202
The Financial Literacy of the Entrepreneurs of Micro Businesses in Sabah
Salmah Topimin1 , Siti Rahayu Mohd Hashim2
1 Entrepreneurship Research and Development Centre (ERDEC), Universiti Malaysia Sabah, Kota Kinabalu, Malaysia
2 Faculty of Science and Natural Resources, Universiti Malaysia Sabah, Kota Kinabalu, Malaysia
_____________________________________________________________________________________________
Abstract: The business survival of micro businesses depends largely on a sound financial management. However, the ability of the entrepreneurs of micro business to use financial knowledge and skills in managing their resources effectively is always being debated. This paper addresses this issue by investigating the level of financial literacy of the entrepreneurs of micro businesses in Sabah and its influence on their financial conduct. The data of this study was collected based on an in-depth interviews with 15 micro business entrepreneurs. This study found out that the majority of micro business entrepreneurs are not familiar with the basic financial terminology and their views on financial literacy are limited to only certain financial activities such as record keeping and seeking for convenient financial resources, thus indicating the low level of financial literacy. In addition, micro business entrepreneurs in this study are unaware of more complex elements of financial literacy such as the need for financial planning system and the use of a right type of finance structure. The lack of financial literacy among micro business entrepreneurs also has caused them difficulty in accessing external financing. This study is significant as it investigates the issue of financial literacy of micro business entrepreneurs from their own perspectives. Therefore, it provides practical relevance to micro enterprises.
Keywords: Financial literacy, micro businesses, micro business entrepreneurs, Sabah
_____________________________________________________________________________________________
1. Introduction
It is agreed by many scholars that micro enterprises are the backbone of many economies throughout the world as they provide skilled workforce, employment opportunity and national income (e.g. Mbonyane & Ladzani, 2011; Ndiaye et al., 2018; White, 2018). Therefore, it is critical to ensure the survival and growth of micro enterprises. Often, entrepreneurs have to make wise business decisions and consider various options that can maximize the outcomes. Within this context, micro business entrepreneurs involved with various tasks which require them to make multiple decision-making activities. Noteworthy is that those activities have financial consequences, thus requiring entrepreneurs to be financially literate (Oseifuah, 2010). It is not uncommon that micro enterprises are confronted with many financial difficulties. Among of the financial problems faced by micro enterprises are related to access to capital, liquidity, imbalance of capital structure and other financial related issues. To properly appraise these issues, micro enterprise entrepreneurs have to understand the key financial concepts (Abubakar, 2015).
However, for micro business entrepreneurs, it is argued that they lack of financial literacy, yet they still have to rely on their limited financial knowledge to handle the financial matters of their business (Fatoki, 2014; Widiyati, Wijayanto & Prihatiningsih, 2018). As a consequence, their business survival is at risk (Wise, 2013). Although the issue of financial literacy is relevant for
203
micro business entrepreneurs, lack of research has been conducted on micro businesses (Gonzalvo
& Avila, 2019). This gap is addressed in this paper and the following research questions are formulated:
• How does micro business entrepreneurs view their level of financial literacy?
• How does their level of financial literacy influence their financial conduct?
This paper is organized as follows: the subsequent section discusses the literature review pertaining to financial literacy followed by a section discusses on the methodological aspect of this research.
The results of this paper is presented in the next section. The paper ends with a conclusion.
Literature review
Financial literacy has been discussed widely as a significant factor that influence the performance and survival of micro businesses (e.g. Dahmen & Rodriguez, 2014; Gonzalvo & Avila, 2019).
However, researchers still have not reached a consensus on the definition of financial literacy and how to measure the financial literacy of an individual (Remund, 2010). Basically, the concept of financial literacy is argued as relevant to individuals in making a sound financial decision, thus it requires the possession of financial knowledge and skills (Widdowson & Hailwood, 2007).
Remund (2010) further expands this definition by adding the element of trust. He believes that the three elements can help an individual in making a responsible financial decisions. Interestingly, Houston (2010) asserts that in order to make financial decisions, an individual must also has the ability and confidence in utilising the financial knowledge. More recent study shows that the term financial literacy is being defined in a more comprehensive way, which comprises elements such as financial awareness, financial knowledge, financial skills, financial attitude, financial capability as well as financial behaviour (e,g. Abubakar, 2015; Gonzalvo & Avila, 2019). However, although researchers use the same element of financial literacy in their research, the sub-elements used in measuring the level of financial literacy could be different. For example, some researchers use basic measures in measuring financial knowledge such as by assessing knowledge on record- keeping, savings, financing and budgeting whereas other researchers use more technical measurement such as on the aspect of taxation, time value of money and investment securities. In this respect, comparing results from different studies is not possible. In addition, if some high level technical measures were to be tested on micro business entrepreneurs, it will place them at a disadvantage position particularly when they are discussed in the entrepreneurship literature as having low level of financial literacy. It is suggested that in the effort to understand the financial literacy of micro business entrepreneurs, it requires researchers to customise the financial literacy understanding according to the business context of SMEs (Mabula, 2016). This issue is addressed in this paper. The investigation of financial literacy of micro business entrepreneurs was conducted qualitatively, thus giving them the opportunity to explain financial literacy based on their business situation.
Previous research shows that financial literacy is significant for business success. Within this context, financial literacy becomes more significant for micro business entrepreneurs particularly when they are characterised as having poor financial knowledge and do not have the ability to make sound financial decisions (Samkin, Pitu & Low, 2014). In this respect, it can be argued that the success of micro businesses depends largely on the financial literacy of the owners. It is believed that the higher the level of financial literacy that entrepreneurs have, the higher the
204
likelihood that the business would survive (Widiyati, Wijayanto & Prihatingsih, 2018). It is argued that by having a higher level of financial literacy, entrepreneurs are more capable in making the right financial decisions that lead to a business to earn higher profit (Gonzalvo & Avila, 2019).
For example, entrepreneurs who are financially knowledgeable know how to regularly review their financial statements and perform financial analysis (Dahmen & Rodriguez, 2014). Therefore, this practice helps entrepreneurs to see the financial strength or weakness of their business and avoid any future financial difficulties. In addition, financial literacy is one of the significant factors that influence firm’s access to external financing. If entrepreneurs are financially literate, they will constantly keeping and producing financial statements, thus improving access to finance (Wise, 2013). In contrast, no lending decisions can be made by financial providers if micro business entrepreneurs do not provide them with relevant financial information needed. Regrettably, not only that micro business entrepreneurs are unaware about financial products that are available for their businesses, they also are not confident to interact with the providers of such financial products and services (Mabula, 2016). In this sense, it can be argued that financial literacy can minimise the barriers to external financing.
Research methodology
The purpose of this study is to investigate the financial literacy of the entrepreneurs of micro businesses. A qualitative research approach which capitalises on in-depth interviews with entrepreneurs of micro businesses was adopted (Creswell, 2014). The use of in-depth interviews helps researchers to understand how entrepreneurs of micro businesses view their level of financial literacy. In this respect, the understanding about and the meaning of financial literacy will be explained based on the experience of participants and not from the researchers’ viewpoints. As a consequence, data collection is subjective and detailed (Rahman, 2017). An interview guide was developed and used during the conduct of in-depth interviews. The
predefined questions in the interview guide are generic in nature; however, researchers have the opportunity to raise additional questions, to probe additional information, to justify previous answers given by participants and to establish connections between topics (Queirós, Faria &
Almeida, 2017). The use of the interview guide was to ensure that all necessary topics are captured and asked in a similar manner for all participants (Bryman, 2015). In this respect, the comparability of data from all entrepreneurs of micro businesses can be ensured while also maintaining the notion of flexibility of qualitative research. In addition, the adoption of qualitative research approach allows researchers to have a bigger focus on understanding the context of the problem (Queirós, Faria & Almeida, 2017). In this respect, it is believed that the financial literacy issue cannot be set apart from the environment in which entrepreneurs is embedded. Therefore, by exploring the financial literacy issue within the contextual situation of the participative entrepreneurs, it is argued that a deeper insights on the issue can be obtained (Shakouri, 2014). In this sense, the meaning of financial literacy refers to the meaning that entrepreneurs of micro businesses hold and not the meaning of financial literacy that researchers bring to the research (Samkin, Pitu & Low, 2014). In addition, since data was collected from a small number of entrepreneurs, it is possible for researchers to have the depth and breadth of knowledge about each participant. As a consequence, any complex issue can be explored and understood easily (Rahman, 2017).
The sample size of this study was determined based on the ‘numerical guidelines’ and the ‘degree of saturation’ point used by previous qualitative researchers (Sim, Saunders, Waterfield &
Kingstone, 2018: 4). The data of this study was collected from 15 entrepreneurs of micro
205
businesses. This size meets the minimum saturation point set by previous qualitative researchers, which is 12 interviews (e.g. Ando, Cousins & Young, 2014; Guest, Bunce & Johnson, 2006) and it provides sufficient evidence of recurring themes. A purposeful random sampling was adopted in this study (Patton, 2014) and the main criterion for the selection of sample is that the businesses are a formal registered business. Since this study was conducted during the Recovery Movement Control Order (RMCO) that is implemented by the government Malaysia to control the spread of corona virus within the Malaysian society, the data collection process has become a great challenge to researchers particularly in obtaining consent from participants to be interviewed. Therefore, researchers have taken two initiatives as an effort to overcome the challenge. First, snowball sampling was used to select samples. A list of micro businesses was obtained from government organisations which provide them with business support programmes. The list was used as a sample frame. Researchers made contacts with a few samples at the beginning of the data collection stage and these few samples suggested the next samples to be interviewed. This method is effective and efficient and can generate trust between participants and researchers as they were suggested by their acquaintances- the first sample group (Naderifar, Goli & Ghaljaie, 2017).
Second, the interview sessions were conducted via telephone. This method is more practical and safe than face to face interviews as it helps to maintain the physical distancing between researchers and participants during the COVID-19 crisis. With the consent of participants, the interviews were recorded, transcribed and analysed under the thematic network approach (Attride-Stirling, 2001).
The analysis process started with the production of codes from the interview transcripts. Based on the codes, the textual data was dissected into text segments to enable the identification of themes that reflect with the research objectives.
Results and discussion Demographics
Out of 15 sample of entrepreneurs of micro businesses, three of them are men and twelve are women. In terms of their age, six of them are below the age of 30, four of them are aged between 31 and 35 whereas five of them are aged between 41 and 50. These age groups indicate that the participants can be categorised as young adults and middle-aged adults. All participants have obtained some level of formal academic qualifications. Nine entrepreneurs obtained university education and six completed their secondary level of education. Therefore, it can be considered that entrepreneurs of micro businesses in this research have a good level of educational attainment.
However, none of the participants had accounting or finance education background.
The demographic profiles of entrepreneurs of micro businesses in this study are shown in Table 1 below.
Table 1: Demographic characteristics of entrepreneurs of micro enterprises Gender
Age group Education level
Below
30 31-35 36-40 41-45 46-50 Above
51 Certificate Diploma Bachelor degree
Master degree
Male 1 1 1 2 1
Female 5 3 3 1 4 2 5 1
Field of study Non accounting and finance
The majority of entrepreneurs of micro businesses (13) are the sole proprietors, while only two of them owned a private limited company. The age of businesses varies from 2 to 12 years. The data
206
reveals that the two oldest businesses in this study are a private limited company, and it is agreed by the owners that the form of their business entity was changed from a simple to a more sophisticated structure once the business is well established in the market. The business activities of micro businesses in this study are related to two type of industries; service (7) and retail (8).
The meaning of financial literacy
To analyse financial literacy of micro business entrepreneurs in this study, their financial knowledge was tested. Micro business entrepreneurs were asked about any financial terms that they are familiar with and their responses are shown in table 2. The finding shows that some micro business entrepreneurs are familiar with financial terms. However, there are also a considerable number of micro business entrepreneurs who are not familiar with financial terms other than the term of profit and loss. Perhaps, this finding reflects on their academic qualification which was not on accounting and finance, implying a high possibility that they are lacking of understanding on the issue of financial literacy.
Table 2: Familiarity of financial terms among micro business entrepreneurs
Financial terms MBEs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T
Debit x x x 3
Credit x x x 3
Costs x x x x 4
Assets x x x x x 5
Profit and loss x x x x x x x x x x x x x 13
Cash flow x x x x x x 6
Liability x x x 3
Balance sheet x x x 3
Break-even point x 1
Interest x 1
Bank loan x 1
Deficit x 1
Financial capital x x x 3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T
However, when micro business entrepreneurs were asked further about the conduct of financial matters in their business, it becomes apparent that they have some basic understandings about financial literacy. First and foremost, micro business entrepreneurs view financial literacy as the ability and capability in handling financial aspect of their business. The use of phrases such as
“capable of” (MBE3), “capable in” (MBE5) and “able to” (MBE2) reflects their conceptual understanding about financial literacy. In this respect, they agree that the success in performing finance tasks requires specific financial ability. In addition, the majority of entrepreneurs in this study conceptualised financial literacy as having financial knowledge. This view can be found in their statements that highlight the importance of financial knowledge such as “know where to get money” (MBE1), “know the process” (MBE3), “know how to calculate” (MBE9) and “know how to control” (MBE15). These findings indicate that micro business owners view financial literacy as related to their competency in managing money and financial aspect, and the effectiveness in performing this task will be depending largely on their financial knowledge. However, since the
207
data in Ttable 2 revealed that micro business entrepreneurs are not aware of the basic financial terminology, there is a possibility that they lack of financial knowledge. The use of financial terminology in determining the financial literacy of micro business entrepreneurs is highlighted in previous research (e.g. Fatoki, 2014; Husin, Salia & Karim, 2018).
Meanwhile, entrepreneurs of micro businesses in this study also view financial literacy from the operational perspective. In this respect, participants share several financial related activities that are currently being practised in their business operation as depicted in Table 3.
Table 3: The meaning of financial literacy from the operational perspective of micro business entrepreneurs
Financial literacy MBEs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T
Financial planning x x x x 4
Financial control x x x 3
Managing working
capital x x 2
Managing financial
resources x x x x x 5
Obtaining financial
capital x x x x x x x x 8
Keeping records of
assets x x x x x x x x x 9
Keeping records of
payment x x x x x x x x x 9
Keeping records of
money received x x x x x x x x x 9
Keeping records of profit being generated (loss occurred)
x x x x x x 6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T
Table 3 outlines different types of financial activities that are viewed by micro business entrepreneurs as reflecting the meaning of financial literacy. Several points can be highlighted from the data. Firstly, the majority of micro business entrepreneurs (9 MBEs) share the same understandings that financially literate is mostly associated with record keeping activities. Within this context, the data revealed that record keeping activities are significant for MBEs particularly in determining the transaction of assets, money as well as profit and loss of their businesses.
Secondly, financial literacy also relates to the activities of managing financial capital which include the identification of suitable financing options for their business. For example, MBE1 clearly stated:
“…financial literacy… for me it is about knowing where I can get money to start and to grow my business. Do I have enough money for the working capital? Do I have enough money to pay for the monthly bills? Do I have money for maintenance… in case my assets break down? So… to answer all these concerns, I must know what the financing options that are available for me are. To do this … I must be financially literate!”
208
Finally, the analysis revealed that most of micro business entrepreneurs in this study do not engage in the financial planning and control activities of their businesses. The data revealed that participants had given less views on these two aspects in explaining their understanding of financial literacy, except for two micro business entrepreneurs who have established their business for more than 10 years (MBE3 and MBE6). MBE3 stated that:
“… how you manage your financial resources and how you utilize them… Are you able to do these tasks? Does your financial planning help you to achieve the objectives that you have set earlier?”
MBE6 added:
“For me … being financially literate means… I’m capable in managing my finance and I know how to evaluate financial statements.”
These findings show that entrepreneurs of micro businesses whom the business is still in a survival stage tend to see financial literacy from the perspective of the financial activities that reflect on their business stage. For micro businesses which are at the survival stage, financial literacy is mostly related to the issue in obtaining capital as well as ensuring a good record keeping for business transactions. This finding supports the argument highlighted by Gonzalvo & Avila (2019) who found that micro business owners tend to give a huge importance on the aspect of record keeping. In contrast, having a formal financial planning and control system becomes more relevant for the micro businesses which are beyond the survival stage as their focus is more on ensuring the long term survival of their businesses. However, the results of this study shows that only a small number of micro business entrepreneurs have shared their views on financial literacy beyond the record keeping aspect. However, the results of this study shows that only a small number of micro business entrepreneurs have shared their views on financial literacy beyond the record keeping aspect. A finding which is also highlighted by Fatoki (2014) who found that most micro enterprises are survivalist, thus they do not engage in formal financial planning, budgeting and control activities.
Financial literacy and access to finance
Table 4 below shows that the majority of micro business entrepreneurs have used their personal money as the main source of financial capital, demonstrating that they rely more on internal than external financing. The data also revealed that seven micro business entrepreneurs had obtained a government loan whereas four micro business entrepreneurs had utilised bank loan. However, it was found that micro business entrepreneurs used a non-business loan from government organisations and a personal loan from banks. Both of these financing can be obtained by any individual and not necessarily entrepreneurs. One of the reasons for the low usage of external financing is due to their unawareness of the different sources of external financing that can be utilised, as they stated: “I have no idea where to apply” (MBE5), “Am I eligible?” (MBE8) and
“I’m not sure where to go” (MBE13). While this findings support the idea on the significance of internal financing for micro businesses (Yuneline & Suryana, 2020), this study also indicates that their lack of financial literacy influences their awareness, understanding and access to external financing (Abubakar, 2015).
209
Table 4: Sources of financial capital
Source of financing MBEs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T
Personal money x x x x x x x x x x 10
Family/Friends x x 2
Government agencies x x x x x x x 7
Bank loan x x x x 4
The data also revealed that micro business entrepreneurs in this study acknowledge the significance of business plan as a tool in accessing external financing. When they were asked about the criteria used in accessing external financing, they agreed on the importance of having a viable business plan. However, they are unsatisfied with their capability in producing a business plan.
For example, MBE15 shows regret through his words:
“… I had prepared a business plan. I planned to expand my market. Unfortunately, my application was rejected. The plan was commented as unrealistic, particularly in terms of the financial projections. But… it was a good experience. Only if I know how to make a good financial projection. I’m now in the process of learning on this aspect. ”
This finding provides another evidence on the impact of financial literacy on accessing external financing as highlighted in previous research. For example, in investigating the financial literacy of micro entrepreneurs, Fatoki (2014) has included business plan as an element that determines financial literacy of micro entrepreneurs, in which, this element will later influence their accessibility to external financing.
Conclusion
The objective of this study is to investigate the financial literacy of micro business entrepreneurs and its influences on the financial conduct of their business. To ensure that the research findings can be a practical relevance to micro enterprises, this study adopts a qualitative research approach to allow micro business entrepreneurs to share their views on the concept of financial literacy and how does the concept relate to their current business operation. This study revealed that micro business entrepreneurs have a low level of financial literacy. Within this context, this study found out that the majority of micro business entrepreneurs are even not familiar with the basic financial terminology. One possible reason for this situation is due to the academic background of entrepreneurs which is not on accounting and finance discipline. However, this study also revealed that micro business entrepreneurs can conceptualise the meaning of financial literacy, although their understanding are limited to only certain basic financial activities such as record keeping of assets, cash and profit and loss. This view is commonly being shared by entrepreneurs who are still in the early stage of their business development. As such, it becomes more apparent that for the young micro businesses, the main concern is in keeping records of business transactions whereas micro business entrepreneurs who have been in business for some considerable years, they have concerns on a more complex elements of financial literacy. What can be concluded from this finding is that the level of financial literacy could be influenced by the complexity of their
210
business activities and the number of years of their business existence. Finally, this study revealed that the lack of financial literacy has caused them to be unaware of and unwilling to access the available external financing that can be used to improve their business capacity. Based on the findings, the issue of financial literacy of micro business entrepreneurs should be acknowledged more seriously by policymakers. One critical way to improve the level of financial literacy of micro business entrepreneurs is to provide them with a comprehensive training programmes. In this respect, it should be acknowledged that any programme to improve financial literacy that works well for small or medium enterprises is not necessarily works for micro businesses.
Therefore, one-size-fits-all approach should be avoided.
Acknowledgement
This paper is part of the research project that is funded by Universiti Malaysia Sabah (Grant number: SDK0200-2020).
References
Abubakar, H. A. (2015). Entrepreneurship development and financial literacy in Africa. World Journal of Entrepreneurship, Management and Sustainable Development, 11(4), 281- 294.
Ando, H., Cousins, R. & Young, C. (2014). Achieving saturation in thematic analysis:
Development and refinement of a codebook. Comprehensive Psychology, 3, 1-7.
Bryman, A., (2015). Social research methods. 5th ed. New York: Oxford University Press.
Dahmen, P. & Rodriguez, E. (2014). Financial literacy and the success of small businesses: An observation from a small business development centre. Numeracy, 7(1), Article 3.
Fatoki, O. (2014). The financial literacy of micro entrepreneurs in South Africa, Journal of Social Sciences, 40(2), 151-158.
Guest, G., Bunce, A. & Johnson, L. (2006). How many interviews are enough? An experiment with data saturation and variability. Field Methods, 18(1), 59-82.
Gonzalvo, Z. & Avila, E. C. (2019). Level of financial literacy of micro-business owners in the municipality of Ragay, Camarines Sur, Philippines. Asia Pacific Journal of Academic Research in Business Administration, 5(1), 1-7.
Houston, S. J. (2010). Measuring financial literacy. Journal of Consumer Affairs, 44(2), 296-316.
Hussain,J., Salia, S. & Karim, A. (2018). Is knowledge that powerful? Financial literacy and access to finance: An analysis of enterprise in the UK. Journal of Small Business and Enterprise Development, 25(6), 985-1003.
Mabula, J. B. (2016). Reviewing financial literacy for SMEs and entrepreneurs in developing economies. International Journal of Science and Research, 5(6), 882-886.
Mbonyane, B. & Ladzani, W. 2011. Factors that hinder the growth of small businesses in South African townships. European Business Review, 23(6), 550-560.
Naderifar, M., Goli, H. & Ghaljaie, F. (2017). Snowball sampling: A purposeful method of sampling in qualitative research. Strides in Development of Medical Education, 14(3), 1-6.
Ndiaye, N., Abdul Razak, L., Nagayev, R. & Ng, A. (2018). Demystifying small and medium enterprises’ (SMEs) performance in emerging and developing economies. Borsa Istanbul Review, 18(4), 269-281.
211
Oseifuah, E. K. (2010). Financial literacy and youth entrepreneurship in South Africa. African Journal of Economics and Management Studies, 192), 164-182.
Patton, M. Q. (2014). Qualitative research and evaluation methods. 4th ed. Thousand Oaks: Sage Publications.
Queirós, A., Faria, D. & Almeida, F. (2017). Strengths and limitations of qualitative and quantitative research methods. European Journal of Education Studies, 3(9), 369-386.
Rahman, M. S. (2017).The advantages and disadvantages of using qualitative and quantitative approaches and methods in language “testing and assessment” research: A literature review. Journal of Education and Learning, 6(1), 102-112.
Remund, D. L. (2010). Financial literacy explicated: The case for a clearer definition in an increasingly complex economy. The Journal of Consumer Affairs, 44(2), 276-295.
Shakouri, N. (2014). Qualitative research: Incredulity toward metanarrativeness, Journal of Education and Human Development, 3(2), 671-680.
Sim, J., Saunders, B., Waterfield, J. & Kingstone, T. (2018). Can sample size in qualitative research be determined a priori? International Journal of Social Research Methodology, 21(5), 619-634.
Samkin, G., Pitu, E. & Low, M. (2014). Identifying the financial literacy skills necessary to run a small New Zealand business. E-Journal of Business Education and Scholarship of Teaching, 8(1), 44-66.
White, S. (2018). Creating better business environments for micro and small enterprises. Technical Report, Donor Committee for Enterprise Development, Cambridge, UK.
Widiyati, S., Wijayanto, E. & Prihatiningsih. (2018). Financial literacy model at micro small medium enterprise (MSMEs). MIMBAR, 34(2), 255-264.
Widdowson, D. & Hailwood, K. (2007). Financial literacy and its role in promoting sound financial system. Reserve bank of New Zealand Bulletin, 70(2), 37-46.
Wise, S. (2013). The impact of financial literacy on new venture survival. International Journal of Business Management, 8(23), 30-39.
Yuneline, M. H. & Suryana, U. (2020). Financial literacy and its impact on funding source's decision-making. International Journal of Applied Economics, Finance and Accounting, 6(1), 1-10.
