Financial Literacy Impact on Small-Medium Enterprises Development and Sustainability in Indonesia
Seth Rajendra Nugroho Sembiring1,2*
1 School of Business and Management, Bandung Institute of Technology, Bandung, Indonesia
2 Faculty of Business, Law, and Politics, University of Hull, Kingston Upon Hull, United Kingdom
*Corresponding Author: [email protected] Accepted: 15 December 2022 | Published: 31 December 2022
DOI:https://doi.org/10.55057/ajafin.2022.4.4.3
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Abstract: Small-medium enterprises (SMEs) in Indonesia are becoming the pillars for the future of Indonesia's economy. Hence SMEs need to thrive and survive in the business world.
This research aims to examine the correlation between financial literacy and the sustainability of small-medium enterprises in Indonesia. Financial literacy in Indonesia is low, and it is not considered an essential factor for the sustainability of SMEs. Although the financial literacy percentage in Indonesia is still low, this does not mean that every SME owner in Indonesia is financially illiterate. A qualitative study will be used to process the data. Data are collected through in-depth interviews of 7 SME owners in Indonesia. which then are analyzed qualitatively using the Nvivo application. It is shown that there is a correlation between financial literacy and the development and sustainability of the SME. The findings in these papers are essential information for business people and SME owners in Indonesia that being financially literate significantly impacts their businesses.
Keywords: Small Medium Enterprises, SMEs, Financial Literacy
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1. Introduction
1.1 Rationale
Literacy is something that people always take for granted. Literacy has contributed to our society nowadays. Researchers have developed two significant theories for literacy. One approach that will be the basis of this research is that literacy presents “as an autonomous, independent skill that proceeds along a predictable evolutionary path” (Foley, 2019). Literacy has sometimes been misunderstood as a skill only used in reading and writing, but it is more than that since literacy has many types. Those types are Civic literacy, digital literacy, health literacy, legal literacy, financial literacy, and many more (Lynch, 2019). One literacy skill necessary for economic development and survival as an individual is financial literacy.
Financial literacy is defined as an ability to understand and be used in personal financial matters (Fernando, 2021). This is a foundation for each person’s relationship with financial management, investing, and budgeting. Many people have gone through the hard road in understanding financial literacy. Being financially illiterate means that the person is most likely to make a wrong financial decision. They did not have long-term budgeting and sometimes even fell into unsustainable debt (Fernando, 2021).
Financial literacy is sometimes confused with the ability to read and know a thing or two about money. In the conceptual definition, Financial literacy is more than that. One can manage personal finance, short-term and long-term, amid era and economic changes (Remund, 2010).
The definition emphasizes the word’ ability,’ which one can use to improve one’s well-being financially in any method, shape, or form (Remund, 2010). If one’s well-being financially is getting better, it will affect the country’s economy. Hence the researchers are taking Indonesia as an example for this research. Aiming to find whether there are a connection and correlation between financial literacy and the development and sustainability of SME in Indonesia
1.2 Problem Statement
Indonesia has experienced significant population growth over the past year, growing steadily at approximately 1.1% each year (Worldbank.org). With 273,523,621 total people, there are 62 Million registered SMEs. In other words, 1 of every 5 Indonesian owns an SME (Tirta, 2021).
OJK conducted a survey. Sadly only 38.03% are financially literate (Prasidya, 2020). Financial literacy has become the biggest obstacle to financial inclusion. The financial inclusion rate in Indonesia is still low at 76.1% (Wirjawan, 2020). This means that a quarter of the Indonesian population still does not have access to financial products and services that can meet their financial needs, which can cause an unstable economic and financial state for the individual and Indonesia as a whole.
According to the world economic forum, “Indonesia’s small business will be an essential driver of the country’s future development” (Tirta, 2021). As of now, Indonesia’s economic development is heavily dependent on SMEs. These SMEs account for virtually 56% of businesses in Indonesia and 97% of domestic employment (Wirjawan, 2020). Although the number of SMEs in Indonesia is high, 98% of those SMEs are microscale which needs further development. Early-stage SMEs lack a strategic growth plan, do not realize their full potential, and do not have the financial attitude or capacity to grow their business to further stages (Tirta, 2021).
A classic problem that usually occurs in SMEs is poor credit risk management. Even though the Indonesian banking system has improved from the previous monetary crisis, most banks still charge higher interest rates than larger firms. It causes 93.5% of SMEs to fund their business using their own money and not loans from the bank (Wirjawan, 2020). The information about finance that SME owners have is still low, which causes their development to stall, and their sustainability is questionable. The loan percentage given to SMEs is still relatively low despite the promotions of banks supporting SMEs. Out of all the loans that are distributed to businesses, only 19.68% are distributed to SMEs (OECD.org). Considering the vast number of SMEs in Indonesia, the percentage may seem small, but the percentage has been growing since 2014; simultaneously, non-bank source of SME financing also increases each year. The outstanding loans grew by 6.7% in 1 year (OECD.org) . Even though the interest rate for non- bank sources is higher, SME owners still choose them over a bank that has a lower interest rate.
Surprisingly the non-performing loan for non-bank sources is lower than the banking firms.
This phenomenon is interesting because SME owners still choose non-banking financing despite the higher interest rate and stricter rules and still perform better than banking financing (OECD.org)
1.3 Research Question
1) What are the major financial literacy aspects that contribute to the sustainable development of small-medium enterprises in Indonesia?
2. How does financial literacy affect the financial attitude of small-medium enterprises in Indonesia?
3. Does financial literacy provide the tools to build sustainable and developed small-medium enterprises?
1.4 Research Objectives
This research seeks to discover the relationship between financial literacy and small-medium enterprises' development and sustainability in Indonesia.
1.5 Scope and Limitations
In the strict timetable and limited resources of the researcher. The researcher will only interview 7 SME owners. Questions asked will be in-depth, since the researcher wanted to dig deep and find enough information to answer the research question
2. Literature Review
2.1 Financial Literacy
Financial literacy is a must-have skill in the modern economic system. Whether starting a new business or SMEs, it becomes a tremendous potential resource for the business and SMEs to develop and have sustainable growth (Hussain et al., 2018). Not only in business aspects, but research also shows that if financial literacy improves, it will increase the financial activities that will benefit all people and the nation (Xiao et al., 2017). Lusardi and Mitchell mentioned that financial literacy is known as the force in SMEs' economic development and financial stability and is also needed for financial competence within the SME (Lusardi & Mitchell, 2011). Financial literate people are participating more in the financial market. One of the prominent examples is borrowing money for their business (Entebang & Eniola, 2015).
Inadequate financial knowledge can result in ineffective financial decision-making for the firm.
Lack of knowledge creates a barrier for the SME to grow; in other words, a lack of financial literacy is harmful to the SME (Joo & Grable, 2000).
Entrepreneurs with higher comprehension of financial education are more profound for the firm's innovation (Song et al., 2011). Better decision-making between trade-off risk and return is more profoundly found in financially literate entrepreneurs. Thus, they can recognize the better financial payoff from investments (Liu et al., 2020). Innovation within the SME will keen to happen often since greater awareness is achieved, revealing that long-term focus for the business is the main priority (Illmeyer et al., 2017).
Financial experience creates a bridge between knowledge, skills, and financial literacy. It affects behaviors and competency (Dewi et al., 2020). Financial literate business people are able to understand credit, utilize bank credit systems, understand the investment, and create and manage budgets. Lacking in this area will trap business people in financial problems (Lusardi
& Mitchell, 2011).
Organizational decision-making has never been more prominent in this modern age.
Accordingly, being financially literate has become the most critical factor. Financial literacy organizations or firms have a more significant chance to employ financial management practices that can boost their sustainability and development (Jianmu, 2019). Financial attitudes have seemingly improved with each individual being financially literate. The decision that each person makes in dealing with investment and financial risk has been the key to each person's sustainability (Jianmu, 2019).
2.2 Financial Attitude
Previous research indicates that a high level of Financial literacy has an impact on making the correct financial attitude for their business (Lusardi & Mitchell, 2011). Furthermore, a higher level of financial literacy increases access to financial resources and information, thus affecting their financial attitude (Van Auken & Carraher, 2013). Improving physical access and feasibility to financial resources affects SMEs financing easier, improving their business performance (Hussain et al., 2018). An excellent financial attitude will give people a good risk management ability, ability to examine influential factors, financial proficiency, and assessment credit (Entebang & Eniola, 2015). Long-term investment and savings will be triggered by the SME's long-term vision (Entebang & Eniola, 2015). Decision-making regarding SMEs is focused on maintaining their competitive advantage. Resources allocated for the SME are calculated beforehand to boost the SME performance (Morgan et al., 2004). Higher financial literacy will also improve the recognition opportunities to develop contact with external financial resources such as banks, venture capitalists, etc. (Deakins & Freel, 1998).
Financial attitude links with awareness and knowledge, understanding the components of business markets and products such as the value of money, savings, investment, assets, etc (Dewi et al., 2020). Awareness is deemed one of the critical elements needed to create financial stability, which eventually will influence financial attitude (Khan, 2015). Lack of financial awareness will result in implications for understanding product knowledge and are able to have a harmful impact on investment and decision making (Dewi et al., 2020).
2.3 Technological Innovation
High financial literacy improves the ability to increase the use of new technologies and increase business knowledge through external help (Soto et al., 2021). Comprehension of innovation becomes more critical, and innovative ways to solve modern problems are opted to become the solution for the sake of the SME relevance in today's age (Garcia et al., 2021).
The rapid development of technology became a double-edged sword for developing countries such as Indonesia. Finance is now associated with technology, which is known as FinTech. The development of FinTech has created more gaps between the financially literate and the illiterate.
(Sophia, 2021). In developing countries, the gap has always been high, caused by the lack of awareness that each individual has. Each individual needs to understand the basic terms such as budgeting, retirement planning, insurance, and many more. Lacking this basic understanding will hinder people from becoming literate (Mokhammad et al., 2020).
The use of technology information for SMEs is to develop managing competencies and information gathering and can reduce transaction costs (Mabula and Dong, 2018). The use of technology has been prevalent for the firm's success and offers a crucial path to financially literate management (Mabula & Dong, 2018). Electronic records of the business are processed in a digital format, made available, and kept for future reference (Mabula & Dong, 2018).
3. Methodology
3.1 Data Collection Method
Qualitative research is the research approach appropriate to obtain all the information and data needed for this research. Qualitative research is suitable because it can observe the phenomenon of social and or human problems (Creswell, 2013). Qualitative research provides a broader scope in data collection; multiple data sources are possible (Creswell, 2013). It also helps in terms of inductive data analysis, where the researcher can build recurring themes and patterns
from the collected data, which is crucial in determining whether financial literacy has an impact on each SMEs sustainability and development.
Primary and secondary data collection will be utilized in this research. The majority of the data collection will be from an interview with the SME owners. SME owners are chosen as the interviewees since the researcher recognized that the interviewee must be in a high position in the SME to obtain the data related to the question. Therefore the best option for the interview to be conducted is with the SME owners.
Interviews will be conducted in a structured settings. Each question are designed by asking a particular issue that will be useful in answering the variables in this research.
3.2 Research Settings
This research will focus on Indonesian SMEs. 7 SMEs have been selected since the researcher has previously observed and has a relationship with each SME owner. The owner of the SME will be the main focus since the data collected will be from those owners. Interviews will be conducted online via Zoom or Google meet. Seven interviews will be undertaken in a time span of 20 to 40 minutes. These interviews will be conducted in Bahasa Indonesia to eliminate language barriers and prevent misunderstandings for each question; since English is not the interviewee's first language. Each interview will be audio recorded for the ease of the researcher transcribing and translating the interview answer to English.
Questions asked are semi-structured questions and open-ended questions. An open-ended question aims to observe the patterns between each interview and find similarities between their answers. Questions that are asked will relate to the main points of the literature review: financial literacy, financial attitude, technological innovation, and effects on SMEs. Questions are designed to analyze the mindset and the reasoning of the interviewee. We also observe the interviewee's opinion and perspective on the particular issue of the effect of financial literacy on SMEs. Post-interview, observation will be conducted further to understand the phenomenon better (Creswell, 2013).
Secondary data collection will be conducted through internet research, case studies, and newspaper articles. Most of the secondary data will be based on case studies. The scope of the case studies is not limited to Indonesia only. Financial literacy studies will be the main focus of the secondary data collection. It mainly focuses on finding the similar pattern that the primary data produced. A case study will be the most suitable for secondary data collection since previous researchers have analyzed the effect of financial literacy in SMEs over the years.
3.3 Data Analysis Method
Data will be analyzed using computer-assisted qualitative data analysis software (CASDAQ) and manual methods. Using the computer-assisted method, the researcher will utilize Nvivo software.
Nvivo is a suitable option for utilizing qualitative data because it eases the research process of finding patterns and codes within the transcript (Zamawe, 2015). Nvivo works with any research design and approach; and allows the researcher to add code to find a particular pattern that could be missed if done manually (Zamawe, 2015). Finding patterns is made accessible because of its auto coding. The researcher can easily find recurring themes, patterns, and interpretations in a small amount of time (Zamawe, 2015).
There are four Nvivo code categories that the researcher made. These codes are created and will be grouped based on each participant's answer. Since each question are designed to find the pattern on these four codes, the researcher can then group them efficiently. The four codes that are used on the Nvivo application are effect on SME, financial attitude, financial literate, and technological innovation. Each code is then divided again into another specific category.
Effect on SMEs is divided into two distinct categories, while financial attitude is divided into seven categories, and technological innovation is divided into four more. Result of the NVivo coding will be shown in the appendix.
Data will be analyzed using exploratory analysis. Exploratory analysis is suitable for this research because this analysis aims to find relationships between variables in the data (Neo, 2020). After going through Nvivo, codes that are found will be analyzed by the researcher will furthermore help in a way to discover new connections between variables, but not necessarily the existence of correlation only; because correlation is not always causation (Neo, 2020).
Exploratory studies can furthermore clarify whether the correlation between the variables is correct. It is also suitable because improvements in financial literacy can not be measured overnight.
4. Findings
4.1 Interviews
4 main points that are needed to be answered in these interviews are; is there a pattern showing that the SME owners are financially literate, have a financial attitude, uses technological innovation, and does all of that have any effect on their growth and sustainability of SME.
4.1.1 Financial Attitude 4.1.1.1 Source of Funding
After conducting all of the interviews, patterns are slowly emerging. Regarding the source of financing to start their SME business, most of the owners choose to finance their own SME for various reasons. Only two of the SME owners start their business with a bank's financing.
The owners who use their own capital to start their business have various reasons. Some think that using their own capital will make them believe that they can manage their money better.
Some others think that their own capital is enough and that they do not need more money from the bank to start their business. However, the most common pattern that the researcher found in the interview is that they are prudent in terms of taking a risk. Borrowing money from the bank means more risk for them. This shows that some of them did not plan their business thoroughly.
Two of the SME owners utilize the bank for their business capital. They have a similar answer stating that most Indonesian banks nowadays support SMEs. “loans are also relatively easy, and the interest from the bank is arguably not relatively high, so even people who borrow will not be too afraid to be able to repay their loans” (Appendix 5). The reasoning for borrowing money from the bank shows that they have been paying attention to recent financial news. Both SME owners give the same reasoning that banks in Indonesia nowadays fully support MSME, so it is relatively more straightforward for them to borrow money from the bank.
4.1.1.2 Basic of Business
From all the seven interviews, all of the SME owners show the same attitude when dealing with the basics of business. All the SME owners did not start their businesses blindly. All of them
have some basic knowledge of how to manage a business. Although their knowledge is not deep, it is enough for them to start and run a business.
The financial side of the business is often mentioned. Such as managing the money within the company and how to market and build a brand for the business. Reinvesting money into the business is also another typical pattern. This pattern emerges from SME owners that are eager to expand their business. Claims that learning how to invest the money back into the business in an effective manner is the way to grow their business.
To reinvest money in the business to develop, SME owners agree that they need to be able to do bookkeeping. Basic bookkeeping such as writing income, expenses, assets, and liabilities.
Managing the business finances needs to be done correctly, no matter how small the business is. “Managing money for business development is also important… at least have essential financial learning, how to use the money, how to reinvest for business progress, etc” (Appendix 5). Learning how to market the business is another distinctive aspect that SME owners mention.
Making the business known to people helps in SME development and growth.
Market research is another pattern that develops in the interview. All the SME owners agree that market research is essential before starting their SME business. However, some SME owners realize this too late. 4 of the 7 SME owners did not conduct market research properly by collecting data from the market. Most of those SME owners conduct market research by observation and asking people for their opinion. By not doing the market research properly, they realized that they struggled to find their competitive advantage and how to penetrate the market. “The first step to take is research… we have data, which becomes a reference for what is right and what is not” (Appendix 5). A typical pattern that develops for the SMEs that did not conduct market research properly is considered a dangerous market since they struggle in the short run and are trapped until they can solve the problem by conducting the proper market research.
4.1.1.3 Long Term Planning
From the seven interviews that have been conducted. Most SME owners did not have a long- term strategy for their business. Four of the seven SME owners did not have a long-term strategy when starting and developing their business. “I did not have a long-term strategy when i first started my business. But over time, i think that this long-term strategy is critical to have…” (Appendix 5). Although most of them did not have a long-term strategy, all knew the importance of having a long-term strategy, which will be discussed in the next section of the paper.
All those SME owners that did not have a long-term strategy, are all focusing on their short- term goals for their business. There is a pattern forming for all SME owners who did not properly conduct their business preparation. They struggle to find their place in their prospective business market, which means they struggle in their early business days. Short-term goals are more prominent because if their business issue is not resolved quickly, it could heavily impact their business. Finding their business stability becomes the main priority.
Meanwhile, for those SME owners with long-term planning or strategy, their businesses are more likely to develop in the right direction. They are more likely to build a sustainable business. “... Because by having a long-term strategy, we know our business direction so we can keep developing it” (Appendix 5). All the SME owners that have a long-term strategy agree that it is a vital aspect to have for their business to grow. A long-term strategy provides guidance
and motivation for the business to develop. It can be said that a long-term strategy is a plan for the business to move forward. The steps for that plan need to be designed well, and it needs to be as specific as possible, so the business will not divert into the wrong path.
Patterns emerged that the SME owners with long-term planning agree that it is crucial to have long-term planning. It has become their best decision in the business to have long-term planning. When the plan is laid out detailed in front of them, it becomes easier to realize that plan in the real business world.
4.1.1.4 Awareness
It can be said that all SME owners that have been interviewed have a high level of awareness.
All of the SME owners mentioned what kind of mistakes they made when first starting their business. Most of them are aware that the financial side of the business is the one that needs extra attention. “The steps I think are necessary are at least learning the basics about business and financing” (Appendix 5). How to manage money, how to do bookkeeping, and how to manage assets and liabilities. Managing money, especially from an outside source, can be challenging for various reasons. Mainly because of the interest that needs to be repaid every few months. However, various external sources can provide SME owners with capital. None of the SME owners went for outside sources other than the bank. They have realized that outside bank sources have a higher interest rate than the bank. Five out of seven SME owners will go to the bank to borrow money to expand their business. Also, because they all realize that banks in Indonesia support MSME more and more, the process is more straightforward, and the interest rate is relatively low. This shows that most SME owners are keeping up with the recent news. Moreover, they know their future possibilities to develop and expand their business.
Realizing this is an essential factor requires a high awareness from these SME owners.
Five of the seven SME owners are aware of their business market before doing business. Either it is their strength in the market area, or they are well researched to find that it is the most competitive market area they can jump into. Some are aware that their market area is currently the most 'trendy' market. Some others find their niche in the market area “My business market is… healthy ready meals, i chose this market because i think it is a particular and niche market…
so the market is not really saturated” (Appendix 5). Therefore, it can be said that these SME owners did not choose their market area by accident. They decided their perspective market area because they know it and are well researched.
Penetrating the market is another common theme that is discovered in the interviews—finding out whether their business has a competitive advantage or not. Breaking the stigma of the customer and finding what is unique about their business product is an important aspect to have for their business to develop and sustain. Competitive advantage can also be helped with their business branding. An excellent branding strategy will differentiate their business from competitors, making them stand out from the crowds.
Before penetrating the market, all SME owners realize the importance of doing market research to build their business. Although the previous paragraph mentioned that not all SME owners did not do market research, they are aware of its importance. The market research acts as a foundation for their business to build upon. By doing this, they unconsciously eliminate early problems they may find when starting their business. Such as what product they should sell, where is the perfect location for the business, etc. Resulting in easiness in their early business stages.
Digitalization has been an important aspect that affects the way businesses work. As technology progresses, all SME owners know that digital technology can help the way they do business.
“In this era of digitalization, everything should be easy…” (Appendix 5) Hence, all of the interviewers SME owners agree that they are using digital technology to ease their business.
Various applications are used to help their bookkeeping, business development, customer easiness, and product marketing; this will be discussed in the next section.
4.1.2 Technology Innovation
Technology nowadays has become a more prominent aspect in the world of business.
Technology has helped many businesses to develop and make them easier to manage.
Furthermore, that is precisely what happens after the interview and testimony from the SME owners were obtained. Patterns are emerging that technology indeed helps the business of those SME owners. That technology helps in various aspects such as bookkeeping, business development, customer easiness, and marketing.
In terms of bookkeeping, keeping records of sales, etc, Most SME owners use a third-party app such as Microsoft Excel and or google sheets. Various reasons emerge on why SME owners choose both of these apps. The most common answer that the interviewer gets is that Microsoft Excel and Google sheets are user-friendly applications. Meaning the app is easy to use and not complicated so that new users can adapt quickly to the app. All are provided in the app in terms of bookkeeping. “... Bookkeeping more straightforward, so all bookkeeping is done there and can be done by many people. And we can constantly check the documents… and can be opened on any internet device” (Appendix 5). The calculation for bookkeeping can be done within the app, and it does not require other software to do that. Features such as making graphs and charts can be done within the app. Seeing sales in the months that the business has been running makes charts out of that data. Data can also be directly converted into the app with ease which helps the owners in terms of saving time and the hassle.
Technology also helps the SME in terms of marketing. Patterns that emerge from the interview are the usage of social media as a means to promote the business “... an efficient way of marketing because it can be said that it does not cost anything…” (Appendix 5) Instagram is the most mentioned social media in the interview for various reasons. One of the main reasons that all SME owners agree upon is that both applications are free to use. SME owners claim Instagram as a versatile tool to market their products and business. “Instagram is a very versatile application because we can promote our products through photos, videos, stories, or reels”
(Appendix 5). The SME owners can post pictures of their products on Instagram, create a video, and put it on Instagram reels. Those posts and reels that they made can be put into Instagram stories, which have a business feature to see how many interactions they got by posting the photo or video. What benefits these SME owners is that all of this comes without a cost, which can be considered free marketing. If these features are not enough, some SME owners can pay for their advertisements on Instagram. Making their post can be seen by more people in various locations. Other social media platforms are also mentioned, such as Twitter and TikTok, but these social media platforms are not popular among the interviewed SME owners.
Social media platforms contribute to marketing and contribute to the business development of the respective SME. There are also other applications that some SME owners use to develop their business even more. “... I also input Go-Food, Shopee, and Tokopedia . E-commerce like this helps sales” (Appendix 5). Those applications are E-commerce applications such as Go- Food, Grab Food, and Shopee are often used as the means of increasing sales and promotion.
The logic in using E-commerce to increase sales is because people that buy their products from
the platform can leave a review for the other customers to see. So for an upcoming product, it is a big help since a review from other customers can attract new customers to their respective stores. Those reviews are also helping the business to develop in the future since it becomes the SME owner's reference to what products need improvements or what the customer wants in the future.
Most of the interviewed SME owners also use the digital payment for their business. All of them agreed that using digital payment is easier for both the business and the customer, also taking into account that everything is now digitised, so it is suiting to use the cashless or digital payment methods. Several cashless payments are selected, such as OVO, Dana, and Go-Pay.
The majority of SME owners accept cashless bank payments. To make it easier, QR bank transfers are implemented so the process can be faster and more efficient. By using cashless or digital payment, the SME owners also benefit from the fact that all the transactions are recorded automatically into the system, “... helpful technology because we can see payment history and everything is recorded, and everything is easy to track” (Appendix 5) Transaction code, transaction time and date, and what products are bought by the customer are all recorded and go into the history of the business purchases. So errors in the bookkeeping can also be kept to a minimal level since all is automated. Every transaction recorded and kept on track digitally is also suitable for SME security. Because there is no physical form of the money kept in the store, human errors such as stealing and miscalculation by the employee will be minimal or nonexistent “Because everything is directly recorded and entered into the system, no one is negligent in recording purchases” (Appendix 5).
4.1.3 Effect on SME
From the interview, the researcher found that all SME owners said their businesses are already developing. “The business has developed from the beginning, which used to be just a small business. Now you can have employees manage the business and expand.” (Appendix 5).
Nevertheless, not all SME owners are confident that their business will be sustainable in the future. Four out of the seven business owners claim that their business can be sustainable because their preparation and knowledge about the business can help them achieve sustainability in the future. Meanwhile, the other three business owners are not confident that their business will be sustainable because they have not implemented the correct preparation before starting their business. They did not have the proper attitude toward their business finance, and long-term strategies are not available yet.
Financial literacy affects their financial attitude, which affects its more minor aspects such as financial awareness, business basics, funding source, and technological innovation. Making some of these SMEs are developed and sustainable.
4.2 Secondary Data Review 4.2.1 Financial Attitude
A paper written in 2017 by Entebang and Eniola examines the relationship between SME owners' financial level and firm performance. This study is analyzed using a quantitative method with a high Cronbach's alpha coefficient value, which means that the data on this study is very reliable (Entebang & Eniola, 2017). The result of the paper shows a positive relationship between financial awareness and financial attitude in using sources of finance for their SMEs, respectively. There is also a significant relationship between the SME owners with a high level of financial awareness and their SME financial performance, implying that a high level of financial awareness results in better financial performance (Entebang & Eniola, 2017).
Financial knowledge did not directly relate to financial attitude regarding the source of financing. Although it has a significant relationship between the usage of equity and debt for financial performance, the source of finance itself can be concluded as not affecting the financial performance itself (Entebang & Eniola, 2017). The most direct impact that the study shows is the impact of financial attitude on financial performance (Michaelas et al., 1998). The paper has demonstrated that the lack of professionalism in management impacts SME managers. Lack of professionalism in the management includes a lack of diversification in the firm and the structure in the firm that created the lack of interest attitude in obtaining debt financing (Entebang & Eniola, 2017).
Higher financial awareness resulted in a higher level of the firm's performance in sourcing debt for the business, but otherwise in sourcing for equity. They imply that the managers or owners of the SME are aware of the advantages and disadvantages of different financial products to utilize for their business (Entebang & Eniola, 2017). External financial support will not be utilized if the risk is high and the effect on the business itself is low (Entebang & Eniola, 2017).
SME owners may have a high level of financial knowledge. However, they need a high financial attitude towards financing to develop and transform their businesses. Having a long-term goal for the business and a positive attitude to prevent future problems in the business (Reijonen &
Komppula, 2007).
4.2.2 Technology Innovation
In 2010, a paper titled 'Importance of technological innovation for SME growth: Evidence from India' was written by Subrahmanya, Mathirajan, and Krishnaswamy presents that innovative SMEs have significant growth in sales, investment, and employment (Subrahmanya et al., 2010). This paper was analyzed using the regression analysis method, and it is identified that higher SME growth is affected by a high share of an innovative product (Subrahmanya et al., 2010). Innovative SMEs are attributed to their technological capability, technical qualification, experience, and innovative ideas based on the market pressure, customer demand, and requirements (Subrahmanya et al., 2010). They are enhancing their competitiveness in every aspect of their business in any way they want to be innovative and have a higher growth rate and sales (Subrahmanya et al., 2010).
Another evidence came from a 2019 paper titled ‘Impact of information technology innovation for firms performance’. ICT empowerment of the owners can boost the innovation level of SMEs (Chege et al., 2019). The level of innovation of the SME is the foundation for the SME to implement new technology (Laguir & Bestern, 2016). The rise and fall of the firms are determined by the owner's ability to respond to the technological changes of today's age (Yunis et al., 2018). New technologies do not gain SME's competitive advantage, but it is how the SME utilizes the technology to help their business (Laguir & Bestern, 2016). Some benefits of technological innovation for SMEs are that it allows the business to understand the market, product, and competitors (Yunis et al., 2018). It also reveals the product quality in all stages of business by keeping updated with the latest technology update (Chege et al., 2019).
SMEs can utilize technological innovation to make more innovative decisions regarding their marketing strategy and product development (Chege et al., 2019). More comprehensive access to information in the country will also help SME owners in their business planning in the future (Chege et al., 2019). Success in the SME in terms of technology innovation depends on each employee's persistence and willingness to learn. Hence regular training needs to be given to utilize the technology effectively and reap the most benefit (Dibrell et al., 2008). The paper
concludes that technology innovation plays an essential role in the relationship between the firm's performance and the competitive advantage of the SME (Chege et al., 2019). SMEs can also maintain that competitive advantage to grow their business and capabilities at all stages of SME development (Chege et al., 2019).
5. Conclusion and Suggestions
5.1 Conclusion
The study results show that financial and general awareness contributes to economic attitudes.
Understanding the terms of running an SME business is mainly achieved through experience.
The result of primary data research shows that all the SME owners are showing a high level of awareness that affects their respective business attitudes, especially in their decision-making ability. Mistakes from previous experience are identified and solved to have better business performance in the future.
The study did not find a direct relationship between the funding source and SMEs' growth and sustainability. Sources of funding of the respective interviewed SMEs mostly came from two sources, which are bank-funded or self-funded. Both sources did not directly affect the growth and sustainability of the SME. Awareness and reasoning behind the source of funding somehow affect the growth and sustainability of the SME because the reason they choose a specific funding source can determine the level of their literacy and hence determine their attitude towards the business.
Long-term planning is also heavily mentioned in the result of the interview. Long-term planning contributes directly to the financial attitude of SME owners since long-term planning provides the foundation and pathway for the business to develop. Long-term planning and the basics of business also contribute directly to financial attitude. SME owners with industry fundamentals tend to have a better judgment and understanding of the company, giving them the best attitude towards their business decision-making. The second research question is whether financial literacy affects SME owners' economic attitudes. Those mentioned aspects such as awareness, basics of business, and source of the funding are some of the elements that literate financial managers will acquire, affecting their financial attitude in creating a developed and sustainable business.
Technological innovation is a significant component that is mentioned in the interviews. All the SME owners are utilizing technology to enhance their business experience, find competitive advantage, and develop their business even more. Technological innovation directly affects financial literacy, indicating that literate SME owners will use technology to ease their business.
Regarding the first research question, aspects that contribute directly to the growth and sustainability of Indonesian SMEs are financial attitude, financial awareness, technology innovation, basics of business, and long-term planning. This connects to the third research question, and the researcher can confidently answer that financial literacy contributes to the growth and sustainability of Indonesian SMEs. It eases the way the SME owner does their business, and evidently, from the owner's testimony that their company is all growing and heading towards the right way of sustainability.
5.2 Evaluation
The primary purpose of this study is to analyze whether financial literacy affects the sustainability and growth of Indonesian SMEs. Considering plenty of financial literacy aspects,
this study has answered its proposed research question satisfactorily. The result of this study is significant as information that Indonesian SMEs need to know. Although sample data might not be of a high quantity, the data is undoubtedly high-quality data. The research questions are all answered with one big answer: financial literacy contributes to the growth and sustainability of SMEs in Indonesia.
5.3 Future research development
Recommendations for future research, the research needs to be done with larger sample size, and it could be done longitudinal to observe the growth and the development of the SME itself.
Data collection could be more selective, and samples are of the highest quality, so the data is reliable.
A quantitative study is recommended to eliminate further research bias since it could produce high-quality and reliable results. The researcher can also expand the scope, not only limited to Indonesian SMEs.
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