halabi,BarrettandDyt,aboven25,167.AlimitationoftheAustralianresearchisthatthenumberofparticipantswas10.51CarraherandvanAuken,aboven8,333;DeThomasandFredenberger,aboven12,20;Halabi,BarrettandDyt,aboven25,171–4.52CarraherandvanAuken,aboven8,333;DeThomasandFredenberger,aboven12,20;Halabi,BarrettandDyt,aboven25,171–4.53Halabi,BarrettandDyt,aboven25,171.54Ibid168.55NahidaFaridy,BrettFreudenberg,TapanSarkerandRichardCopp,‘TheHiddenComplianceCostofVAT:An Exploration of Psychological and Corruption Costs of VAT in a Developing Country’ (2016) 14(1)eJournalofTaxResearch166.


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compliancecostshavebeenmiscategorisedasataxcostwhenitismoreacostaboutbasicrecordkeepingforabusiness.56Moreimportancecanbeplacedonremainingup-to-datewiththecashatbankbalance,withthisfigureperceivedtobeamoreaccuratemeasureofperformance.57Accordingly,whileSBOscanidentifythatcashisessentialforsurvivalof their business, research suggests that they still do not see the importance of usingfinancial reports, like a cash flow budget or cash flow statement, to assist them inmanaging their cash flow.58 It appears that this may be a result of their inability tocomprehendtheinformationcontainedinthefinancialreportsinordertoimprovetheperformanceoftheirbusiness.59

B ComputeraccountingsoftwareliteracyCAShasbeenadvocatedasbeingofgreatimportancetosmallbusinesssuccess.Sincetheintroduction of the GST in 2000 and increases in the personal use of informationtechnology,itispositedthatalargenumberofsmallbusinessesinAustraliauseaCASsystemforrecordkeepingintheirbusiness.60ForaCASsystemtobeeffectivetoasmallbusinessitshouldbesimpletomaintainbytheowner,61astheSBOislikelytobeactiveinrecordkeepingratherthanhavingadelegatedemployee.PotentiallythisallowstheSBOtogainagreaterunderstandingofthefinancialstrengths andweaknesses of the business.62 A CAS system allows SBOs to collect andcollate information from transactions for use in a timely manner, without having torequestthisinformationfromaccountants.63

AustralianresearchsuggeststhatSBOsdonotusetheirCAStoitsfullpotential.64Indeed,themajorityofSBOsdonotproducefinancialreportsfromtheirCAS.65Thereasoningfornon-generation of reports was that SBOs do not understand accounting language,conventionsorterms(thatis,havelowprofessionalfinancialliteracy),andthereforeseelimitedvalueingeneratingareportthattheydonotunderstand.66Also,itappearedthat

56ChrisEvans,KRitchie,BinhTran-NamandMichaelWalpole,‘TaxationComplianceCosts:SomeRecentEmpiricalWorkand InternationalComparisons‘ (1997)14AustralianTaxForum93;PhilipLignierandChrisEvans,‘TheRiseandRiseofTaxComplianceCostsfortheSmallBusinessSectorinAustralia‘(2012)27(3)AustralianTaxForum615.57Halabi,BarrettandDyt,aboven25,167–74.58DeThomasandFredenberger,aboven12,18–19;Fatoki,aboven1.59GerardStone,‘Let’sTalk:AdaptingAccountants’CommunicationstoSmallBusinessManagers’ObjectivesandPreferences‘(2011)24(6)Accounting,Auditing&AccountabilityJournal781,785.60PhilipLignier,IdentificationandEvaluationoftheManagerialBenefitsDerivedbySmallBusinessesasaResultofComplyingwiththeAustralianTaxSystem(PhDThesis,UniversityofNewSouthWales,2008)25;LignierandEvans,aboven56.61DeThomasandFredenberger,aboven12,21;Stone,aboven59.62Fatoki,aboven1,156.63CarraherandvanAuken,aboven8;Halabi,BarrettandDyt,aboven25,166.64BelleIsleandFreudenberg,aboven3;MelissaBelleIsle,BrettFreudenbergandTapanSarker,‘TheSmallBusinessCashFlowStruggle:WhatRoleDoesOwnerLiteracyPlay?’(WorkingPaper,GriffithUniversity,2017);Halabi,BarrettandDyt,aboven25,166.65Ibid.66DeThomasandFredenberger,aboven12,22–3;Halabi,BarrettandDyt,aboven25,168.


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10percentofSBOswereunawarethattheycouldevenproducefinancialreportsfromtheirCAS.67RecentAustralianresearchindicatesthattheCASisnotbeingusedeffectivelytoassistwith management of cash flow, with low engagement in the use of CAS reportingoptions.68Asaresult,participantswerespendingconsiderabletimearrangingfinancesfor payment of liabilities.69 In contrast recent international research suggests thatindividuals who make regular use of tax software are more financially aware.70 ThedifferencecouldbeexplainedbytheexistenceofapositionindicatorinthetaxsoftwareusedintheUnitedStatesofAmerica.71ItcouldbearguedthatCASsystemsavailabletoSBOsinAustraliaarealsocapableofprovidinganindicatorofcashflowposition,howeverthiswouldbereliantontimelyrecordingoftransactions.

As a result, it is argued that the lowutilisation of CAS is in part the result of limitedknowledge(literacy)aboutthefunctionsoftheCASsystemandthebenefitsthatcanberealisedfromusingtheCASforcashflowmanagementinasmallbusiness.

C BusinesstaxationliteracyRecent research by Chardon, Freudenberg and Brimble72 and Freudenberg, Chardon,Brimble and Belle Isle73 suggest that understanding of tax systems is beneficial to aperson’soverallfinancialposition.Thelevelofknowledgethatanindividualpossessesoftax systems is posited to have a relationshipwith their ability to communicate withadvisors,budget,makedecisionsandunderstand theirrightsandobligations.74 Itwasproposedthatthereisabaseleveloftaxationandsuperannuationliteracyorknowledgerequiredinordertobefinanciallyliterate.75Recent research conducted in Australia found that individuals that are involved inbusinessaremoreliterateinregardtoindividualtaxationrequirementsthanthosewhoarenot.76However,theleveloftaxliteracyinrelationtobusinesstaxsystemsdoesnotappeartobeadequateformanagementoftheirbusinesstaxrequirements.77Researchinthe1990’ssuggestedthatSBOsneededtospendmoretimeimprovingtheirlevel of tax knowledge. McKerchar78 proposed that SBOs experience difficulty with

67Halabi,BarrettandDyt,aboven25,171.68BelleIsleandFreudenberg,aboven3;BelleIsle,FreudenbergandSarker,aboven64.69BelleIsle,FreudenbergandCopp,aboven9.70 Nicholas CHunt and Govind S Iyer, ‘The Effect of Tax Position and Personal Norms: An Analysis ofTaxpayerComplianceDecisionsUsingPaperandSoftware‘(2018)41AdvancesinAccounting1.71HuntandIyer,aboven70.72Chardon,FreudenbergandBrimble,aboven4.73Freudenbergetal,aboven4.74Chardon,FreudenbergandBrimble,aboven4;Freudenbergetal,aboven4,26.75 Toni Chardon, ‘Weathering the Storm: Tax as a Component of Financial Capability‘ (2011) 5(2)Australasian Accounting Business & Finance Journal 53<http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1168&context=aabfj>; Freudenberg et al, above n 4,26.76Chardon,FreudenbergandBrimble,aboven4;Freudenbergetal,aboven4,45.77Freudenbergetal,aboven4,26;MargaretMcKerchar,‘UnderstandingSmallBusinessTaxpayers:TheirSourcesofInformationandLevelofKnowledgeofTaxation‘(1995)12AustralianTaxForum25,40.78McKerchar,aboven77,32–5.


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understandingsuperannuationguarantee(SG),incometax,provisionaltax79andfringebenefit tax. McKerchar found that SBOs experienced difficulty in determining whichbenefits were classified as a fringe benefit, which employees attracted SG and whatdeductionswereallowable.80MorerecentresearchfindingsindicatethatSBOtaxliteracymayhave improved inregardtoallowabledeductions,as69percentofGSTbusinessoperators81 could differentiate between assets that were immediately deductible incomparisontothosethatwoulddepreciateovertime.82Thismaybeasimilaroutcomefordetermination of correct dates for lodgement and payment of the tax liability. SBOsexperienced complexity in identifying the reporting andpayment requirementsof taxsystems in the 1990s. In comparison, 71 per cent of SBOs were confident that theyaccuratelymeettheirGSTrecordingandreportingobligationsinresearchconductedin2017.83Also, a significant number of SBOs in the research by McKerchar84 had a limitedunderstandingofprovisionaltax,theforerunnertothePAYG(payasyougo)instalment.SBOs had difficulty comprehending that a payment of provisional tax decreased theoverall amount of tax liability due at the endof the financial year.85 The level of SBOliteracyintermsofthecurrentPAYGinstalmentsystemisunclear.Whileresearchfoundthatmorethan90percentofSBOssuggestedthattheypursuedtaxinformationfromvarioussourcesincludingadvisorsandtheAustralianTaxationOffice(ATO),thesepracticeswererarelyundertakenbySBOs.86Also,evidencesuggestedthatSBOsarenotproactiveinimprovingtheirtaxknowledge,whichwassubstantiatedduringpriorstudieswhenresearchersprovidedrespondentswithinformationoftaxesthatwereidentifiedasbeingcomplex.Theparticipantsdidnotmakeuseoftheinformationduringthetimethattheresearchwasconducted.87Itwassuggestedthatthereweretwoprimaryreasonsforthelackofuptakeofthetaxinformation.First, taxobligationswerea lowpriority forSBOs,withgreater importanceplacedonincomeearningactivities.88AsecondpossiblereasonwasthatSBOsperceivedthattheywereknowledgeableaboutbusinesstaxmatters,89andoncebusinessownersbelievedthat theywerewell informedaboutaspecifictaxmatter theydidnotrevieworrevisetheir taxmanagementpracticesatalaterdate.Asaresult,SBOswereoblivioustoanychangestolegislationormisrepresentationsoftaxlawthatoccurredatalatertime.90Thisissupportedbyfindingsof‘GSTbusinessoperators’inastudyconductedmorerecently

79ProvisionaltaxwasreplacedandthenewsystemisknownasPAYGinstalments,coveredunderANewTaxSystem(PayAsYouGo)Act1999(Cth).80Freudenbergetal,aboven4,27;McKerchar,aboven77,34.81InFreudenbergetal,aboven4,SBOswereidentifiedas‘GSTBusinessOperators‘.82Freudenbergetal,aboven4.83Ibid48.84McKerchar,aboven77,34.85Provisionaltaxwasessentiallypre-paymentsofanestimatedincometaxliability.Soonceataxreturnwaslodgedfortheyear,theoveralltaxliabilityowingwouldbereducedbythepriorinstalment(provisionaltax)paid.86McKerchar,aboven77,30.87Ibid32;WallschutzkyandGibson,aboven9,528.88McKerchar,aboven77,36;WallschutzkyandGibson,aboven9,528.89McKerchar,aboven77.90Ibid35.


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onAustralianbusinesstaxpayers.91ItwaspurportedthatSBOsmaystruggletostayup-to-datewithcontinualchangesintaxlawsandtheresultantoutcomecouldbethattheyfailtomaintaintherequiredlevelofliteracytoefficientlycomplywiththetaxsystemsrelevanttotheirbusiness.92Furtherreasoning for limitedtax literacywasdeterminedtorelate toexpert advisors.SBOsplacedgreatrelianceontheiraccountanttocarryoutandunderstandalltaxmattersrelevanttotheirbusiness.93ThisissupportedbymorerecentfindingsbyFreudenbergetal,whosuggestedthatthoseSBOswhohadbeeninbusinessforasubstantialperiodoftimehadlowerlevelsoftaxliteracy,astheyreliedheavilyonadvisorstocarryouttheirbusiness tax obligations.94 McKerchar indicated that therewas a need to improve taxliteracy of SBOs, but noted that if SBOs did not perceive that being tax literate wasimportantoriftheydidnotrecognisethattherewasashortfallintheleveloftaxliteracythey possessed, then any attempt at educating them would be futile.95 Therefore, itappearsthatthepersonalperceptionsofSBOsmaybeacriticalmotivatorinwhethertheywant to improve their tax literacy. Recent research into literacy of trustees of a self-managed super fund suggests that literacy has a positive association with fundcompliance.96ThiscouldsuggestthatitwouldbeadvantageousforSBOstoremainataleveloftaxationliteracytoensurethattheyarecompliantwithrelevanttaxsystems.Consequently,itcanbeappreciatedthatSBOsneedliteracyinanumberofareasincludingprofessional financial, CAS and business taxation literacy. Although prior researchsuggeststhatSBOsmayhavehigherliteracywhencomparedtothebroaderpublic,itisquestionablewhethertheirliteracylevelissufficienttooperateabusinessandwhetheritinfluencestheircashflowmanagementpractices.

IV METHODOLOGY

Thisarticlereportsthefindingsofdatacollectedfromsmallbusinessexpertstogreaterunderstand the level of literacy required in terms of professional financial, CAS andbusinesstaxation97literacyinorderforSBOstosuccessfullymanagetheirbusinesscashflow.Theresearchquestionbeingaddressedinthisarticleis:Arecashflowmanagementpracticesinsmallbusinessesinfluencedbyliteracyofsmallbusinessowners?

It is important to acknowledge that this study forms partof a larger research projectinvolvingAustraliansmallbusinesses.TheviewsandopinionsofSBOsaretheprimaryfocusinthelargerproject.ThejustificationforincludingexpertsinthelargerprojectwastovalidateandcompareresponsesofSBOsduetotheheterogeneityofthesmallbusiness

91Freudenbergetal,aboven4.92Ibid50.93McKerchar,aboven77,36.94Freudenbergetal,aboven4,39.95McKerchar,aboven77,40.96 George Mihaylov, John Tretola, Alfred Yawson and Ralf Zurbruegg, ‘Tax Compliance Behaviour inAustralianSelf-ManagedSuperannuationFunds’(2015)13(3)eJournalofTaxResearch740.97ThePhDprojectforwhichthedatarelatedtothisarticlewascollectedfocusesonfivetaxobligationswithwhichsmallbusinessesmightcomply,including:goodsandservicestax,fringebenefittax,incometax,PAYGwithholdingandsuperannuationguarantee(notataxsystem).Itshouldbeacknowledgedthatexpertswerenotaskedtotalkspecificallyaboutthesesystemsinthesemi-structuredinterviews.


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sector. Diversity of small businesses is particularly evident in terms of taxability,ownership,flexibility,industry,economiesofscale,financialmarketaccessandlevelofinformationasymmetry.Thisdiversitycanmakeitdifficulttoascertainanycommonalitybetweenonesmallbusinessandthenext.

A TheDelphitechniqueThestrategyofinquiryimplementedforthispartoftheprojectandrelevanttothisarticleinvolved the first (of two) stages of a Delphi technique.98 The Delphi technique is asystematic,repetitiveprocessofcollectingopinionsorviewsfromagroupofexperts.99Itsobjectiveistoclarify,explainorobtainconsensusfromexpertsinrelationtoaneventorphenomenon.100Theuseofexpertopinionsasopposedtootherindividualsisjustifiedon the basis that their opinions will be logical or sensible in comparison to havingirrational judgement.101 Knowledge of experts in relation to a particular issue isindependently collected and results are combined to give an overview of all expertresponses.102Thecollectiveresultsareusedtovaryorratifytheoriginaldatacollectioninstrument,which is then redistributed to the same groupof experts at a time in thefuture.103Thepurposeofalteringtheoriginalinstrumentasaresultofcollectiveexpertopinionsistorevealwhetherindividualjudgementsarerevisedasaresultofreviewingthe collective expert feedback or whether experts are steadfast in their originalresponses.104TheDelphitechniqueforthisarticlewasconductedinthequalitativephaseimmediatelyafter the conclusion of a multiple case study of Australian small service-relatedbusinesses.Data collection instrumentswerecreated in the formof a semi-structuredinterviewanda seriesof short surveyquestions from the collective findings from themultiplecasestudyandpriorliterature inanattempttosubstantiate theresponsesofSBOs. The design of the Delphi technique for the research was adapted to suit thevalidationroleofexpertsintheproject.Thatis,theresponsesofSBOsinthemultiplecasestudyshapedtheinterviewquestionsandshortsurveyquestionsposedtoexperts.105

98 It isanticipate that futurepublications for this research,oncebothDelphi stagesarecompleted,willdiscusstheapplicationoftheDelphitotheresearchinmoredepth,includingstrengthsandweaknessesthatwererecognised.99 Chris Evans, ‘Unravelling the Mysteries of the Oracle: Using the Delphi Methodology to Inform thePersonal TaxReformDebate inAustralia’ (2007) 5(1) eJournal of TaxResearch 105, 107; Jon Landeta,‘CurrentValidityoftheDelphiMethodinSocialSciences‘(2006)73(5)TechnologicalForecastingandSocialChange467,468–9. 100MonicaRGeist,‘UsingtheDelphiMethodtoEngageStakeholders:AComparisonofTwoStudies‘(2010)33(2)EvaluationandProgramPlanning147,148and152;ChituOkoliandSuzanneDPawlowski, ‘TheDelphiMethod as aResearchTool: AnExample,DesignConsiderations andApplications‘ (2004) 42(1)Information&Management15.101Geist,aboven100,148and152;Landeta,aboven99,468–9.102Geist,aboven100,148and152;Landeta,aboven99,468–9.103OkoliandPawlowski,aboven100.104 TheodoreGordon andAdamPease, ‘RTDelphi: AnEfficient, “Round-Less”AlmostReal TimeDelphiMethod‘(2006)73(4)TechnologicalForecastingandSocialChange321,322.105Thefindingsfromexpertswillthenbeusedinconjunctionwiththemultiplecasestudytocreatealarge-scalesurveythatwillbecompletedbyAustraliansmallservice-relatedbusinesses.Thefindingsofthelarge-scale surveywill then be used to create a second survey thatwill form the second part of theDelphitechniqueandwillbecompletedonlybythoseexpertsthatparticipatedinthefirstpartoftheDelphi.


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Thepurposeoftheshortsurveywastoaddressfindingsfromthemultiplecasestudythatrequiredvalidationandincorporateareasofliteraturethatrequiredfurtherexaminationof literacy relevant toSBOsandcash flowmanagement.106The shortsurveyquestionswereadministeredverballybytheresearcher,andparticipantswererequiredtogiveaquickresponseonaLikert-typescalebetween‘StronglyDisagree’and‘StronglyAgree’.Thesemi-structuredinterviewquestionsincomparisonwereconstructedfromreviewingfeedbackfromSBOsinthemultiplecasestudy,andidentifyingareasthatrequiredfurtherexploration.ThepurposeoftheinterviewswastodeterminewhetherexpertsperceivedthattherewereimportantconceptsthatSBOsshouldpossessorwhetherthereisabaselevelofknowledgethatshouldbeattainedbySBOsinordertoadequatelymanagethecashflowoftheirbusiness.

B ParticipantsExperts represented four groups, including academia, government, advocacy andadvisory.Twenty-threeexpertsparticipatedintheproject,withfiveexpertsrepresentingthegroupsofacademia,governmentandadvocacy,andeightexpertsinvolvedinadvisorypositionswithsmallbusinesses.Thedataforboththesemi-structuredinterviewsandtheshortsurveywascollectedfromexpertsduringthesamesession,withthesemi-structuredinterviewsprecedingtheshortsurveyquestions.Thedurationofthesessionswithexpertsrangedfrom11minutesto40minutesinlengthandallsessionswereconductedoverthetelephone.Voicerecordingtechnologywasusedinordertocapturetheresponsesofparticipantsandthedatawastranscribedatalatertime.TelephoneinterviewswerechosentoallowtheresearchertoengageexpertsfromdifferentStatesandTerritoriesthroughoutAustralia.AnoverviewofparticipantyearsofexperienceandrolesheldcanbefoundinTable1.Twentyparticipantshadbeeninvolvedinthesmallbusinesslandscapeformorethanfiveyears.Theremainingthreeparticipantswereinvolvedinassistingsmallbusinessesforaperiod of three to five years (two participants) or fewer than three years (oneparticipant).Sixteenoftheparticipantshadbeeninvolvedinmorethanoneexpertroleover their years of experience, and six participants had previously owned a smallbusiness.Table1:Anoverviewofparticipantexpertiseinrelationtosmallbusinesses

Expert Yearsofexperience

Fieldofexpertise Priorrolesheldasanexpert

ACA1 Over10years

Academic Nootherroleheld

ACA2 Over10years

Academic Accountant

ACA4 Over10years

Academic Accountant

ACA5 5–10years Academic Government/ATOemployee

106Drexler,FischerandSchoar,aboven16.


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ACA6 Over10years

Academic Government/ATOemployee

ACC4 3–5years Accountant Nootherroleheld

ACC5 Over10years

Smallbusinessadvisorotherthananaccountant

Accountant

ACC6 Over10years


Smallbusinessowner

ACC8 Over10years

Smallbusinessadvocate Smallbusinessadvisorotherthananaccountant

Government/ATOemployee

Smallbusinessowner

ACC10 Over10years

Accountant Smallbusinessowner

Boardmemberofnot-for-profitagencies

ACC11 <3years Smallbusinessadvisorotherthananaccountant

InvolvedinadvisingASBFEOoncashflowmanagementpractices

ACC12 5–10years Accountant Smallbusinessadvisorotherthananaccountant

Smallbusinessadvocate

ACC13 Over10years

Accountant Smallbusinessadvisorotherthananaccountant



ADV1 Over10years


Smallbusinessowner

ADV3 5–10years Smallbusinessadvocate Government/ATOemployee

ADV4 Over10years

Smallbusinessadvocate Government/ATOemployee

ADV5 Over10years

Smallbusinessadvocate Accountant


ADV6 Over10years

Smallbusinessadvocate Academic

Smallbusinessowner

GOV1 Over10years

Government/ATOemployee Nootherroleheld

GOV2 5–10years Government/ATOemployee Smallbusinessadvisorotherthananaccountant

GOV6 Over10years

Government/ATOemployee Accountant



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Smallbusinessowner

GOV7 Over10years

Government/ATOemployee Nootherroleheld

GOV8 3–5years Government/ATOemployee Accountant

Key: ACA: Academic; ACC: Accountant or Advisor; ADV: Small Business Advocate; GOV:GovernmentorATOemployee.

V FINDINGS

Expertperceptionwasexploredtoaddresstwoimportantquestionsforeachoftheareasofliteracyaddressedinthisproject.Expertfeedbackwassoughtonwhetherthereareessential concepts or a base level of literacy that SBOs require in relation to use andunderstandingof financialstatements,CASandbusiness taxation systems.ThesecondquestionposedwaswhetherthelevelofliteracythatSBOspossesshasaninfluenceontheirability tomanagecash flowintheirbusiness.Theresponsesarediscussedbelowundereachliteracyarea.

A ProfessionalfinancialliteracyAs previously mentioned, professional financial literacy includes having anunderstanding of financial statements, cash flow management, internal controlmechanisms and corporate governance.107 Two components of professional financialliteracyareinvestigatedinthisproject:(i)theunderstandingoffinancialstatements;and(ii)theabilitytoimplementcashflowmanagementprocesseswithinabusinesssituation.DeterminingtheabilityofSBOsto implementcash flowmanagementconcepts for thisarticlewasadoptedfromthedefinitionofDrexler,FischerandSchoarofeffectivecashflowmanagement.108Effectivecashflowmanagementincludestheactivitiesofkeepingfinancial accounts, maintaining a business plan and cash budget, keeping records ofrevenue and expenses, creditor and debtor invoicing and maintaining an inventoryschedule.109 Prior research suggests that SBOs are better equipped to operate theirbusinessiftheirliteracyintheseareasisadequate.110

1 Expertperceptionofcash flowmanagementprocesses implementedbysmallbusinessowners

Previous research suggests that effective cash flow management includes keepingfinancial accounts,maintaining a business plan and a cash budget, keeping recordsofrevenue and expenses, creditor and debtor invoicing, and maintaining an inventoryschedule.111Theresearchexploredopinionsofexpertparticipantsandthe importance

107Worthington,aboven5,5.108Drexler,FischerandSchoar,aboven16,13.109Drexler,FischerandSchoar,aboven16,13;Ekanem,aboven8,125.110BermanBrown,SaundersandBeresford,aboven34,179–80.111Drexler,FischerandSchoar,aboven16,13;Ekanem,aboven8,125.


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they place on the concepts of effective cash flow management. The semi-structuredinterviewsidentifiedthatunderstandingofcashflowandliquiditywouldbemeaningfulfor SBO literacy. The largest number of responses related to liquidity and cash flow.ExamplesofparticipantresponsesaredetailedbelowandhighlightconcernsthatexpertshaveintermsofSBOcashflowliteracy:

Definitelyyouneedtounderstandtheprinciplesbehindidentifyingdebtors,identifyingagedpayables, identifyingwhat’sprofit,what’s a loss, identifying those indicators ofliquidity.Havingthatplanningaheadofwhat’scomingupintermsofyourbusinessdebtsandwhatyourcashflow’sgoingtobe(ADV3).

Ithinktheyneedtodosomeeducationaroundcashflowmanagementbecauseitdoesn’tcomenaturallytothosethataren’tfinanciallyinclined.Therefore,itisimportant,ifnotcritical, for them to get their mind around numbers and cash flow versus profit inparticular because there is a significant difference and a lot of owners just don’tunderstandit(ACC13).

Probably the difference between what’s profit and what is actual cash inflow andoutflow.We findthatalotofsmallbusinessownersdon’tunderstandthe interactionbetweentheprofitandlossandtheactualcashflow(ACC12).

To investigate cash flowmanagement literacy further, expertswere asked to indicatetheirthoughtsinresponsetothesurveystatement:‘Smallbusinessownershaveagoodunderstanding of their cash flow.’ Seven participants (30.44 per cent) agreed, fiveparticipants were neutral in their response and eleven participants (47.83 per cent)disagreed thatSBOshave a good understanding of their cash flow (seeTable 2). Thisindicatesthatnearly50percentofexpertshaveconcernsaboutSBOunderstandingofcashflow,whichisconsistentwiththepriorliterature.112Table2:ExpertsurveyresponsesrelatingtouseoffinancialstatementsbySBOs(n=23)

StronglyDisagree Disagree Neutral Agree Strongly

AgreeNotSure

NotApplicable

a)Smallbusinessownershaveagoodunderstandingoftheircashflow.

21.74 26.09 21.74 21.74 8.70 0 0

b)Smallbusinessownershaveproceduresinplacetomanagetheircashflow.

13.04 43.48 26.09 13.04 4.35 0 0

c)Smallbusinessownersmakeuseoffinancialstatementstomanagetheircashflow.

17.39 52.17 21.74 8.7 0 0 0

112BelleIsle,FreudenbergandCopp,aboven9;BelleIsleandFreudenberg,aboven3.


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d)Smallbusinessownersrelyonthebankaccounttomanagecashflow.

4.35 4.35 8.7 52.7 30.43 0 0

e)Thecashflowstatementshouldassistsmallbusinesstomanagetheircashflow.

0 4.35 8.7 43.48 43.48 0 0

f)TheProfitandLossstatementshouldassistsmallbusinesstomanagetheircashflow.

4.35 26.09 13.04 21.74 30.43 4.35 0

g)Thebalancesheetshouldassistsmallbusinesstomanagetheircashflow.

9.09 22.73 18.18 31.82 18.18 0 0

h)Smallbusinessesshouldprepareabusinessplantomanagecashflow.

0 17.39 21.74 26.09 34.78 0 0

i)Smallbusinessesshouldprepareacashbudgettomanagecash.

0 0 8.7 30.43 60.78 0 0

Note:Resultsdisplayedasapercentage(%).Roundingmayinfluencecalculationsasapercentof100.

Inresponsetothesurveystatement‘Smallbusinessownershaveproceduresinplacetomanagetheircashflow’,thenumberofexpertsthatdisagreedincreasedfromthepriorquestion to three strongly disagreeing and ten disagreeing (seeTable 2). Overall, thisrepresents56.52per centwhobelieve thatSBOsarenot implementingprocedures tomanagecashflow.ThiswouldtendtosuggestthatexpertshaveconcernsastowhetherSBOsarecapableofmanagingtheircashflow.Thesemi-structuredinterviewsandsurveyquestions then explored what concepts of effective cash flow management wereconsideredimportantforsmallbusinesssuccess.RelyingonthedefinitionofDrexler,FischerandSchoar113todetermineeffectivecashflowmanagement,participantswereaskedtoexpresswhethertheybelievedthatSBOsshouldprepareabusinessplantoassistwithmanagementofcashflow.Fourteenparticipants(60.8 per cent) agreed in the short survey questions that a business plan should bepreparedformanagingcashflow(seeTable2),andonlyfourparticipantsdisagreed(fivewere neutral). This suggests that experts consider a business plan to be a worthyinstrument for effective cash flowmanagement. However, the responses in the semi-structuredinterviewsdidnotaccentuateabusinessplanasbeingimportanttoeffective

113Drexler,FischerandSchoar,aboven16.


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cashflowmanagement.NoneoftheparticipatingexpertsdiscussedabusinessplanwhenidentifyingnecessaryconceptsthatSBOsshouldmaintainformanagementofcashflow.Consequently,theconnectionbetweenabusinessplanandcashflowmanagementisnotclear.Itmaybetheexistenceofabusinessplanitselfwillnotassistcashflowunlessitisregularlyusedandreused.Alternatively,expertsmaynotconsiderthatabusinessplanisasimportantasothercashflowmanagementconceptsandthereforedidnotdiscussitinthe interview. However, when prompted in the survey, they recognised it could be aworthytoolformanagingcashflow.

TherewasasimilaroutcomewhenexpertswereaskedtoindicatewhethertheybelievedthatpreparationofacashbudgetwouldassistSBOstomanagetheircashflow.Therewasminimaldiscussionintheinterviewsabouttheusefulnessofpreparingacashbudgetforcashflowmanagement.Howevertheshortsurveyquestionsshowedthat60.78percentstronglyagreed(14participants)and30.43percentagreed(7participants)thatSBOsshouldprepareacashbudgetinordertoeffectivelymanagecash(seeTable2Table3:).Theremainingtwoparticipantsrespondedwithaneutralanswer.Thisdemonstratesthat,tosomeextent,expertsbelievethatacashbudgetisaworthytoolforeffectivecashflowmanagement,butitisofconcernthattherewasalackofdiscussionofcashbudgetsintheinterviews,especiallywhenpriorresearchsuggests thatabsenceofbudgeting insmallbusinessisassociatedwithbusinessfailure.114

The responses in the semi-structured interviews in relation to understanding ofnecessaryconceptsforprofessionalfinancialliteracygaveconsiderablesupporttoSBOshavinga thoroughunderstandingof theirdebtorsandcreditorsandwhateffect theseconceptshaveontheircashflow.Collectively,therewere15responsesintheinterviewsrelating to treatment of debtors and creditors (or aged payable or receivable).Predominantly this was discussed in concertwith a misunderstanding of what thesefiguresrepresent in the financialstatements(thiswillbediscussedfurther in thenextsection)andhowcredittransactionscangiveafalseindicationoftheimmediatecashflowsituationof thebusiness.That isbecauseexpensesmaybepurchasedoncredit,whichdoesnotimmediatelyaffectcashflowgiventhatcashoutflowisdelayed.

Theinfluenceofcreditvastlychangessituationssothatapersoncangobrokemakingaprofit(ACA2).

Understanding of the concepts of debtor, creditors especially accounts payable andaccountsreceivableisprobablyanotheronethat’sreallyimportant(ACC8).

Intermsoftherequirementtokeepfinancialaccounts,includingarecordofrevenueandexpenses, minimal discussion (if any) was directed specifically at these concepts.However, the discussions in the interviews appeared to suggest that keeping theserecordsareanecessarycomponentofoperatinganybusiness.Thisisparticularlyevidentwhereexpertsbelievedtherearespecificfinancialstatementsthatneedtobemaintainedandunderstood.Withoutaccurateandup-to-daterecordsoftransactionsthesefinancialstatementswouldnotbeatruerepresentationofthefinancialstatusofthebusiness.Thatis,forrecordstobeofanyusetocashflowtheyneedtobebothaccurateandup-to-date,

114Fatoki,aboven1,154.


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becauseifrecordsareaccuratebutold,orup-to-datebutinaccurate,theirusefulnessisdiminished.115

2 Baselevelorconceptsoffinancialstatementliteracythatshouldbeacquiredbysmallbusinessowners

In relation to financial statements,professional financial literacy includes readingandunderstandingbalancesheets,incomestatements,statementsofcashflowandpreparingacashbudget.116Preparationanduseoffinancialstatementshasbeenadvocatedasbeingeffective inhelpingSBOstomakemore informeddecisions. Information fromfinancialstatementscanillustratetheconsequencesofthebusinessoperationsandtheimpactofpreviousfinancialdecisions.117Animportantadvantageofuseoffinancialstatementsforsmall businesses is to provide up-to-date cash flow information. Regardless of theabundanceofresearchthatsuggests thatuseof financialstatements isvaluableto theongoingsuccessofsmallbusinesses,itappearsthatSBOsinAustraliaandoverseasmakelimiteduseoffinancialstatementstoassisttheminmanagingtheirbusinesses.118ThismayberelatedtoSBOfinancialstatementliteracy,asFatoki119suggeststhatSBOswithhigherlevelsofliteracyproduceandmakeuseoffinancialstatementsmorefrequentlythanthosewithlowerlevelsofliteracy.ThesurveyresponsequestionsexploredwhetherexpertshavewitnessedSBOsmakinguseoffinancialstatementsforcashflowmanagement.Expertswerefirstposedwiththestatement:‘Smallbusinessownersmakeuseoffinancialstatementstomanagetheircashflow’(seeTable2).Onlytwoparticipantsagreedwiththisstatement.Incomparison,16participants (69.56 per cent) disagreed/strongly disagreed (five participants gave aneutral response). This would suggest that experts do not think SBOs use financialstatementstomanagecashflow.In comparison to the use of financial statements, the survey questions explored therelianceonthebankaccountbalance.ExpertswereaskedtogivetheirthoughtsonSBOuseofthebankstatementorbankaccount.Inresponsetothestatement:‘Smallbusinessownersrelyonthebankaccounttomanagetheircashflow’,82.9percentofresponses(19participants)wereinagreeanceincomparisonto8.7percentdisagreeing(Table2).ThissuggeststhatexpertsbelievethatSBOsarerelyingheavilyontheirbankstatementorbankbalanceasanindicatorofcashflow.InordertodeterminewhethersmallbusinessexpertsperceivedthattherearespecificconceptsofwhichSBOsshouldhaveunderstandingtohavefinancialstatementliteracy,thesemi-structuredinterviewsaddressedthequestion:‘Inyouropinion,whatisthebaselevelor conceptsof literacy requiredby smallbusinessowners in relation touseandunderstanding of financial statements?’ To facilitate discussion, participants were

115Fatoki,aboven1,154–5.116BermanBrown,SaundersandBeresford,aboven34,188.117BruhnandZia,aboven43,234and248;Fatoki,aboven1,153.118DeThomasandFredenberger,aboven12;DytandHalabi,aboven47;Halabi,BarrettandDyt,aboven25;Peel,WilsonandHoworth,aboven11;SharmaandIselin,aboven48.119Fatoki,aboven1,153.


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suppliedwith a list of possible concepts thatmight be consideredwhen determiningfinancialstatementliteracy(seeAppendix1).Asalreadydiscussed in theprior section, therewasa largenumberof responses thatrelatedtoagedpayablesandreceivablesandliquidityandcashflow.However,intermsoffinancialstatementliteracy,therewerevaryingviewsonwhichconceptsandfinancialstatements were necessary for a SBO to be considered literate. Only one participantmentionedtheneedtounderstandaccountingratios.ThissuggeststhataccountingratiosmaynotbeconsideredanecessarypartofprofessionalfinancialliteracyforSBOs.

An attempt was made to determine whether experts believed that certain financialstatementswerebettersuitedorgavemorevaluetoaSBOforcashflowmanagement.The semi-structured interviews and the survey questions explored the importanceexpertsplacedonuseoffinancialstatementsforcashflowmanagement.Theinterviewsgavevaryingfeedbackregardingthenecessitytounderstandfinancialstatements:

Ithinkthebaselevelconceptisaround,thedifferencebetweenassetsandliabilities.Howmuch equity they have; fundamentally thedifference between a balance sheet and aprofitandlossstatement,andwhattheycanbeusedfor.Isupposeit’sprobablymoreabout what financial statements can be used for in terms of running their business(ACA6).

The expert feedback in the interviews relating to the importance of specific financialstatementswasdiverse.Thelargestnumberofresponsesintheinterviewsrelatedtotheprofitandlossstatement,followedbythebalancesheetandthestatementofcashflowreceiving equal feedback. The outcome of the survey questions, however, placed thestatement of cash flow as the most important financial statement to assist withmanagementofcashflow.Feedbackfromthesurveyquestionsrelatingtotheprofitandlossstatementsuggestedthat justoverhalf (52.17percent)of theexpertparticipantsbelieveittobeusefulforcashflowmanagement.Thirtypercentdisagreethatitisacashflowmanagementtoolandtheremainingexpertswereeitherunsureorgaveaneutralresponseaboutitspurposeforcashflowmanagement(Table2).Theinterviewresponseshoweverweremore supportiveof theprofit and loss statement.Participantsgave thefollowingfeedback:

WellIthinktheyneedtounderstandwherethey’remakingaprofit,soprofitandloss,andtheyneedtodetermineshortandlongtermviability(ACA5).

Soprobablythebaselevelofusingfinancialstatementsshouldbetheabilitytoreadtheprofitandloss,and intermsofunderstanding, thebigthingwetryandgetpeople tofocusonistheirgrossprofitmargin(ACC10).

Forabusinessstartingouttheyshouldunderstandfinancialstatementsanddifferencebetweenrevenueandprofitandloss(ACC12).

Thebalancesheetwasdeterminedtheleastusefulstatementtoassistwithmanagementof cash flow in the survey questions (Table 2). Fifty per cent of participantsagreed/stronglyagreedthatitwaseffective,whereas31.82percentdisagreedand18.18percentgaveaneutralresponse.Theseresultsaresupportedbythelackofresponsesonbalancesheetsfromtheinterviews.OnlytwoexpertsgavefeedbackaboutthenecessityforSBOstounderstandthebalancesheetinordertohaveprofessionalfinancialliteracy.Thosecommentsdidnotprovidepersuasiveargumentstoconcludethatunderstandingofthebalancesheetisimportantforprofessionalfinancialliteracy.


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The survey questions expressed significant support for the understanding of thestatementofcashflowasatoolforcashflowmanagement(Table2).Participantswereasked to respond to the statement: ‘The statement of cash flow should assist smallbusiness to manage their cash flow.’ An overwhelming response of 87 per cent ofparticipants(20people)agreedthatthisisausefulstatementforcashflowmanagement.Onlyoneparticipantdisagreedandtheremainingtwoexpertsgaveaneutralresponse.Asmentioned,theinterviewcommentswerenotassupportiveofthestatementofcashflowasanecessarycomponentofprofessionalfinancialliteracy.Commentsrelatingtothestatementofcashflowwere:

Soobviouslythestatementofcashflowswouldbeprobablythemostimportant;andtheprofitandloss;andthebalancesheet,Iguesswouldbethenext(ACA2).

Wetryandencourageclientstodoannualforecastingbutprobablygetthemmoretofocusona12weekcashflowforecast,whichismoreprobablydynamicandcontinuing.Sointermsofusingfinancialstatements,thecashflowstatementisthemostimportant(ACC10).

Althoughunderstandinganduseofthestatementofcashflowwasnotwelldiscussedintheinterviews,cashinflowandoutflowandthedistinctionbetweencashandprofitwasgiven substantial consideration overall in terms of cash flow literacy (see previouscomments).Thissuggeststhatknowledgeandunderstandingofliquidityisanessentialpartofprofessionalfinancialliteracy.Insummary,expertssuggestthatSBOsdonotcurrentlymakeuseoforunderstandtheirfinancialstatements.TheresultsdemonstratethatexpertshaveobservedthatSBOsplacemoresignificanceontheinformationobtainedfromthebankaccountasanindicatorofcashflowstabilitythananyothersource.Thisisconcerning,consideringthatunlikethestatement of cash flows the bank account balance does not take liabilities intoconsideration.

Incontrast,smallbusinessexpertsproposethatthemostinfluentialfinancialstatementsthatSBOsshouldmakeuseofandunderstandinordertobeliterateincludethestatementofcashflowandtheprofitandlossstatement.Preparingacashbudgetandabusinessplanwerealsogivenstrongsupportbyexpertsasnecessarycomponentsforcashflowmanagement and professional financial literacy. Financial concepts that have beenimpliedbyexpertsasbeingessentialforSBOsincludeidentifyingindicatorsofliquidityorrecognisingcash flowissues,suchasunderstandingtheeffectofagedpayablesandreceivablesoncashflow,determiningthedifferencebetweenprofitandcash,andhavingsomeabilitytoprepareandmaintainacashbudgetorforecast.

3 Does the level of small business owner professional financial literacy influence theirabilitytomanagecashflow?

The views of experts were examined in relation to whether the level of professionalfinancialliteracyofSBOshasanyimpactontheirabilitytomanagecashflow.120Onlyoneparticipantsuggestedthatliteracylevelshavenobearingoncashflowmanagementfrom

120BermanBrown,SaundersandBeresford,aboven34,179–80.


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afinancialstatementliteracyperspective,andthiswasbecausefinancialstatementsonlyprovideSBOswithhistoricaldataandareofnouseforcashflowmanagement:

Most of them don’t understand their financial statements and I don’t think thatinfluencestheirabilitytomanagecashflow.Basically,nobodyusesfinancialstatementsproducedbytheiraccountant,you’reontothenextfinancialyearbeforeyougetthem(ACC6).

However,thisstatementappearstobemoreintermsofend-of-yearreportingincludingbalancesheetsandprofitandlossstatements.Thisparticipantarguesthatend-of-yearreporting is redundant for cash flowmanagement due to the statements by that timecontaininghistoricaldata.ThissuggeststhatthelevelofSBOliteracyisirrelevantbecausethesefinancialstatementsdonothavecurrencytobeusefulforcashflowmanagement.The remaining feedback fromexpertsall confirmed that the levelof literacyhassomeimpactonmanagementofcashflow.Theresponsesfromparticipantsrevolvedaroundfourmain themes.Experts suggested that literacy levels influence theSBO’s ability tosucceed by allowing them to understand the principles in the financial statements, toidentifycashflowissuesinadvance,toillustratetheeffectsofpreviousdecisions,andtohave more informed conversations with external stakeholders. The expert feedbackreinforcestheexistingliteraturesuggestingthatadequateprofessionalfinancialliteracysupportsSBOswitheverydayfunctionsintheworkplaceandallowsthemtomakemoreinformedandstrategicdecisions.121

First, responses indicate that without adequate literacy SBOs are not equipped tointerprettheimportantinformationcontainedinthefinancialstatementsintermsofcashflow. Misunderstanding of the concepts and principles required to read financialstatementscanleaveSBOsinavulnerablesituationintermsoftheircashflow.122Expertsexpressedtheirconcernsabout inadequateability tounderstandtheseconcepts in thefinancialstatements:

A lot of small businesses don’t succeed because they don’t understand the financialstatements.Iftheydon’tcreatethemordon’tunderstandthem,thenthatcausescashflowproblems.Soyes,averystrongrelationshipbetweentheliteracyandmanagingcashflow(ACA5).

Thelevelofliteracythattheyholdinmanywayscaninfluencethesuccessofthebusinessbecausetheyneedtounderstandhowtomanagetheirrevenuesandtheirexpenses.Theycanpayanaccountanttodothatbutit’sexpensiveandtheytendtoshyawayfromthatandtheytendtodoitthemselves.Therefore,especiallyinthoseinitialstagesofowningabusiness, thehigher theirlevelof literacyaround financialnumbers thegreaterthechancesofthemsucceedinginmanagingtheirbusiness(ACC13).

SimilartoresearchbyBruhnandZia123andFatoki,124expertsexpressedtheirviewsonhow increased literacy of financial statements can improve the SBO’s cash floweffectiveness, and their firm’sperformanceandgrowth. Itwas stated thatbeingmore

121Ibid. 122Fatoki,aboven1,156.123BruhnandZia,aboven43,234and238.124Fatoki,aboven1,179–80.


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literateallowsSBOstobemoreinformedindiscussionswithexternalstakeholdersandreducesexpenditurewhenengagingadvisors:

Ahigherlevelofliteracyalsohelpsthemtocontainadvisorcostsbecauseitmeansthattheyhavethecapabilitytoputtogetherbriefsandstatementsandinformationinawayinwhichitsavesadvisorstimeintermsofgettingontopofandunderstandingwhattheirbusinessis(ACC13).

Havingadequateprofessionalfinancialliteracyhasbeenadvocatedasbeinginfluentialinhelping SBOs to make more informed decisions, which in turn facilitates improvedperformance.125 Expert responses support prior research, by implying that increasedliteracyinfinancialstatementsassistsSBOsinidentifyingtheconsequencesofpreviousfinancialdecisionsonbusinessoperations:

Thehigher the level of literacy, thebetter theunderstandingof financial statements.Theycanthenseeandrecognisetheearlywarningsincludinganyvariancesandreactand respond to make it favourable to them. If their literacy is low, then theirunderstandingofitislowandthereforetheymaynotevenbeabletoreadthesignalseveniftheydogettheinformation(ADV1).

Previous research indicates that cash flow understanding is critical in determiningsolvencyand therefore limitations in literacyare likely to causedetrimental effects toongoingbusinessviability.126HigherlevelsofcashflowandprofitabilityliteracyhasbeenadvocatedtoallowSBOstomakeamoreaccurateassessmentofthepresentstatusoftheirbusinessandassistwithimplementingstrategiestoovercomeanycashflowproblems.127SomeexpertsexpressedtheirconcernsaboutSBOsmisunderstandingprofitabilityandcashflow,andtheimplicationsthatcanresultfromalackofknowledgeoftheseconcepts:

Itdoesinfluencetheirabilitytomanagetheircashflowbecauseiftheydon’tunderstandhowthecashthattheyspendimpactsontheirfinancesthentheycanhavecashissues.We find thata lotofpeoplesay that theydon’tmakeaprofitbecause they’vegotnomoney,whichisnotnecessarilytrue.Theyjustspendallofthemoney,theyjustdon’trealisehowit’sbeenflowingthroughthefinancialstatements(ACC12).

OverallitappearsthatthemajorityofexpertsintheresearchperceivethatthelevelofaSBO’sliteracyhasanimpactontheirabilitytomanagetheirbusinesscashflow.Concernswere expressed about limitations in professional financial literacy having a negativeimpactontheabilityofSBOstoidentifyearlywarningsignsofcashflowissues.Expertssuggestedthat inordertosupportcash flow,SBOsshouldhavea levelof literacythatallowsthemtocomparecurrentfinancialswithpriorfigures,determinetheconsequencesofpreviousdecisionsinordertobemoreinformedaboutdecisionsinthefuture,andhaveincreasedawarenessof financial status inorder tohavemoreeducatedconversationswithadvisorsandexternalparties.

125BruhnandZia,aboven43,234and238.126SharmaandIselin,aboven48.127Ibid.


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B ComputeraccountingsoftwareliteracyRecentresearchbyBelleIsleandFreudenberg128indicatesthattheCASisnotbeingusedeffectivelytoassistwithmanagementofcashflow,asthereislowengagementintheuseofCASreportingoptions.ConsideringthatCASliteracyisarelativelynewconcept,thisprojectreliesontwoareasofprofessionalfinancialliteracy,cashflowmanagementandunderstanding of financial statements, to determine CAS literacy. The researchinvestigatestheuseofCASforcashflowmanagementactivitiesincludingpreparingacashbudget, keeping records of revenue and expenses, creditor and debtor invoicing andgenerationanduseoffinancialreports.

1 BaselevelorconceptsofCASliteracythatshouldbeacquiredbysmallbusinessownersExpertswereaskedtodetermineiftherearespecificfunctionsinCASthatSBOsshouldbe capable of performing. First, the survey questions explored whether experts haveobserved that record keeping is accurate as a result of the use of CAS by SBOs. AsillustratedinTable3,12participants(52.18percent)agreedthatsmallbusinessrecordsaremoreaccurateasaresultofCAS,incomparisonto17.39percentwhodisagreedand30.43percentwhogaveaneutralresponse.Table3:ExpertsurveyresponsesrelatingtouseofCASforcashflowmanagement

StronglyDisagree Disagree Neutral Agree StronglyAgree

NotSure

NotApplicable

a)SmallbusinesseshavereliablerecordsasaresultoftheirCAS.

4.35 13.04 30.43 47.83 4.35 0 0

b)TheinitialsetupofCASshouldbecarriedoutbyanaccountantoradviser.

0 4.35 13.04 34.78 47.38 0 0

Thelargenumberofneutralresponsesmightbeexplainedbytheresponsesgiveninthesemi-structured interviews,where expertswere asked to respond to the question: ‘Inyouropinion,whatisthebaselevelorconceptsintermsofoperatingCASthatisrequiredbySBOsforcashflowmanagement?’ParticipantswereprovidedwithalistofpossibleCASconcepts that theycouldrefer toinordertodetermineCAS literacyrequirements(seeAppendix1).Onethemethatpresentedanumberoftimesrelatedtotheincorrectcodingoftransactionsandhowthatcouldresultininaccurateprocessingofrecords.Thisconcerncanbeseeninthefollowingcomments:

128BelleIsleandFreudenberg,aboven3.


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Asweallknow,dataoutputisonlyasgoodasthedatain.Ifthedata’sbeenclassifiedorincorrect,thenit’snotthatusefultothem.Theyhavetohaveabaseunderstandingofhowtocodethetransactionsthemselvessothattheycangeneratetheoutputthattheyneed(GOV1).

HalfthetimeIthinkthey’restrugglingbecauseoferrorsthatcomeupintheaccountingsoftwarefromincorrectenteringofdata(ADV3).

Thisargumentisstrengthenedbythefeedbackgiveninthesurveystatement:‘TheinitialsetupofCASshouldbecarriedoutbytheaccountantoradvisor’(seeTable3).Nineteenofthetwenty-threeparticipantexperts(82.61percent)agreedthattheCASinitialsetupshouldbetheroleoftheaccountantoradvisor.Thisindicatesthatexpertsperceivethattheremaybearelationshipbetweencodingerrorsandincorrectsetupofthesoftware.ParticipantGOV1discussedtherequirementtohavetheinitialsetupcarriedoutbyanexpertiftheSBO’sliteracyislackinginthatarea:

Ithinkitdependsonthesoftware.Idon’tknowthatthebusinessownernecessarilyhastounderstandhowitallworksiftheycansetitupproperlyortheycangetsomeonetosetitupproperlyforthem(GOV1).

The purpose of the semi-structured interviews was to determine what concepts andfunctionsoftheCAStheSBOshouldbeabletocompleteinordertobeconsideredCASliterate.Theresponsesfromtheparticipantswerevaried.SomeparticipantsbelievedthatCASwasnotusefulforcashflowmanagementandcouldbedetrimentaltoeducatingandincreasingknowledgeofaccountingconceptsforSBOs.OneparticipantbelievedthatCASremovestherequirementforSBOstoundertakebasicaccounting,whichpreventsthemfromundertakingfundamentalaccountingproceduresonaregularbasis:

Therelianceonelectronicdataprocessinghasovercomegoodbasicsoundaccountingknowledge–everybodynowisanexpertbecausetheycanhitakeyonthecomputer(ACA2).

Thisresponsecontradictspriorresearchthatsuggestsuseofsoftwareandinformationsystemsincreasesfinancialawareness,efficiencyandperformanceofsmallbusinesses.129TwooftheparticipantssuggestedthatSBOsshouldhaveaminimumlevelofliteracythatallowsthemtoproduceandunderstandfinancialreportsavailableintheirCAS:

Definitelytheydoneedtoknowwhichreportstoprint,howoftentoprintthem.Soyouwanttokeepyoureyeoutonyourcashflowregularly;profitandlossstatement,youwanttodoatleastmonthly;andbalancesheetthatcanbedoneonalessfrequentbasis(GOV6).

Theyshouldbeusingitasamanagementtool.Itrytogetmyclientstodoamonthlyprofitandloss,andagingdebtorsandagingcreditors,because thenyoucanseehowtheircashflowisgoing(ACC11).

The remainingexpertsbelieve that a thoroughunderstandingofhowCAS functions isnecessary to be considered as having adequate CAS literacy. ParticipantGOV7 gave adetaileddescriptionofwhatSBOsshouldbecapableofwhenoperatingtheirCAS:

129Fatoki,aboven1,156;HuntandIyer,aboven70.


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Ideally,theyshouldbeabletoproducereportsandunderstandwhatthosereportsaretellingthem.Sotheyneedbasicdigitalliteracy,thentheyneedtounderstandtheiractualaccountingsoftware,whatitwilldoandwhatitwon’tdoforthem.Theyneedtoknowhowtouseit,andtheyneedtoknowhowtogetvalueoutofitrelevanttorunningtheirbusinesseffectively.Theydon’tneedtobeexpertsbuttheydoneedtohavealevelofabilitytousethesoftwaretoactuallyhelpthemrunthebusiness(GOV7).

Overall,19ofthe23expertsbelievedthatCASliteracyofSBOsshouldataminimumallowthemtoproduceandunderstandfinancialreports.Threeexpertsextendedtheirideasofthe minimum level of literacy to suggest that a thorough understanding of how CASfunctionsisnecessaryinordertobeconsideredCASliterate.Incontrast,expertsconcurthattheinitialsetupofaCASsystemdoesnotformpartofSBOCASliteracy,andinsteadexpertsbelievethatthesetupshouldbecarriedoutbyanaccountantoradvisor.Thiswasseenasanecessarypracticetopreventincorrectrecordingandcodingoftransactionsinthefuture.

2 DoesthelevelofSBOCASliteracyinfluencetheirabilitytomanagecashflow?The semi-structured interviews explored whether experts believed that SBOs, CASliteracyinfluencedtheirabilitytomanagetheircashflow.ThreeparticipantsagreedthatCASliteracylevelswereimportantforcashflowmanagement.TheirresponsessuggestthatwithoutCASknowledgethereportsanddataavailablewillbeworthlessandservelittlepurposeforcashflowmanagement:

Looking at your financial statements and having good accounting software andknowledgehelpstoanalysecashflow.Ithelpsyoutolookforward,thinkingaboutyourtaxliabilitiesandotherdebtsandplanningforthose(ACC8).

TheremainingcommentsfromexpertsrevolvedaroundSBOs’knowledgeofaccountingconcepts.ItappearsfromthedataanalysisthatparticipantsperceivethatmanagementofcashflowusingCASisreliantonSBOs’understandingofbasicaccountingconcepts:

It’snotliteracyofthecomputeraccountingsoftware,it’sliteracyofdebitsandcreditsorwhat’sprofitandloss,thatinfluencestheirabilitytomanagecashflowwhenusingtheirsoftware(ACC12).

AreviewofthedatasuggeststhatitisnotsolelythelevelofunderstandingofthefunctionsinCASthatinfluencesSBOs’abilitytomanagecashflow.ItappearsthatknowledgeandunderstandingofbasicaccountingconceptscomplementsorunderliesSBOs’CASliteracylevels.ThisisconcerningwhentakingintoaccounttheviewsofparticipantACA2,whosuggestedthatrelianceonelectronicdatasystemsforrecordingofbusinesstransactionshaserodedbasic financial andaccountingknowledgeofSBOs.This is aresultofSBOsneverhavingtodeterminethetreatmentofthetransactionsthattheyprocessthroughtheCASsystem.

C BusinesstaxationliteracySBOs have been identified as being broadly tax literate in relation to individual taxsystems,howeverthislevelofliteracymaynotbesufficientforbusinesstaxsystems.PriorresearchsuggeststhattheleveloftaxknowledgeofSBOsisnotsufficientformanagement


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of their ongoing business tax obligations.130 This research explores the perception ofexpertsinregardtothelevelofbusinesstaxliteracyrequiredbySBOsinordertomanagecashflowandinturnasuccessfulbusiness.

1 Baselevelorconceptsofbusinesstaxliteracythatshouldbeacquiredbysmallbusinessowners

Prior literature suggests that a managerial benefit is available for businesses fromrecording transactions for tax compliance.131 This is attributed to the regularity ofrecordingaccountingtransactionsinordertosatisfytaxreportingobligations.ThesurveyquestionswereutilisedtodeterminewhetherexpertsbelievedthatrecordkeepingfortaxationpurposesassistedSBOsinmanagingtheircashflow,allowingthemtorecognisethis benefit. Seventeen of the experts agreed/strongly agreed that tax recording isbeneficial for cash flow management. Only two participants disagreed/stronglydisagreed.ResponsesaredisplayedinTable4.ThiswouldsuggestthattaxobligationsareperceivedasbeingbeneficialtoSBOcashflowmanagement.Table4:Expertsurveyresponsesrelatingtobusinesstaxsystemsandcashflowofsmallbusiness

StronglyDisagree Disagree Neutral Agree StronglyAgree

NotSure

NotApplicable

a)Therecordsandinformationgeneratedbytaxobligationsassistsmallbusinesseswithmanagingtheircashflow.

4.35 4.35 13.04 47.83 26.09 0 4.35

Thesemi-structuredinterviewsthenexploredthelevelofbusinesstaxliteracyrequiredforSBOs.Participantswereasked:‘Inyouropinion,whatisthebaselevelofliteracyorconceptsofbusinesstaxationrequiredbySBOstobeconsideredliterate?’Thereweretwocommon themes that emerged. Themost prevalent responseswere focused on beingaware of their obligations and realising that the tax liability is a business expense.Research by McKerchar132 showed that determining correct payment and lodgementdates for taxationwasa complex issue forSBOs.Experts todayappear to suggest thatawarenessoflodgementandpaymentdatesarestillnecessarycomponentsofbusinesstaxliteracy:

Theydefinitelyneedtohaveagoodunderstandingofwhenthosepaymentsneedtobemadesotheycanmanagetheircashflowappropriately(ACC11).

130Freudenbergetal,aboven4;McKerchar,aboven77.131LignierandEvans,aboven56.132McKerchar,aboven77,34.


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Theyshouldknowhowoftentheyhavetoreportintheirtaxreturnsandtheyshouldknowwhatdatestheyhavetopaythetax.Theyshouldknowthedatesthattheyhavetofillinthosereportsandshouldbeabletocommunicatewiththeiradvisers(ACA5).

Participants were also concerned that SBOs did not plan for the payment of the taxliability.ThiscouldbearesultofSBOsnotrecognisingthattaxisabusinessexpenseornotbeingabletopredictorforecasttheamountoftaxthatwillbedueattheendofeachreportingperiod.ThiscanresultinthetaxliabilityowingtotheATObeingclassifiedascashavailableforbusinessspending.A number of participants gave feedback about specific tax systems and necessaryconcepts in those tax systems of which SBOs should be aware. The most frequentlydiscussedtaxsystemwasGST.Thefeedbackfromexpertsrelatedtorulesabouttaxablesuppliesandcredits,understandingwhatgoodsaresubject toGST,anddetermining ifyourbusinessisrequiredtoberegistered:

WithGST,whichgoodsorserviceshaveGSTandwhichonesdon’tandhowthataffectscashflow.IthinkGSTismoreaboutcashflow(ACA6).

GSTonabaselevel,Ithinkpeopleunderstandtherearetaxable[supplies],andtherearecreditscomingback.Ithinktheyneedtohaveabaseunderstandingofthoseconcepts,andthenhowthatfitsintopreparingaBAS(ACC10).

Minimal feedbackwasgiven in relation to literacy required for theotherbusiness taxsystemsrelevanttothisresearch.Expertsmadecommentsregardingincometax,PAYGinstalments and fringe benefit tax – however, the feedbackwas scarce. Responses forincometaxconcentratedonunderstandingdepreciationanddeterminingthedeductionsavailabletotheindividualbusiness:

Myviewisthattherearebasicconceptsaroundwhat’sdeductibleandwhat’snot.What’sadeductionandwhat’sdepreciation(ACA6).

Incometaxisabitdifferent.Incometax,becauseofthewaythatitoperates,youprobablyhavetohavelessknowledgeofit,butitisalwaysgoodtounderstandwhatconcessionsareavailabletoyousothatyoucanmakethebestuseofthosethatareavailable(GOV1).

OneexpertdiscussedtheimportanceofSBOliteracyforPAYGinstalments,133particularlyinthefirstyearoftrading.Thisparticipantsuggestedthatwithouttherequiredlevelofbusinesstaxliteracy,SBOscouldexperiencesignificantcashflowproblemsiftheyhavenot forecastedorset aside funds tosatisfy their income tax liability for the first year.SubsequentyearswillincuraPAYGinstalmentthatisrequiredtobepaidthroughouttheyearbasedonthepreviousyear’sincome.134However,consideringthatthereisnopriortradinginthefirstyear,theincometaxliabilitywillbedueasalumpsumoncethereturnislodgedwiththeATO:

Payasyougo instalmentswill,asamatterofcourse,beanegative toyourcash flowbecauseofwhatitdoes.Essentially,it’saprovisiontowardsyourincometaxliabilityforthatparticularyear,soyou’reactuallypayingitearlierthanyouotherwiseshouldhave.

133ANewTaxSystem(PayAsYouGo)Act1999(Cth).134Ibidpt2-10sub-div45-C.


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Particularlyforsmallbusinessesthatarestartingout,theycangetthemselvesintoquiteabitoftroublebecausetheyhaven’tactuallybeenmakingprovisionfortheirincometaxliabilitythroughouttheyear,sowhentheylodgethatfirstreturnthathasataxliabilityonit,there’snothingtooffsetthatliability,withalumpsumamountthattheyhavetothenfindthecashfor.Unlessthey’veactuallybeenputtingthemoneyaside–wecallitpayasyougoinstalmentlagorpayasyougoinstalmentshockbecausethereturncomesin,it’sprobablyninemonthsaftertheendoftherelevantincomeyear,they’regoingokay(GOV1).

This feedbackdiffers to the resultsof the research in1995 relating toprovisional tax.McKerchar135suggestedthatSBOsexperiencedcomplexitywiththeunderstandingthataprovisionaltaxpaymentdecreasedtheoverallamountoftaxliabilityowedattheendofthe reporting period. Current expert feedback in comparison suggests that the mostsignificant issue for cash flow is not identifying the implications of not paying aninstalmentinthefirstyearoftrade,andthepossiblerestrictionstocashthatSBOscouldfacewhenthetaxliabilityisdueinthesubsequentyear.Thissupportstheresponsesinarecentrelatedcasestudyprojectofsmallbusinessparticipants,136wherebusinessownerssuggestedthatmoreeducationisrequiredatthestart-upofabusinessinrelationtothelikelytaxliabilitythatwillbeowedattheendofthefirstyearoftrade.Expert ACC5 supported research by McKerchar,137 suggesting that fringe benefit taxliteracyneedstobeimproved.LackofunderstandingbySBOsaboutwhatisclassifiedasafringebenefitisstillprevalentintoday’ssmallbusinessenvironment:

Alotofsmallbusinessesdon’tpayFBT.Buttheyshould.Alotofthemhavegotexposuresandtheydon’tevenknowthey’vegotanexposure(ACC5).

In summary, expert feedback indicates that record keeping for tax obligations is stillregarded as being beneficial for cash flowmanagement. Concepts identified as beingessential forSBO literacywith respect tobusiness tax systems include theneed tobeawareofongoingtaxobligations,anddeterminingthecorrectlodgementandpaymentdatesforthetaxsystemsthatarerelevanttotheirbusiness.SBOsshouldalsobecapableofidentifyingthattaxliabilitiesareabusinessexpenseandshouldbeabletodifferentiatebetweenthemoneyallocatedtotaxliabilitiesandcashavailableforbusinesstrade.In regard to specific tax systems, the largest number of participants identified GSTconceptsasbeingnecessary forSBOtax literacy. Inparticular,conceptshighlightedascriticalwererulesrelatingtotaxablesuppliesandcredits,determinationofgoodssubjecttoGSTandunderstandingtheGSTregistrationrequirementsandthresholds.Othertaxconcepts that are consideredcrucial forSBOliteracy includedeterminationofwhat isconsidered a fringe benefit, identifying available deductions and concessions,understandingdepreciation,andforecasting for incometax liability in the firstyearoftradebeforePAYGinstalmentsbecomepartofbusinesstaxobligations.

135McKerchar,aboven77.136BelleIsle,FreudenbergandSarker,aboven64.137McKerchar,aboven77.


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2 DoesthelevelofSBObusinesstaxliteracyinfluencetheirabilitytomanagecashflow?ThecollectionofdatathenfocusedontheperceptionofexpertsabouttheeffectofSBOs’business tax literacy on cash flowmanagement. One expert expressed their concernsaboutSBOs’abilitytomanagecashflow.However,theysuggestedthattherelationshipbetweenbusinesstaxliteracyandcashflowmanagementisirrelevant.TheyimpliedthatSBOsshouldhavesimpleunderstandingoftaxwherecalculationofthetaxliabilityaspartofcashflowshouldbepredictedasone-thirdofnetprofit:

Iseecashflowmanagementasavastlysuperiorproblemtotaxation.Ifasmallbusinessismakingagoodprofit,taxisanirrelevance.Quitesimply,allthebusinessproprietorhastounderstandisthatit’sroughlyathirdofhisnetprofit:that’shisdepreciationcosts(ACA2).

IncomparisontheremainingparticipantssuggestedthatthelevelofSBOs’businesstaxliteracy would likely influence their ability to manage cash flow. One participantsuggested that taxation was more complicated for SBOs than any of the otherrequirementsofrunningabusiness,andthereforetheirbusinesstaxliteracywouldhavesomebearingontheirabilitytomanagecashflow:

Ithinkitprobablyismoreinrelationtothetaxation,theGST,PAYGwithholdingandsuperguaranteesideofthings.Becausethetaxobligations,Ithink,dohaveanimpactontheir ability tomanage cash flow.Myview is that theyprobablyhave less literacy inrelation to the taxation obligation, than they do in relation to their general business(ACA6).

Twoparticipantshighlightedtheimportanceofbusinesstaxliteracyanditsrelationshipwithcashmanagement,particularlyinrelationtoforecastingforthetaxliability:

Theyabsolutelyneedtounderstandtaxationobligationsbecauseinmyviewitimpactscashflowdirectly.Youhavetohavethecashflowtopaythetaxwhendue(GOV2).

ImeanjustthebasicissueofGST,tobeabletoaccountforthatandbudgetforthat,sothatwhen itdoesbecomedue, that it isthereandcanbepaidon timewithout themspendingitandhavingitincludedintheirdaytodaycash.Theythinktheircashflowisgoodbutit’snotbecausepartofitistheirtaxliabilities(ADV1).

TheremainingfeedbackproposedthattheimpactofbusinesstaxliteracyoncashflowmanagementrevolvedaroundthelevelofliteracyheldinfinancialstatementsandCAS.Experts indicatedthat insufficient literacy in theothertwoareaswouldhavenegativeconsequencesonthelevelofbusinesstaxliteracyheld,andinturntheabilitytomanagecashflow.ThissuggeststhatinordertohavebusinesstaxliteracySBOsneedtobeliterateinfinancialstatementsandCAS.TheseoutcomesbroadlycontradictthepropositionbyChardonetalthatabaselevelofliteracyintaxationandsuperannuationisrequiredinordertobefinanciallyliterate.138Alternatively,theresultsmaynotopposeChardonetal,butmaysuggestthattaxation,superannuation,financialstatementandCASliteracyworkinconcertwitheachother,andhavingahighlevelofliteracyinanyoftheseareasisin

138Chardon,FreudenbergandBrimble,aboven4.


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turnbeneficialtoanindividual’sunderstandingofotherconcepts,especiallytheirabilitytomanagecashflow.139Commentsofexpertsarehighlightedbelow:

Literacyhasconsequencesontheircashflow.So,ifthey’renotfullyunderstandingtax,financialstatementsandcomputeraccountingsoftwarethenitwillinfluencenegativelyifthey’renotsurehowtheseinterplaywiththeircashflow.Ifyoudon’tknowwhatthetax consequences are then you’re not going to be able to project the cash correctly(ACC5).

WhatIwouldsayisthatthereisaproportion,welllessthanhalf,ofsmallbusinesseswhostartoutwiththerequiredliteracyandcapabilitytoactuallyeffectivelymanagetheirfinances, their business planning, and their tax and superannuation. Therefore, theremainingsmallbusinessownerscan’tmanagetheircashflowbecausetheydon’thavethosecapabilities.Theysimplycan’tdoit.Theydon’tunderstandbasicthingslikethedifferencebetweentheirbusinessincomeandtheirpersonalincome.Businessexpenses,personalexpenses.Theirlevelofunderstandingisverylow.Consequently,theygetintofinancialstrifeorunderfinancialstressveryquickly(GOV7).

Insummary,analysisofthedatafromthesemi-structuredinterviewsindicatesthatthelevelofbusinesstaxliteracyheldbySBOscouldhavesomeinfluenceontheirabilitytoperformeffectivecashflowmanagement.ParticipantresponsesindicatethatexpertsaremostlyconcernedthatSBOslackthecapacitytodeterminetheremainingcashavailableaftertakingthetaxliabilityintoconsideration.ReponsesfromtheremainingsixexpertswhodiscussedtheinfluenceofbusinesstaxliteracyoncashflowmanagementindicatesthatthelevelofSBObusinesstaxliteracymayhavearelationshipwiththeirliteracyintheotherareasinvestigatedinthisresearch.ExpertsperceivedthatbusinesstaxliteracyofSBOsissupportedbytheirleveloffinancialstatementandCASliteracywhentakingcashflowmanagementintoconsideration.

VI CONCLUSION

Thisarticledetailedthefindingsofastudythatsoughttoexplorethecriticalissueofcashflow for small businesses. In particular, the article reported what business expertsthoughtaboutSBOprofessional financial,CASandbusinesstax literacyandhowtheseliteraciesmayormaynotinfluencecashflowmanagement.

Overall,itappearsthatinordertohaveprofessionalfinancialliteracy,expertsbelievethatSBOsshouldmakeuseofacashbudget,businessplan,profitandlossstatementandcashflowstatement.However,acriticalpartofusingthesedocumentsinthemanagementofcashflowistheabilitytoextractmeaningfulinformationinordertounderstandtheircashflowsituation.Essential information includeshow to interpret thedifferencebetweencash andprofit, and the effect of cash receipts in comparison to aged receivables andpayables.For CAS literacy, SBOs should ideally have a thorough understanding of how CASfunctions,andatminimumbecapableofproducingfinancialreportsandcomprehendingtheinformationcontainedinthosereports.WithregardtotheeffectofCASliteracyon

139Ibid.


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managementofcashflow,expertsconsidercomprehensionofbasicaccountingconceptsasarequisitetoCASliteracyconcepts.Whenassessingbusinesstaxationliteracy,expertssuggestthatSBOsshouldbeawareoftheirongoingtaxobligationsanddeterminationofcorrectlodgementandpaymentdatesforthetaxsystemsthatarerelevanttotheirbusiness.Inregardtospecifictaxsystems,identification of goods attracting GST and rules relating to registration, thresholds,taxablesuppliesandcreditswereconsideredessentialforGSTliteracy.Forincometax,necessary concepts highlighted were identification of allowable deductions andconcessions,comprehensionofdepreciationrulesandunderstandingtheimpactofthetaxliabilityoncashflowafterthefirstyearofbusinesstrade.Experts expressed concerns that SBO business tax literacy could impact cash flowmanagementifSBOswereincapableofdifferentiatingbetweenthemoneyallocatedtotaxliabilities and cash available for business trade. Experts propose that to effectivelymanage cash flow, SBO taxation literacy needs the support of adequate levels ofprofessionalfinancialliteracyandCASliteracy.

VII RECOMMENDATIONS,LIMITATIONSANDFUTURERESEARCH

If experts perceive that cash flowmanagement in small businesses is related to theinteractionofSBOliteracyintermsofbusinesstaxation,CASandprofessionalfinancialliteracy, then mechanisms should be adopted that seek to bring their literacy to anadequatelevel.Althoughtherearemixedreviewsinpastresearchabouttheeffectivenessof literacyeducation, thereareanumberofways that education initiativeshavebeenconsideredsuccessfulinothercountriesforSBO.140Tailoringadvicetotheindividualusercanbeeffectiveifdeliveredthroughtheprocessofeitherjust-in-timeeducationorone-on-onecoaching.Just-in-timeeducationorone-on-onecoachingallowsadvisorstosatisfythediversecharacteristicsoftheindividualSBOandprovideeducationatatimethatisrelevanttothecurrentsituationofeachindividualsmallbusiness.141InorderfortheSBOtorecogniseanybenefitfromtrainingthecontentshouldbedeliveredindescriptivelanguagethatisclearandstraightforward.TheintroductionoftaxpreparationsoftwaresimilartosystemsusedintheUnitedStatesofAmericaandAustriacouldalsobeuseful,asthesesystemsprovidefinancialadviceandindicatorstousers,whichineffectimprovestheirfinancialawareness.142

OnewayofachievingordirectingSBOstoundertaketrainingcouldbethroughtheATO.Asanalternativetoimposingashortfallinterestchargeonanamendedassessmentorapenalty formaking a false ormisleading statement, the Commissioner could, at theirdiscretion, imposea trainingorderontheSBO.This trainingordercouldberelatedtoimproving the literacy of the SBO and be required to be undertakenwithin a specificperiod of time. The order could also determine the duration that the SBO should be

140DanielFernandes,JohnGLynchandRichardGNetemeyer,‘FinancialLiteracy,FinancialEducation,andDownstreamFinancialBehaviors’(2014)60(8)ManagementScience1861,1875.141Fatoki,aboven1;EleonoraJohannaKuiperandMarijnJanssen,‘Re-UsingTaxpayer’sData:ScenariosforWealthManagementforthePublic‘(2018)4(1)JournalofTaxAdministration88;Stone,aboven59.142HuntandIyer,aboven70;KuiperandJanssen,aboven141.


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involvedinthetraining.Thecostsrelatedtoengagingintrainingunderatrainingorderimposed by the Commissionerwould not be eligible as a tax deduction for the smallbusiness,asitshouldstillbetreatedorrelatedtofinesandpenaltiesunders26-5oftheIncomeTaxAssessmentAct1997.

Itisacknowledgedthatthisarticledoesnotlookindepthatindividualdemographicsandcharacteristics of SBOs that could restrict the level of literacy that is achievable. Thepurpose of the article was to examine expert perception of what level of literacy isdesirabletoallSBOs.Alimitationofthearticleisthatitonlyreportsonepartofalargerresearchprojectandalthoughthereisconsiderablecontentdiscussedintermsofexpertviewsonliteracy,itisimpracticabletoreviewindepththeotherstagesoftheprojectthathavealreadybeencompleted.Afurtherconstraintofthefindingsinthisarticleisthesmallnumberofparticipatingexperts.AlthoughitshouldbeacknowledgedthattheintentionoftheresearchwastoexplorethefindingsfromamultiplecasestudyofSBOsthatwascarriedoutpriortothispartoftheresearchandtoexamineperceptionofarangeofsmallbusinessexpertsintowhatwasconsideredthenecessarylevelofliteracytosupportcashflowmanagement.

Giventhefindingsofthisstudy,thereareanumberofrelationshipsthatcouldbeexploredin the future. Considering that there is conjecture regarding theusefulness of literacytrainingforSBO,itwouldbebeneficialtoexploreonalargerscaletheviewsofSBOintodifferentformsofliteracyeducationortoconductexperimentswithSBOtodeterminewhatwouldbethebestdeliveryoptionforretentionofconceptsrequiredforliteracyinsupportcashflowmanagement.Particularlytheuseoftaxpreparationsoftwareusedinothercountriescouldbetrialedthroughoutthesmallbusinesssector.Theresearchhasalso highlighted important concepts relating to professional financial literacy, CASliteracyandbusinesstaxliteracy.FuturestudiescouldinvestigateonalargerscaleSBOconfidence,perceivedimportance,actualliteracyandperceivedliteracyinrelationtotheconceptsidentifiedbysmallbusinessexperts.

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APPENDIX1

Baselevelliteracycouldincludesomeorallofthefollowingconcepts.Financialstatements Computeraccounting

software(CAS)Smallbusinesstaxation

Understandliquidityratio PerformoriginalsetupofaccountsinCAS

Understandreportingandpaymentdatesfortaxes

Understandindicatorsofinsolvency

Inputdataforcreditoranddebtorinvoicing

Prepareincometaxreturns,businessactivitystatements,instalmentactivitystatements,superannuationreports

Determineprofitabilityinincomestatement

MaintainbankreconciliationinCAS

Understandsuperannuationguaranteeandsuperannuationcontribution

Understandnetvalueinbalancesheet

Performsetupofemployees,includingtaxandsuperannuationobligations

Understandfringebenefitdetermination

Understandthedifferenceandeffectofcurrentandlong-termdebt

Preparesuperannuationreportingandpayment

Understandtreatmentofdividends,dividendimputationcredit,factoringaccounts

Analysecomparativedatain:cash,accountspayable/receivable,equity,inventoryandretainedearnings

PrepareIASandBASinCAS Understand:income;businessincome;revenuevscapitalreceipt;immediatededuction;smallbusinesscapitalgainstax;repairs;depreciation;smallbusinessimmediatedeductions;marginaltaxrates;Medicarelevy

Understandthedifferencebetweenoperationalcosts,assetinvestmentsandfinanceinthecashflowstatement

DeterminetaxtreatmentoftransactionsinCAS

Effectivelycommunicatewithfinancialandtaxadvisers

Comparetheincomestatementandcashflowstatementtodetermineiftherearenon-essentialexpenses

ProducefinancialreportsfromCASincludingbalancesheet,incomestatement,statementofcashflow

UnderstandGSTterminology:GSTfree;non-reportable;GSTinclusive/exclusive;taxablesupplies;inputtaxcredits

Understandtheconceptsofdebtors,creditors,assets,liabilitiesandequity

PrepareafinancialbudgetinCAS

Understandcapitalgainstax,50percentCGTdiscount,smallbusinessCGTconcessions

Makeuseofinformationinfinancialstatementstosupportpreparationofabusinessplanorbudget

Moderatelevelofproficiencyinbusiness-relatedsoftware,includingExcel

Understandtreatmentofoffsets,deductions,write-offs,concessions,taxrates

Source:Theconcepts listedinthistablehavebeencollatedfromavarietyofsourcesincluding:articlesreferred to in the literature reviewof this article; the findings of themultiple case study of SBOs thatprecededthedatacollectedforthisarticle;andtheresearcher’sownideas.

is the literacy of small business owners important … · reliance on small business however can be...

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