CC BY
4СЕКЦИЯ - ЭКОНОМИЧЕСКИЕ НАУКИ SECTION - ECONOMICAL SCIENCES
UDK 658.1
Moroz Karyna
master's degree, National Technical University Kharkiv Polytechnic Institute,
Ukraine, Kharkov
FINANCIAL LITERACY AS A BASIS FOR MAKING EFFECTIVE
FINANCIAL DECISIONS IN SMALL AND MEDIUM ENTERPRISES
Abstract: The article examines the importance of financial literacy (FL) as a foundation for making effective financial decisions in small and medium enterprises (SME). It explores the impact of entrepreneurs' level of financial knowledge on strategic planning, cash flow management, risk assessment, and the utilization of external financing. The article also analyzes challenges faced by SME owners due to inadequate FL, such as errors in capital and debt management, as well as missed opportunities in tax optimization and investment. Additionally, the article discusses government programs and educational resources aimed at enhancing entrepreneurs' financial skills.
Keywords: Financial literacy (FL), small and medium enterprises (SME), strategic decisions, financial management, risk assessment, government programs, business consulting.
INTRODUCTION
In a constantly changing economic environment, entrepreneurs face various financial challenges, such as liquidity management, capital acquisition, and investment opportunity assessment. A lack of financial knowledge can lead to poor decision-making, jeopardizing the stability and growth of the business. Financial literacy (FL) enables entrepreneurs to manage their assets and liabilities consciously, mitigate risks, and improve overall financial performance. It is particularly important to understand that entrepreneurs in the small and medium enterprise (SME) sector often lack specialized financial knowledge, leading to inefficient resource use and negative business outcomes. While large companies can afford financial consultants and analysts, small business owners often rely on their knowledge and intuition. The
absence of proper financial planning, inability to manage cash flows effectively, and lack of skills in financial analysis can become barriers to business growth and development.
The relevance of this topic is due to the fact that increasing FL levels among SME entrepreneurs can not only enhance their ability to make effective financial decisions but also reduce the likelihood of financial crises, improve business sustainability, and strengthen competitiveness in the market. The objective of this research article is to explore the significance of FL for SME and to consider strategies for its enhancement.
MAIN PART. THE ROLE OF SME IN THE ECONOMY AND THE
IMPORTANCE OF FL Enterprises characterized by a relatively small number of employees and lower revenue compared to large companies are defined as SME. They play a crucial role in the economy, driving economic growth and employment. The USA is the country with the most opportunities for SME development. According to data from the USA small business administration (SBA), in 2022, 33,2 million businesses were categorized as SME, accounting for 99,9% of all enterprises in the USA (fig. 1).
33.2
Figure 1. Dynamics of the number of SME in the USA, 2014-2022, millions [1] This trend not only reflects the dominance of SME in the business sector but also highlights their crucial role in job creation and economic stability.
In the context of SME, the role of FL is crucial, as it directly impacts an entrepreneur's ability to manage the business, assess financial risks and opportunities,
and ensure the company's sustainability and growth. Thus, FL is a set of knowledge and skills that allow individuals to effectively manage their finances and make informed financial decisions. For entrepreneurs, FL encompasses not only personal finance but also managerial skills related to budgeting, tax planning, capital, and debt management. This comprehensive understanding allows SME owners to make decisions that optimize cash flow, minimize costs, and maximize revenues, which is essential in a dynamic economic environment.
One significant aspect of FL is the ability to understand basic financial terms and instruments. Entrepreneurs with such knowledge can efficiently use loans, investments, tax benefits, and other available resources to support and grow their businesses. Understanding loan conditions correctly helps avoid unmanageable debt and choose optimal financial products with minimal interest rates. A financially literate entrepreneur knows when it is advantageous to seek external financing for business expansion and when it is better to utilize internal resources. Moreover, knowledge of investment instruments allows entrepreneurs to make informed decisions about capital allocation, evaluating the potential benefits and risks of various investments.
Tax optimization is another critical aspect influenced by FL. Understanding tax legislation and available benefits can significantly reduce tax expenses and improve the company's financial standing. Entrepreneurs who are financially literate are also capable of analyzing their business's financial statements. Understanding documents such as the balance sheet, income statement, and cash flow statement allows for an objective assessment of the company's current state, forecasting financial outcomes, and making informed decisions. Financial analysis enables entrepreneurs to identify business weaknesses, such as excessive expenses or insufficient income, and take timely measures to address them.
Proper cash flow management is one of the primary tasks for entrepreneurs, directly impacting business stability. Improper allocation of funds, insufficient planning of inflows and payments, can lead to liquidity shortages, hindering the business from paying suppliers, wages, or servicing debt in a timely manner. The introduction of FL helps entrepreneurs avoid such problems by understanding the
importance of forecasting and planning cash flows [2]. A business owner who carefully plans their income and expenses can ensure the necessary funds are available at all stages of the company's operations, minimize capital shortage risks, and attract external financing when needed.
Implementing FL directly affects SME owners' ability to make informed decisions, optimize resources, and avoid financial pitfalls. Understanding the importance of this management aspect not only improves current financial performance but also ensures long-term business sustainability and growth. THE IMPACT OF FL ON STRATEGIC DECISION-MAKING AMONG SME
Strategic decision-making in entrepreneurship is significantly influenced by FL, which plays a crucial role in various aspects of business management. This is particularly relevant for investment decisions, which require careful risk and benefit assessment. When planning business expansion, acquiring assets, or entering new markets, entrepreneurs with high levels of FL can objectively evaluate long-term prospects and avoid excessive risks. A well-informed approach to investments allows for balanced decision-making, taking into account not only potential profits but also possible costs and the overall strategic goals of the company.
Financial planning and budgeting also directly depend on an entrepreneur's level of FL. The ability to create accurate and realistic budgets helps reduce the likelihood of unforeseen expenses or cash shortages, which is essential for ensuring the company's financial stability. Such entrepreneurs are better at forecasting revenues and expenses, enabling them to plan activities over the long term and avoid short-term financial issues. This approach helps enhance resource efficiency and optimize business processes. Moreover, FL plays an important in evaluating funding sources. Entrepreneurs with the necessary knowledge can carefully analyze available options, such as bank loans, crowdfunding, venture investments, or issuing shares. This enables them to choose the best financing source based on the company's current needs, risk level, and cost of capital.
Despite the evident advantages that FL offers in decision-making related to financing and business management, many entrepreneurs, particularly in the SME sector, face significant challenges in this area (table 1).
Table 1. Main challenges with FL among SME entrepreneurs [3, 4]
Problems Reasons Effects
Insufficient level of knowledge Lack of basic financial education, lack of time and resources for training. Mistakes in decision-making, deterioration of the financial condition of the business, an increase in the debt burden, the risk of bankruptcy.
Lack of access to training The high cost of courses, the lack of flexible training formats (online / offline). Inability to adapt to changing market conditions, irrational use of resources, inability to improve financial stability and increase profits.
Lack of information about new financial technologies The rapid development of technology, the lack of specialized sources of information for SME. Missed opportunities to attract financing, low work efficiency.
Lack of risk management skills Lack of knowledge about risk assessment methods, difficulty understanding financial forecasts, lack of professional advice. Making risky decisions, inadequate use of borrowed funds, lack of insurance against financial losses, which leads to debts and reduced sustainability
Thus, insufficient FL among SME entrepreneurs is one of the causes of financial difficulties and a barrier to the growth of their companies. To enhance business resilience, it is necessary to pay more attention to financial education, developing risk management skills, and ensuring access to modern financial technologies.
STRATEGIES FOR ENHANCING FL IN THE SME SECTOR A significant factor contributing to the success of SME is FL. In a dynamic market and economic instability, having financial knowledge helps entrepreneurs make well-informed decisions, minimize risks, and enhance business resilience. Various strategies have been developed to increase the level of FL among entrepreneurs.
One such strategy involves government programs that play a crucial role in supporting SME through FL training. Initiatives targeted at entrepreneurs include courses, webinars, and consultations on the basics of financial planning, cash flow management, and investing. These programs can be free or government-subsidized, making them accessible to a wide audience. For example, the SBA actively offers
ХОЛОДНАЯ НАУКА №9/2024
resources and courses to improve financial skills, promoting the successful development of businesses [5]. Specifically, the money smart for small business program, developed in partnership with the Federal deposit insurance corporation, provides SME owners with basic financial knowledge, including cash flow management, taxation, and lending [6].
The creation of accessible educational resources is another effective way to enhance FL. Free or subsidized programs, including online courses, mobile apps, and financial management platforms, allow entrepreneurs to learn at their convenience. These resources are often tailored to the specifics of SME and provide information on current financial issues. The availability of such tools enables SME owners to independently learn the fundamentals of financial management, fostering their growth and competitiveness. An example of such educational resources is the SCORE program, supported by the SBA [7]. It offers free educational resources for entrepreneurs in the form of webinars, online courses, articles, and financial planning tools. These resources help SME owners better understand financial planning, cash flow management, budgeting, and risk assessment.
Engaging professional financial consultants is also an important element in enhancing FL. Consultants assist entrepreneurs at all stages of business development, from drafting business plans to managing debts and attracting investments. These specialists can offer personalized solutions tailored to the specific needs of a business, helping to avoid common mistakes and improve the company's financial outcomes.
Research by the global cloud platform for small businesses, Xero, revealed a noticeable gap in FL among SME owners in the USA. According to their data, 50% of small businesses in the USA face financial difficulties due to insufficient FL. However, companies that have begun to actively use financial tools and work with consultants have improved cash flow management, optimized tax strategies, and increased overall business resilience [8].
The lack of FL can lead to severe negative consequences for SME. Entrepreneurs lacking sufficient knowledge may make mistakes when choosing credit or investment offers, resulting in increased debt burdens and reduced liquidity for the company.
Consequently, businesses face debt servicing issues, which can lead to bankruptcy. A lack of basic knowledge in financial planning leads to inefficient resource allocation, increasing the likelihood of financial difficulties and limiting growth opportunities. Examples of such failures are found in both developing and developed countries, where a lack of knowledge prevents entrepreneurs from effectively managing their businesses.
Therefore, FL is an integral element of successful management for SME. In conditions of economic instability and changing market conditions, entrepreneurs with a high level of financial knowledge can make more informed decisions, manage resources efficiently, and minimize risks.
CONCLUSION
Understanding FP is an essential foundation for effective decision-making in SME. This gives entrepreneurs an idea of important financial processes such as budgeting, cash flow management, risk assessment and attracting external financing. This knowledge allows SME owners to make informed strategic decisions, minimize risks, and strengthen the financial stability of their companies.
In an unstable economic environment, entrepreneurs with high FL levels can adapt to changes, manage debts, and seize growth opportunities. Government initiatives, educational programs, and consultations with professional financial experts play an important role in improving the financial skills of SME owners, which, in turn, contributes to long-term business success. Conversely, a lack of FL can lead to serious financial problems, such as inefficient resource use, planning errors, and debt management issues, increasing the likelihood of bankruptcy. Therefore, systematically improving FL among SME entrepreneurs is key to sustainable growth and competitiveness in this sector.
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