ABSTRACT
The purpose of the study was to examine financial literacy
of small business owners, financial records keeping and enterprise performance
in the Tarkwa-Nsuaem Municipality of Ghana. Financial literacy level and
operating performance of those enterprises as a measure of business economic
performance was examined. In addition, the study examined financial records
kept by small business owners. It was an explanatory study which employed
quantitative methodology and survey strategy. Findings were based on responses
from 120 small business owners, comprising 60 retailers, 30 artisans and 30
food manufacturers. Data was analyzed using Descriptive Statistics, Index Pool,
Chi-square Test for independence, Independent Sample T-Test and Linear
Regression. The study revealed that there is a weak positive correlation
between the financial literacy and performance of small business enterprises.
It came out from the results that most small business owners are confronted
with some complicated financial decisions in running and managing their
businesses. Most small business owners’ lack of knowledge, skill and attitude
to manage the finances of their organization in a professional way poses a
significant obstacle to performance growth of sustainable small scale
enterprises. Finally, it can be concluded that the financial literacy of small
business owners have a significant influence on small business performance.
Developments in the financial markets make financial literacy increasingly
important for financial well-being. Therefore, in order to boost the financial
literacy of small business owners within the municipality, policy makers should
specifically design programs and workshops targeted at further enhancing the
financial literacy levels of these owner-managers.
CHAPTER ONE
INTRODUCTION
Financial literacy plays a major role in the economic
development of the world’s economies. This role is more vital in developing
countries where poverty exist in pandemic proportions. Improved knowledge on
financial issues is key in channeling resources to more productive use and is
an important mechanism for enhancing household income and livelihoods (Atieno,
2001). Increasing knowledge on financial issues helps economic units to take
advantages of economic opportunities that are available. It also reduce the
financial risk and encourage the youth in investing in self-managed ventures.
Lack of financial knowledge has been a major challenge to entrepreneurs across
the world.
Background to the Study
The development of small businesses is considered as the key
condition in promoting equitable and sustainable economic development in
Africa. These small businesses are usually more labour intensive and highly
linked to the local industries; they contribute to skill development in
entrepreneurship and the spread of technology and as a result are very
important in ensuring broad based economic growth on equitable basis (Bahar,
2001). The sector has been the source of livelihood to most of the poor
households in the developing countries. Small Businesses account for over 60%
of GDP and over 70% of total employment in low-income countries, while they
contribute over 95% of total employment and about 70% of GDP in middle-income
countries (Ayyagari, Beck & Demirguc-Kunt, 2003). In Ghana, 85% of the
manufacturing, retailing and artisans’ related employment comes from Small Businesses; they contribute 70% to GDP,
constitute 92% of all businesses and make up 80% of the private sector (Abor
& Quartey, 2010).
In Ghana, a key strategy the government has adopted for
increasing employment and production is to take measures to improve the
capacity of the private sector as a means of accelerating the growth of small
businesses (Adomako-Ansah, 2012). Small business also referred to as one man
business occupy the biggest sector of the employment base and are the bedrock
of the local private sector in Ghana. Successive Governments in Ghana have adopted
various strategies aimed at improving the financial capacity of Small Business
Owners for financial growth, business growth, among others to enable them
increase production and hence employment (Adomako-Ansah, 2012).
Government again realizing the socio-economic importance of
the Small Business Enterprises, set up National Board for Small Scale
Industries (NBSSI) in 1981 as an apex body aiming at building the capacity of
individual business owners for the development of Small Scale industries in Ghana.
It was established in 1985 by an Act of Parliament of the Third Republic of
Ghana (Act 434 of 1981). This was because government viewed the sector as
having the potential to contribute substantially to reducing the high
unemployment rate and contributing to the growth of the economy of Ghana.
Also the introduction of Ghana Alternative Market (GAX) rules
in 2013 by Ghana Stock Exchange with approval from the Securities and Exchange
Commission (SEC) aimed at affording small business owners the opportunity for
securing long term capital, broaden their investor base and provide liquidity
for their businesses. In addition, enterprises may enjoy other incentives
including pre initial public offer (IPO) financing, underwriting and access to a revolving fund to support the cost of raising
capital and deferment of up-front fees.
Small Businesses account for a significant share of economic
activity in Ghana and can play an important role in achieving the Sustainable
Development Goals (MDGs). The sector is characterized by low levels of
financial education and training of the self-employed. Small Business Owners
who are into food manufacturing, retailing, and other processing sectors are
viewed as costly and highly risky entities by the key players in the financial
sector and as a result, many of the commercial banks refuse to grant them
credit. These Small Businesses who could contribute a major role in job
creation and sustainable economic development are therefore marginalized.
Nevertheless, for any financial institution to bind themselves for the
disbursement of loan facility to any organization, they require efficient and
reliable information concerning cash inflow to assess the financial
sustainability of such enterprise. Mutegi and Phelister (2015) affirm that
financial literacy facilitates decision making processes such as payment of
bills on time, proper debt management which improves the credit worthiness of
potential borrowers to support livelihood, economic growth, sound financial
systems and poverty reduction. Furthermore, it provides superior mechanism of
one’s financial future, more effective use of financial products and services,
and reduced susceptibility to overenthusiastic retailers or fraudulent schemes.
The long-term goal for Small Businesses is to maximize their
contribution to the country’s economic and social development with respect to
production, income distribution, employment and the closer integration of
people in the rural areas with the national economy. Ghana Commercial Bank (GCB) recognizing the socio-economic importance of Small
Businesses piloted a financial scheme for retail businesses, food manufacturers
and other artisans to ensure the development of strong and viable small
business enterprises in the country. Interestingly, Barclays Bank Ghana Ltd
embraced the idea and opened a branch in Accra near the Liberation circle to be
solely in charge of small business enterprises (Adomako-Ansah, 2012).
To critically see the cash inflow and outflow of the
businesses concerned, as well as the production of other financial records are
kept and reported accurately, financial knowledge is required to detail out
every single transaction undertaken by the businesses during the period. To
address these issues, an efficient financial knowledge and skill is essential
to business owners of all sizes and type. The financial knowledge will be
beneficial on the day-to-day activities of the businesses.
Statement of the Problem
Some studies (OECD 2013; MOFEP 2012 & Programme for
International Studies Assessment [PISA], 2012) suggest that improved literacy
rates lead to increased financial literacy and eventually financial well-being.
Even though there may be some more fundamental reasons for a business failing
to start or progress, the lack of financial knowledge and skill and lack of
financial records keeping are the most immediate reasons. As a result the
growth of small businesses is weakened. The real problem is the ability to use
knowledge, records and skills to manage financial resources effectively for a
lifetime of financial wellbeing. Lusardi and Mitchell (2011) report that
improved knowledge in financial literacy education is very pivotal in the fight
against poverty.
Financial literacy and financial records keeping have
attracted a wide range of interest from policy makers and scholars over the
years and as a consequence, it is defended that the financial literacy and
financial records keeping should be seen as public policy objective in order to
improve welfare through better decisions making and mitigate the asymmetry
between the final consumer and the financial institutions (Huston, 2010).
These concerns were rapidly expanded to include scientific
community and nowadays, it is noticed a hugged growth of research based on
financial literacy matters, mostly in relation with the financial records
keeping and accurate financial literacy levels, which are seen as indicators to
sustain the need for financial education (Huston, 2010). Another reason for
this recent growth in research is related to the effects of reducing fear
associated with exposing business secret if adequate financial records are
kept.
In a developing economy like Ghana, Small Business
Enterprises play very important roles in the economic development of the
country. Small Business Enterprises may include; retailers, artisans, food
manufacturers, services and production firms, agro-based organizations among
others. In effect, efficient management of these Small Businesses and proper
monitoring of day-to-day transactions of the business requires accurate
financial knowledge, managerial skills and accurate financial records.
The long-term goal for Small Business Enterprises is to
maximize their contribution to the country’s economic and social development
with respect to production, income distribution, employment and the closer
integration of rural areas with the national economy. However, the system put
in place by most Small Business Enterprises does not provide the
necessary guidelines and procedures for proper financial records keeping.
Improper financial records keeping by Small Business
Enterprises may result in over or under estimation of profit. In spite of the
proliferation of such businesses in Ghana, Ghana Revenue Authority (GRA) still
report low domestic tax generation from Small Business Enterprises. For this
reason flat rate or tax stamp was introduced by VAT authorities in February,
2005, to regulate a realistic tax from the Small Business Enterprises (Abor,
& Quartey, 2010).
It is in view of these issues raised by the government and
other financial institutions that has called for this research to find out why
the owners of the small businesses are not ready to ensure that proper
financial records are kept. Also, the major research done so far is mainly
focused on firms, leaving a gap for the analysis of the levels of financial
literacy among small business owners (Adomako & Danso, 2014).
The link between financial literacy of small business owners,
financial records keeping and the performance of enterprises is of immense
interest from the policy viewpoint in many nations and investment communities.
The performance of Small Business Enterprises may be correlated with financial
literacy level. Thus the two vital questions from empirical viewpoint are
whether financial literacy of small business owners and performance are in any
way related, and if so what is the kind of relationship. Secondly, whether the
financial literacy of small business owners influence the real variables in a
considerable manner and again if so, what is the kind of correlation?
In many developed economies financial literacy controls the
real sectors massively but in the Ghanaian context financial literacy appears
rather superfluous in this respect. This is due to the fact that the boundary
conditions are less examined in a developing country context. Conversely, over
the period of time; governments and other stakeholders’ involvements have
attempted to discount such “bull effect” and have made positive contributions
in the performance of Small Business Enterprises. This drive is prompting a
thorough study to delve into the questions posed above (Abor & Quartey,
2010).
Financial literacy is important for individuals and investors
because it will enable them understand and master financial products and
services. Atkinso and Messy (2011) suggested that the low level of financial
literacy of individuals and investors was one of the causes of the recent
financial crises. Lusardi and Mitchell (2011) add that individuals need
financial skills to survive in today’s volatile economic environment. This is
because less financially literate individuals are less likely to make good
financial decisions, less likely to keep financial records to manage customer
and vendor account and more likely to have more costly debt. It stands to
reason that the performance of an enterprise depend on the financial literacy
of the owner.
Considering the importance and contributions of small
business enterprises to the national economy and the little attention that
scientific community has given to the measurement of financial literacy levels
among small business owners in the developing economies, the study is
fulfilling the gap by assessing the financial literacy among small business
owners in the Tarkwa-Nsuaem Municipality in the Western Region of Ghana. Also
whether the results would be correlated with actual performance of
the Enterprises, as a measure of the business economic performance.
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