One in 10 entrepreneurs can't answer correctly any of 10 questions in a quiz on key accounting concepts.
Many new small businesses fail because their owners lack basic business knowledge such as the role of a balance sheet and how to improve cashflow.
According to research conducted for financial management solutions provider Intuit Australia, one in 10 entrepreneurs surveyed can't answer correctly any of 10 questions in a quiz on key accounting concepts.
Of 400 startup owners surveyed nationwide, 12 per cent scored only one out of 10, and only 42 per cent scored five out of 10 or more.
Just three per cent of startup owners answered all 10 questions correctly.
"The survey revealed that there is a critical knowledge gap when it comes to financial fitness for these startup businesses," Intuit Australia managing director Nicolette Maury said on Tuesday.
The research also revealed demographic differences in financial understanding, with Gen Y startups possessing the least knowledge, Gen X with more, and the Baby Boomers having the most knowledge.
Furthermore, only one in 10 business owners claim to thoroughly understand their finances, only two in 10 use an external accountant, and 22 per cent still use a pen and paper rather than accounting software in managing their accounts.
Ms Maury said more than 500,000 Australians are involved in startup activity at any time.
Data from the Australian Bureau of Statistics shows that one in four startups fail within their first year and only half make it through their third.
Ms Maury said business owners lacking basic financial knowledge could find it harder to know where they stand financially, harder to pick up problems, and harder to comply with regulatory requirements.
"It's tough for the economy to have businesses that fail - it takes up a lot of resources and a lot of people experience financial hardship," Ms Maury said.
"But it's also the opportunity cost - some of these businesses that fail have fantastic, innovative products and services that don't get traction because the business can't be kept running."
Ms Maury said a first step towards avoiding failure was for entrepreneurs to build a network of people around them who were financially savvy.
Entrepreneurs could engage an accountant or financial manager, employ cloud-based financial systems to help them learn as they go, or join a "financial fitness boot camp" to learn some of the basics.