Financial Literacy and Enterprise Performance among Owner-Managed ICT SMEs in Nairobi County

Abstract

The purpose of this study was to investigate the relationship between financial literacy and enterprise performance among owner-managed ICT SMES in Nairobi county. The study was guided by three specific objectives. First, to investigate the relationship between financial literacy and the age, gender and level of education of owner-managers of ICT SMEs; second, to investigate the relationship between, financial literacy among ICT SME owner-managers, and profitability as an indicator of performance; and third, to investigate the relationship between, financial literacy among ICT SME owner-managers, and liquidity as an indicator of performance. Age, gender and level of formal education were identified as potential factors influencing financial literacy. The study examined the level of financial literacy among owner-managers and tested the extent to which it was associated with their age, business experience, gender, level of formal education and business performance. The research methodology adopted for this research project was quantitative design. Out of a target population of 420 registered ICT firms in Nairobi a representative sample of 201 owner- managed ICT SMEs was selected through simple random sampling. Collection of primary data was achieved through the use of a structured questionnaire, while secondary data was gathered through a broad review of existing literature. Both methods were guided by the specific objectives. In conducting the analysis of data, two applications, namely SPSS version 22.0 and Microsoft Excel 2016 were used. Data collection resulted in an 82 percent response rate with tables, graphs and charts being used to summarize and interpret the findings. A standardized test was adopted from Intuit (2015) and used to test financial literacy where a score of less than 75 percent indicated a failure to satisfactorily apply some basic financial concepts in business management such as the accrual concept. This study found that 46 percent of ICT SME owner-managers demonstrated what was described as a high level of financial literacy (greater than or equal to 75percent) while 54 percent of them demonstrated a low level of literacy (less than 75percent). Analysis of data showed evidence of a relationship between financial literacy and the age of ICT SME owner-managers (p < 0.001), where older managers demonstrated better financial decision-making abilities through higher scores. There was evidence of a relationship between financial literacy and gender among ICT SME owner-managers (p < 0.001) with males exhibiting higher scores on average. A relationship was also observed between financial literacy and the owner-managers’ level of formal education (p < 0.001) with those who had acquired tertiary educational qualifications demonstrating higher scores. Twenty-four percent of the owner-managers reported having received specialized financial training. This study focused on the financial dimension of performance measurement using profitability and liquidity as indicators. Profitability was described using the net profit while liquidity was expressed using the cash position of the SMEs over a five-year period. The key findings were that the owner-managers’ level of financial literacy was not independent (p < 0.001) of net profit. Secondly, there was sufficient evidence to suggest that financial literacy is related (p < 0.001) to cash position of the businesses as well. The interpretation of these outcomes is that firms ran by owner-managers with higher financial literacy managed to report higher profitability and a greater quality of working capital management than those led by less financially literate managers. Therefore, it is the conclusion of this study that there is a relationship between financial literacy and the performance of owner-managed ICT SMEs. This implies that varying levels of financial literacy among ICT SME owner-managers can be associated with differential levels of enterprise performance in Nairobi county. This study recommends that ICT SME owner-managers engage in well documented financial management practices including budgeting, capital investment appraisal, tax planning, and forecasting profits. The seventy-eight percent of ICT SMEs that do not have internal professional financial management by way of finance departments, should consider contracting external financial advisory services. Innovation has led to the development of both local and international web-based platforms that offer access to freelance finance specialists at cost-effective rates suitable for SMEs. This study focused on profit and liquidity. In subsequent research, other indicators such as efficiency and leverage would provide greater insights into the relationship between owner-managers’ understanding of financial management and enterprise performance.