Financial literacy and growth of entrepreneurial ventures

Managing enterprises worldwide and especially in Africa requires financial literacy as several studies have concluded. Financial literacy is a key ingredient needed by entrepreneurs and their managers to make concrete financial decisions.  Financial literacy is a key strategy for improving money management skills. Surely entrepreneurs need competences in savings, investment, debt management, budgeting, and financial records keeping; among others. This article explains the key dimensions of financial literacy and its nexus to growth of entrepreneurial ventures.

Financial literacy has been defined variously by different scholars. A common understanding is financial literacy to be viewed as having the knowledge, skills and confidence to manage one’s finances well, taking into account one’s economic and social circumstances.  In this regard: “knowledge” means understanding personal financial issues; “skills” means being able to apply that knowledge to manage one’s personal finances, and “confidence” means feeling sufficiently self-assured to make decisions relating to one’s personal finances. It is logical to say that it is plausible that if one manages personal finance well; it is likely that the enterprise finances will also be managed appropriately and hence the growth of the venture.

Entrepreneurial growth is related to effective mobilization of financial and non-financial resources, managing risks, efficient allocation of resources and outshining the competition. This requires specific skills such as debt management skills, savings, record keeping and financial planning competencies which are dimensions of financial literacy. The growth of an enterprise (high, moderate, slow or no growth at all) will depend on several factors, but outstandingly the financial competences of the entrepreneur and those mandated to handle the enterprise are paramount.

The major dimensions of financial literacy explained in this article are financial record keeping, debt management and savings.

Record keeping literacy and growth of entrepreneurial ventures

Record keeping is a basic financial literacy skill. In 2013, Siekei et al., carried out a study on the role of financial literacy on the performance of small and micro enterprises, using a case study of the Equity Group Foundation Training Program. The findings revealed that venture owners and managers scoring high on financial record keeping competence reported improvement in business performance because of improved ability to track business events from the record system.

Also Ezejiofor et al., (2014) found that small and medium ventures in Nigeria that kept proper books of account were in a position to determine the performance of their ventures accurately and measure its financial growth based on the financial records. The study pointed out that ventures with proper record keeping systems stand high chances of growth than others because of the fact that bookkeeping enhances financial planning that helps to predict growth of ventures

Despite common conclusion by many scholars about how record keeping literacy affects the growth of entrepreneurial ventures, record keeping is still a challenge to Youth and women led Enterprises.

Debt management literacy and growth of entrepreneurial ventures

Debt management literacy is a component of financial literacy explained as the ability to make calculated decisions regarding debt acquisitions, usage and how to apply basic mathematical knowledge on interest compounding to everyday financial choices. Debt management literate person has got the knowledge, skills, and information on managing their debts and other financial matters such as possessing knowledge on sources of debt sources, computing principle and interest, understanding repayment schedules, knowledge about management of money and assets; and uses that knowledge and understanding to plan and implement financial decisions.

Several researchers have emphasized a positive relationship between debt management literacy and the growth of youth entrepreneurial ventures. Studies reveal that individuals with less debt literacy are always challenged in issues relating to debt management. In the same line of argument, Fatoki in 2015 carried out a study with an aim of examining the relationship between the level of financial literacy and the probability of being over-indebted, and the level of over-indebtedness of families that seek financial assistance. In the study, it was concluded that financial literacy specifically debt literacy has a significant effect on the growth and probability of being over-indebted.

Mohamad and Lee (2017) in their study about debt literacy, financial experiences, and over-indebtedness specifically looking at knowledge of elements that relate to debt management, such as the knowledge about interest discounting and compounding, the workings of credit cards, and the knowledge about different methods of loan repayment payment (reducing balance or fixed balance method, lump sum or instalment method) and found a strong relationship between debt literacy and both financial experiences and debt loads. The same study revealed that individuals with lower levels of debt literacy take part in the high-cost transaction, incurring higher fees and using high-cost borrowing and this negatively affect the financial growth of ventures these individuals operate. The results imply that entrepreneurs with high debt literacy borrow knowledgeably and use less expensive sources of finance that positively affects growth and business performance.

Savings literacy and growth of entrepreneurial ventures

Several researchers emphasized the increase in savings literacy having a chance of increasing growth of entrepreneurial ventures in various perspectives. The literature suggests that individuals with more savings knowledge engage in activities that minimize business expenditure and achieve a faster rate of business growth (Neha and Singh 2018). In fact, savings minimize unnecessary expenditure in business.

Tuyisenge, Mugambi and Kemirembe (2015) studied the role of financial literacy on savings and loan repayment amongst small and medium entrepreneurs in Rwanda using Urwego Opportunity Bank as the case study. The research was based on 109 small and medium entrepreneurs in Urwego Opportunity Bank. The study concluded that having many smaller enterprises without access to savings and resources to grow their ventures was a wastage of time. The research also showed that financial institution such as banks, microfinance institutions are increasingly reluctant to lend to small-scale entrepreneurs and therefore, they have to rely on their savings knowledge to mobilize resources. Financial literacy savings competences are necessary skills that each entrepreneur needs possess to exploit the power of ploughing back profit saved into the business and achieve a faster rate of growth.

Clearly, financial literacy is a key ingredient needed by entrepreneurs and their managers to make prudent financial decisions. Entrepreneurs should endeavour to enhance their record keeping, savings, and debt management so as to grow their business ventures.

References

Fatoki, O. (2014). The financial literacy of micro enterprises in South Africa. Journal of Social Science, 40(2):151-158 Finance, Planning and Economic Development.

Mohamad Fazli Sabri and Lee May Poh (2017). How Financially Literate is Today’s Youth? International Journal of Asian Social Science, 2017, vol. 7, issue 10, 803-817.

Neha Garg, and Shveta Singh, (2018). “Financial literacy among youth”, International Journal of Social Economics, Vol. 45 Issue: 1, pp.173-186, https://doi.org/10.1108/IJSE-11-2016-0303.

Siekei, J. Wagoki, J &Kagio, A. (2013). An assessment of the role of financial literacy on performance of small and microenterprises: A case of Equity Group Foundation Training Program on SMEs in Njoro District, Kenya. Journal of Economics and Finance September, 2013, vol.1, No,7.

Tuyisenge, Mugambi and Kemirembe (2015). The Role of Financial Literacy on Loan Repayment among Small and Medium Entrepreneurs in Rwanda Case Study: Urwego Opportunity Bank European Centre for Research, Training and Development (ECRTD), UK

Mukokoma & Ssekyewa, 2019

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