BUILDING CAPITAL:

FINANCIAL
LITERACY
EDS121
 INTRO

• We are in the age of start-ups, and hundreds of new ventures open almost every day. The Nigerian start-
up market is one of the largest and the fastest growing markets in Africa at present. With many new
ventures emerging, the scope of the market seems promising.
• As Nigeria is the most populous country in Africa and the largest economy with estimated GDP of
N400 billion, raised N55.37m in Q1 2020 for start-ups, strengthening the country’s position as the
largest startup ecosystem in Africa, amidst intensifying competition from countries like South Africa
and Kenya.
• On one hand, these numbers are a clear indication of the Nigerian market flourishing with more
business opportunities, and new avenues becoming increasingly prominent, .
• While on the other hand, it also means a tighter competition and race to be in the top tier of the business
world.
 INTRO
• Entrepreneurs form the backbone of all successful economies globally since they are considered as the
vital source of economic growth in the provision of employment opportunities, eradicating poverty
and contributing to the development of gross domestic product (GDP) of both developed and
developing countries .
• Nevertheless, financial literacy remains a subject of discussion across developed and developing
countries including Nigeria On one hand, these is a clear indication of the Nigerian market
flourishing with more business opportunities, and new avenues becoming increasingly prominent, .
• While on the other hand, it also means a tighter competition and race to be in the top tier of the
business world.
 INTRO
Research as shown that there are various reasons for new start-ups failing such as
• no market need,
• running out of funds,
• no or impractical business models,
• unable to withstand competition,
• lack of funds and resources,
• unskilled workforce, incorrect forecasts,
• mismanagement of finances –
• but sound financial capability and poor planning emerged as the top cited reasons across all sectors
 DEFINITION OF FINANCIAL LITERACY
• The low levels of financial literacy of entrepreneurs can restrict SME’s ability to grow and achieve outstanding
stable results. With not more one-half of SME’s surviving the first five years of their operation and just few
develop into established innovative firms with outstanding performance.
• Poor financial management knowledge constitute one of the major reasons for SME’s failure which could
hinder them from accessing financial loans from institutions and investors, This calls for why entrepreneurs
must be adequately armed with financial management knowledge and skills to manage the enterprise
successfully.
• According to Remund (2010) In business, financial literacy is the degree to which one understands important
financial concepts and possesses the capacity and confidence to handle funds of appropriate, brief period
decision-making and solid long-term financial forethought.
• Several researchers have defined financial literacy in different ways in the area of personal finance and most of
the time failed to capture the entrepreneurial manager and the business persons.
 WHAT IS FINANCIAL LITERACY
Financial Literacy is the ;
• Entrepreneur’s ability to comprehend and analyse financial information and act
• Entrepreneur’s ability and financial decision-making aspect
• Entrepreneur manage and strategize financial knowledge, which significantly affect decision making
behaviours, knowledge and attitudes, concerning sound decision making and eventually achieving
business performance.
• Financial literacy enables entrepreneur to make effective decisions on utilization of financial products
and services.
• Is the degree to which the entrepreneur is able to make effective decision on the utilisation and
management of money long-term financial planning.
• Is one of the critical managerial competencies in entrepreneurial business performance and growth
 CON’T

• Financial literacy has been listed as one of the critical managerial competencies in entrepreneurial
business performance and growth
• Scholars mostly agreed that entrepreneurs, irrespective of their age, are systematically involved in
decision-making activities regarding procurement of resources, distribution and utilization, such
activities virtually have financial consequences and therefore, in order to be effective, entrepreneurs
must be financially literate.
• Financial literacy helps to provide entrepreneurs with financial knowledge necessary to make
households budget, initiate savings plans and acquire financial knowledge and skills to meet their
financial goals.
 CLASSIFICATION OF FINANCIAL LITERACY
Financial literacy can be classified into five categories based on various definitions namely:
• Knowledge of financial concepts
• Ability to communicate about financial concepts.
• Aptitude in managing personal finances
• Skill in making appropriate financial decisions
• Confidence in planning effectively for future financial needs.
This shows that a financial literate entrepreneur is someone who knows what are the most suitable
financial and financial management options for his or her business and have at various growth stage of
the business knows where and how to obtain the most suitable financial product/services to meet the
goals of his enterprise.
 IMPACT OF FINANCIAL LITERACY ON BUSINESS PERFORMANCE

• Scholars mostly agreed that entrepreneurs, irrespective of their age, are systematically involved in
decision-making activities regarding procurement of resources, distribution and utilization, such
activities virtually have financial consequences and therefore, in order to be effective, entrepreneurs
must be financially literate.
• 1) equip individuals with financial knowledge necessary to create household budgets, initiate savings
plans, and make strategic investment decisions
• (2) facilitate the decision making processes such as payment of bills on time, proper debt management
which can improve the credit worthiness of potential borrowers to support business performance.
• (3) enables investors to evaluate and compare financial products, such as bank accounts, saving
products, credit and loan options, payment instruments, investments, insurance coverage, so as to
make optimal decisions
 IMPACT OF FINANCIAL LITERACY ON BUSINESS PERFORMANCE

• 4) It ensures that entrepreneurs ultimately achieve financial wellbeing.

• 5) Helped in new venture survival as adoption of financial tools such as financial statements and
ratios helped in loan repayment and decreased likelihood of new venture failure.
• 6) It improves utilization of financial forces because literate entrepreneurs are more likely to utilize
and access financial services which help to improve the performance of their business
• 7) Financial literacy has a positive influence on the competence of an entrepreneur thus increasing his
forecasts of financial attachment into the social economic mainstream by increasing the possibility of
his profits and an increased functioning capability and performance of the business.
Thus, financial literacy education provides an individual with the ability to recognize commercial
opportunities, knowledge, self-esteem and skills, hence improving his business performance and help to
achieve positive economic result.
 COMPONENTS OF FINANCIAL LITERACY

Financial literacy consist of three main pillars as financial knowledge, financial attitudes and financial
behaviours according to Schuhen (2014).
Financial Knowledge : Knowledge is about understanding exactly how business performance and
business situation are measured by the psychological model to ease, strengthen, or enhance decision
making.
There is a link between financial literacy and low-cost borrowers, as most high cost borrowers show very
low levels of financial literacy, lack knowledge of basic financial concepts, which affect their business
performance level. It has been established that, the field of individual actions affects the financial
literacy level and individuals that invest in financial awareness have a higher level of financial literacy.
Financial literacy is equally an important determinant of stock market participation, as individuals with
more financial knowledge are more likely to engage in a wide range of recommended financial practices.
 COMPONENTS OF FINANCIAL LITERACY

Financial Behaviour:
An entrepreneur with best financial behaviour may results in improving business performance and
financial wellbeing. Financial behaviour provides information about the extent to which entrepreneur’s
take responsibility for business finances and budgeting.
As financial behaviour is one of the critical managerial competencies for entrepreneurial business
performance and growth, as it aids the decision-making process such as prompt bills payment and
appropriate saving, debt management, book keeping and business planning which help entrepreneurs to
improve their business performance, while at the same time improving economic development, sound
financial systems and poverty reduction.
Financial literacy is significantly linked to financial behaviour such as book keeping, savings, cash
management, debt management and investment decisions that maximizes benefits for entrepreneurial
business owners (ACCA, 2014).
 COMPONENTS OF FINANCIAL LITERACY

Financial Attitude:
Financial attitude is the process of applying financial principles in order to create and uphold value through proper
decision making and resource management. Financial attitude is enhanced through obtaining appropriate
information
Financial literacy can be improved through the realisation of the right financial attitude in terms of risk management
and diversification. And equally, attitudes like the risk management and investment diversification may improve
the business performance of the entrepreneur. For example, research as shown in Nigeria that majority of the micro
enterprise owners do not have insurance policy to cover their business in time of hazard which in turn affect their
business performance negatively. This shows that the attitude of entrepreneurial business owner also plays a
significant role in determining business performance based on risk management strategy.
Financial literacy is significantly linked to financial behaviour such as book keeping, savings, cash management,
debt management and investment decisions that maximizes benefits for entrepreneurial business owners (ACCA,
2014).
 CONCLUSION

Financial literacy is an important part of entrepreneurship, business may have a tendency of having very
high growth but nevertheless, they are more likely to go out of business or remain stunted due to
institutional and financial literacy complications.
Financial literacy is a significant key driver of business performance and therefore should be developed
as an inbuilt part of the business activities. Therefore, entrepreneurs should know and manage the
educational process of finance management.
Entrepreneurs should take a more complex assessment of how and why financial knowledge, financial
behaviour and financial attitude affect performance outcomes of entrepreneurial business operating in a
less developed market.