Final Paper

1

IMPACT OF FINANCIAL LITERACY ON SME’S

Impact of Financial Literacy on the Performance of Small and Micro Enterprises (SMEs)

Antionette Johnson, Leslie Herndon, Terese Denton

Saint Leo University

Analytics for Decision Making DBA 740-DBOL1

Dr. Tomi Wahlstrom

7/23/2023

Students Signature: Antionette Johnson, Leslie Herndon, Terese Denton

Introduction

Small and medium-sized businesses (SMEs) promote broad-based growth in competitiveness and entrepreneurship and provide economic benefits, including innovation and increased productivity. SMEs significantly impact employment, output, and the resuscitation of the global and national economies in both developed and developing nations (Esiebugie et al., 2018). However, many SMEs need help managing their finances effectively, leading to limited growth and sustainability. The challenge of financial management would be due to a need for financial literacy skills. Entrepreneurs who run SMEs require financial literacy to enable sustainable growth and development of the SMEs. Therefore, this proposal examines how financial literacy affects SMEs' performance. 

Problem Statement

Financial literacy is crucial to the growth and success of small and medium-scale enterprises (SMEs). It has been a focus and concern of economists, governments, and firms (Eniola et al., 2015). Financial literacy is the ability of an entity to manage and grow its resources during a defined period of time (i.e., fiscal year, 3-year financial plan). It is about making the correct decisions in relation to cash, investments, inventory, and other short- and long-term assets. It is about strategically planning for growth and even more difficult times through reserves and other liquid assets. 

A problem for SMEs is that they need financial knowledge to grow and sustain their enterprises (Eniola et al., 2015). The issue can stem from the financial staff's need for knowledge, skills, and ability to make effective decisions that will strengthen the enterprise. This study will compare (1) years of financial l training, (2) education level, and (3) mentorship to revenues and profits of SMEs. The goal is to determine if revenues and profits are higher in enterprises where these three factors are a focus of leadership in hiring and retaining a financial team for the entity. 

SMEs are an essential part of the gross domestic product and a leading place of employment for many people (Nunoo & Andoh, 2011). They are an essential part of the business enterprise in many industries, and their success is vital to the future of a stable economy. Their financial literacy is essential to their ability to secure loans, make lucrative investments, and continue to thrive. Financial literacy begins early in life for those in finance positions; it should be taught in high schools or earlier to enhance decision-making (Hussain et al., 2018). "Financial management knowledge is recognized as the core resource that aids effective decision-making by owners of SMEs (Hussain et al., 2018)."

Data Collection

The objective of this proposal is to find out the impacts of financial literacy on SMEs' performance. The study will collect 50 observations from 50 SME owners and managers in various industries. First, the SMEs will be chosen from various industries and geographical areas using a stratified random sampling technique. By doing so, it will be possible to ensure that the sample reflects a wide variety of businesses and that the results can be applied to the entire SME population. In order to choose a representative sample from a large population, Iliyasu & Etikan (2021) reveals that stratified random sampling is one of the best sampling methods to use. Typically, the method entails segmenting the population into subgroups or strata following particular traits or qualities pertinent to the study question. A random sampling technique, simple random sampling, is then used to sample each stratum separately.

Similarly, SMEs are numerous and diverse, and for one to achieve a representative sample whose results could be generalized, adopting stratified random sampling would be the best. Secondly, a structured questionnaire will be developed for the managers and individuals owning SMEs to collect data on financial literacy levels and business performance metrics after sampling. Data that will be collected concerning financial literacy includes

· the years of training in financial management,

· years of formal education of the SME owner or the manager, and

· years of business mentorship.

Training in financial management will focus on assessing whether the SME owner or the manager has been trained and have knowledge of financial statements, budgeting, and financial planning. More specifically, the study will focus on the period in which the training was taken. In addition, the years of schooling that the owner or the SME manager have and the period with which the individual has been under business mentorship. 

On the other extreme is the data on the performance of the business, which will be obtained by getting the average sales revenue and the profits obtained by the SMEs annually. The questionnaire will include open-ended questions to gather actual quantitative figures. The survey will be conducted through the drop-and-pick method for the respondents, which could be easily accessed, and through mailed questionnaires for them that would not easily be accessed. The sampled respondents will be contacted, and the questionnaires will be sent or mailed to them for reply. The group members shall follow up with the respondents to ensure a higher response rate.

Model Formulation and Selection of Software Tools

Multiple regression analysis will be employed in the study to examine how financial literacy affects SMEs' performance. Multiple regression analysis is a statistical technique used to understand how multiple predictors or factors simultaneously influence the outcome of interest (Keith, 2019). Financial literacy will be the independent variable in the model, including the years of training in financial management, years of formal education, and business mentorship. On the other hand, financial performance metrics will be the dependent variable, including the business revenues and profits. The study will pinpoint important SME success variables by examining the links between financial literacy and performance measures. The model could be given as follows:

 

Y = βo + β1X1 + β2 X2 + β3 X3 + ε     

Where: Y = SMEs performance shown by revenue or profits

               βo = Constant

X1 = years of training in financial management

              

X2 = years of formal education

              

X3 = years of business mentorship

               

ε = Error Term

β1 β2 β3 = Regression Coefficients for financial literacy levels the Independent Variable

The study will employ SPSS (Statistical Package for the Social Sciences) software to analyze multiple regression and manage the data. The regression is appropriate to assess the association between financial literacy and SME performance, and SPSS software provides powerful statistical tools for analyzing and interpreting complicated statistics (Sarstedt et al., 2019). The software's user-friendly interface makes it easy to manipulate data, visualize it, and test hypotheses, resulting in accurate and thorough data analysis. In a nutshell, this proposal aims to assess how financial literacy affects SMEs' performance. The study intends to contribute to creating targeted policies and programs that enable SMEs to make informed financial decisions, ultimately resulting in their growth and sustainability. 

References

Esiebugie, U., Richard, A. T., & Emmanuel, A. L. (2018). Financial literacy and performance of small and medium scale enterprises in Benue State, Nigeria.  International Journal of Economics, Business and Management Research,  2(4), 65-79.

Eniola, A., Entebang, H., & Law, K. (2015). Financial literacy and SME firm performance. International Journal of Research Studies in Management, 5. https://doi.org/10.5861/ijrsm.2015.1304

Hussain, J., Salia, S., & Karim, A. (2018). Is knowledge that powerful? Financial literacy and access to finance: An analysis of enterprises in the UK. Journal of Small Business and Enterprise Development, 25(6), 985–1003. https://doi.org/10.1108/JSBED-01-2018-0021

Nunoo, J., & Andoh, F. K. (Eds.). (2011). Sustaining Small and Medium Enterprises through Financial Service Utilization: Does Financial Literacy Matter? https://doi.org/10.22004/ag.econ.123418

Iliyasu, R., & Etikan, I. (2021). Comparison of quota sampling and stratified random sampling.  Biom. Biostat. Int. J. Rev,  10(1), 24-27.

Keith, T. Z. (2019).  Multiple regression and beyond An introduction to multiple regression and structural equation modeling. Routledge.

Sarstedt, M., Mooi, E., Sarstedt, M., & Mooi, E. (2019). Regression analysis.  A concise guide to market research: The process, data, and methods using IBM SPSS Statistics, 209-256.