Analysing the need for financial literacy in small- and micro-enterprises
Abstract
Small- and micro-enterprises form an integral part of any economy. This is no different in South
Africa, where small- and micro-enterprises provide employment, assist in alleviating poverty and
contribute to overall growth of the economy. Nonetheless, the significance of small- and microenterprises
demonstrates a very low survival rate, especially within the first five years of trade. A
lack of financial literacy has been identified as a prevalent reason behind failure, in addition to
being a factor that hinders the development and growth of small- and micro-enterprises. A lack of
financial literacy is believed to be accompanied by the display of a lack of enterprise management
skills and is often associated with other challenges that hinder the development and growth of
small- and micro-enterprises, such as a lack of access to finance. Several studies have
highlighted the importance of financial literacy; however, the limited research available on the
topic within a small- and micro-enterprise context limits our understanding thereof. This hinders
the development of meaningful interventions on the side of financial literacy to enhance the
sustainability and growth of small- and micro-enterprises. This study aims to analyse the financial
literacy of small- and micro-enterprise owners in addition to determining the financial literacy
needs through the identification of areas of weakness. It further aims to determine the financial
literacy needs as per the small- and micro-enterprise owners. The analysis of the financial literacy
needs provides meaningful information in order to provide recommendations based on the results
obtained.
A detailed literature review as well as empirical research was conducted in order to analyse the
need for financial literacy in small- and micro-enterprises. The review of literature revealed that
defining small- and micro-enterprises remains a convoluted matter around the globe, with South
Africa being no exception. Determining a uniform definition of financial literacy is also a difficult
matter; however, common attributes are found in several definitions presented by various
researchers, which include that financial literacy is a form of knowledge and understanding of
financial concepts, products and services; the ability to apply such knowledge; being able to make
informed or effective decisions regarding the management and use of money; and that it pertains to an individual’s ability to work with numbers. The investigation of financial literacy, enterprise
management skills, along with factors that affect financial literacy provided a framework on which
the development of a questionnaire was based. The review of literature also enriched the
interpretation of the results obtained through the empirical research.
The questionnaire developed was completed by small- and micro-enterprise owners from a
suburb in Potchefstroom, namely Promosa, South Africa. Follow-up interviews were conducted
after completion of the questionnaire and served the purpose of enriching the findings.
It was found in that the knowledge of finance, financial concepts and the understanding thereof
of small- and micro-enterprise owners is low and that the owners particularly fell short in planning
for their enterprises. The major areas of weakness identified were related to the knowledge and
understanding of interest and inflation and decision-making. It was also found that the use of the
services of accountants, financial advisors, lawyers and other professionals for the purpose of the
enterprise among the small- and micro-enterprises is not very common and the numeracy abilities
of the owners came into question after poor results were scored in the questions that required
basic calculations. Recommendations, among others, of ways to improve the financial literacy of
small- and micro-enterprise owners include the establishment of government support
programmes specifically aimed at improving financial literacy and basic accounting capabilities;
SARS could assist in developing financial education strategies that are targeted at improving the
knowledge and application of taxation; corporate entities should consider investing in corporate
social responsibility initiatives in the form of financial education programmes; and small- and
micro-enterprise owners should be more proactive in educating themselves on financial literacy
and enterprise management matters.
Results also showed that the majority of the small- and micro-enterprises were started out of
necessity and the majority initial funding came from personal capital. It was further established
that small- and micro-enterprises are in great need of financial literacy, as the owners placed very
high importance on obtaining knowledge and learning more about financial literacy concepts,
especially on learning how to save and invest money. Funds to grow the small- and microenterprises
were identified as the greatest current need that the owners have with regard to their
enterprises. The analysis of financial literacy and current greatest needs of the small- and microenterprise
owners enabled the researcher to identify and suggest interventions to enable the
growth and development of these enterprises as well as enhancing their contribution to the South African economy. Some of the interventions include the implementation of a small- and microenterprise
financial literacy mentorship tier programme where incentive is provided by the
government (by way of BEE points, grants, subsidies, and other.) to enterprises that provide
mentorship to a smaller entity to their own; establishing a government advisory programme for all
prospective enterprise owners seeking funding from the government to start an enterprise, which
places an emphasis on improving the causes of reasons why funding applications are rejected;
as a way to secure their investments in small- and micro-enterprises, financial institutions should
provide free or affordable financial education and enterprise management programmes to
enterprise owners who have received financial support from the institutions; and the
Unemployment Insurance Fund (UIF) can invest in the implementation of an entrepreneurship
training programme designed to improve or advance entrepreneurial skills and related knowledge
to equip unemployed individuals with the skills necessary to start their own enterprises.
This study contributes to limited existing research or data available on the financial literacy of
small- and micro-enterprises in South Africa. It also provides valuable insight into the areas of
weakness in terms of the financial literacy of small- and micro-enterprises as well as their financial
literacy and other support needs