THE EFFECT OF FINANCIAL LITERACY ON THE SUCCESS OF SMALL-SCALE ENTERPRISES IN CAMEROON
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THE IMPACT OF FINANCIAL LITERACY ON THE PERFORMANCE OF SMALL SCALE ENTERPRISES IN CAMEROON.
THE EFFECT OF FINANCIAL KNOWLEDGE ON THE SUCCESS OF SMALL BUSINESSES IN CAMEROON
| PAGES = 54 | CHAPTER = 1 – 5 |
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The role of small-scale enterprises (SSEs) in the national economy is significant and should not be underestimated. In recent years, however, policymakers have increasingly focused on these businesses, particularly in developing countries, as dissatisfaction with the results of their development strategies has grown. Studies show that small and medium-sized enterprises (SMEs) play a crucial part in job creation, rural development, entrepreneurial growth, mobilization of local resources, linkage with larger industries, and promoting regional balance through more equitable investment distribution. For centuries, small and medium-sized enterprises (SMEs) have been pivotal in driving development, especially in countries like Malaysia, Thailand, China, and India. These businesses have accounted for more than 70 percent of exports, a factor that has contributed to the rapid economic growth seen in these nations in recent years (Delavande, 2018). In Nigeria, however, sector-specific enterprises (SSEs) face numerous challenges that greatly hinder their growth and progress.
Numerous researchers have shown that small-scale enterprises (SSEs) form the backbone of industrialization in most developing countries. SMEs have played a vital role in enhancing the global standard of living by reducing social stigma, fostering domestic entrepreneurship, and creating job opportunities, all while optimizing the use of limited resources. As the term implies, financial literacy is a crucial element in achieving overall organizational success (Bernheim, 2018). Furthermore, it supports a sustainable level of financial profit, which is a key business goal. Over the centuries, financial literacy has been a decisive factor in the success or failure of businesses in our country. As a result, organizations and companies are responsible for keeping accurate and comprehensive financial records to ensure the reliability of their financial statements. This, in turn, will lead to increased profitability over time.
Furthermore, profit is often considered the lifeblood of an organization, making it essential for the accounting foundations, principles, and practices applied to include and reveal all relevant information to ensure accurate evaluation (Nelson & Onias, 2021). Enikanselu and Oyende (2019) also highlighted that a business’s operations rely on both financial literacy and the maintenance of accounting records to some extent. Therefore, it can be concluded that sufficient financial literacy is crucial for the successful management of any enterprise, regardless of its size. Additionally, efforts are being made to enhance financial literacy among small and medium-sized businesses, enabling them to provide thorough and relevant financial data that is crucial for informed decision-making and ultimately boosting profitability. However, despite their role as key drivers of employment creation and technological progress, most small-scale enterprises in Nigeria have underperformed and failed to meet their expected potential. The main challenge facing SMEs in Nigeria is inadequate financial literacy, as evidenced by their inability to maintain comprehensive accounting records. As a result, SSEs in the region have consistently struggled to secure a fair share of business profits. Furthermore, the lack of sufficient financial literacy complicates the accurate calculation of financial data. As a consequence of these issues, there has been a noticeable decline in the profitability of small-scale enterprises. Several factors contribute to this decline, including a lack of adequate understanding regarding financial opportunities and risks, imprudent spending habits, the misappropriation of business funds for personal use, limited access to essential bank credit facilities, and insufficient insurance coverage (Houston, Texas, 2019). Given these challenges, it is essential for research to focus on exploring how financial literacy influences the performance of small and medium-sized businesses in Cameroon. Such investigations will provide valuable insights into the relationship between financial knowledge and business success, helping to address the critical gaps that impact these enterprises’ overall performance and sustainability.
1.2 Statement of the Problem
The growing recognition of the importance of micro and small enterprises (MSEs) in developing countries is a deliberate and necessary focus to boost their economies through job creation, income growth, and increased purchasing power. The Kenyan government has acknowledged the critical role of MSEs in generating employment and alleviating poverty. In response, policies have been developed and promoted to support the sector’s expansion, including Kenya Vision 2030. This initiative has revitalized policy efforts aimed at advancing the growth of micro, small, and medium enterprises (MSMEs) by enhancing skills and improving access to financial services. The MSE Act, a legislative measure introduced by the government, aims to promote the growth of micro and small enterprises (MSEs) by offering access to business development services, creating a supportive business environment, and establishing an authority responsible for developing, reviewing, and monitoring relevant policies (David 2020). As a result, it provides a framework for encouraging business development, driving innovation, advancing industry, creating jobs, and expanding the economy. Despite continuous efforts through policy interventions and financial education programs, the micro, small, and medium enterprises (MSMEs) sector in Kenya still faces challenges in achieving significant growth and competitiveness. This is true even with the enhanced access to financial resources that has been made available (Densil 2018). Extensive research has been carried out to investigate the impact of financial literacy on the development and profitability of micro, small, and medium enterprises (MSEs). These studies have consistently demonstrated that a pervasive deficiency in financial literacy has led to numerous business failures. Moreover, this lack of financial knowledge was also identified as a contributing factor to the global economic crisis of 2008-2009 (Niwaha, Schmidt, & Tumuramye, 2016). This underscores the critical importance of financial literacy in ensuring the success and sustainability of MSEs. A study on the influence of financial literacy on women-owned businesses in Kenya found that budgeting, cash management, deposits, and record keeping are essential for their profitability (Kalekye & Memba, 2017). The research highlighted the importance of financial education in enhancing both the operational effectiveness and daily management of these businesses. Another research study that explored the impact of financial literacy on the growth of small and medium-sized enterprises (Lusimbo & Muturi, 2016) revealed some significant findings. While the majority of managers in micro and small enterprises (MSEs) demonstrated a foundational understanding of debt management, they faced challenges in comprehending how factors such as inflation and interest rates affected their loans. This difficulty particularly pertained to the alignment of assets and liabilities. Moreover, the study highlighted that the managers’ insufficient knowledge in bookkeeping contributed to stagnation or lack of growth in their businesses. The inability to effectively manage and record financial transactions further hindered their ability to expand and improve their operations.
Some researchers argue that the financial literacy of managers does not significantly impact the success of small businesses. For instance, a study by Plakalovi (2018) investigated financial literacy among managers of small and medium-sized enterprises (SMEs) and found that these managers had a generally inadequate grasp of basic financial principles. Only a small fraction of them used appropriate financial ratios and ratio analysis. Additionally, the study noted that these managers were often unaware of the intangible value of their organizations and managed business liquidity in a haphazard manner. According to Plakalovi, financial expertise is not necessarily a prerequisite for the success of small and medium-sized enterprises (SMEs). Many studies on financial literacy have failed to link personal finance management with effective business administration. Typically, these studies focus on aspects such as personal and household finance ratio analysis, literacy in bookkeeping, and understanding of banking services. In contrast to previous research that concentrated on specific elements of managers’ financial behavior, the current study explores a broader range of factors. It investigates how financial knowledge, financial behavior, and financial attitudes collectively influence the profitability of micro, small, and medium enterprises (MSEs). This comprehensive approach aims to provide a more nuanced understanding of how different dimensions of financial literacy impact business success.
1.3 Objective of the Study
The primary aim of this study is to investigate how financial literacy affects the performance of small-scale enterprises in Cameroon. The specific objectives of the study are as follows:
To evaluate the impact of financial knowledge on the performance of small-scale enterprises in Buea Municipality, Cameroon. This involves determining how the level of financial understanding among business operators influences their overall business performance.
To assess the extent to which financial behavior enhances the performance of small-scale enterprises in Buea Municipality, Cameroon. This objective seeks to understand how the financial practices and habits of business managers contribute to the success and efficiency of their enterprises.
To determine how financial skills contribute to the performance of small-scale enterprises in Buea Municipality, Cameroon. This involves examining how practical financial skills, such as budgeting and financial planning, impact the operational success and growth of small-scale businesses.
To identify the challenges and obstacles that hinder the effective utilization of financial literacy in managing small-scale enterprises among operators in Buea Municipality, Cameroon. This objective focuses on uncovering the difficulties faced by business owners in applying financial knowledge and skills to their management practices.
1.4 Research Questions
How does financial knowledge impact the performance of small-scale enterprises in Buea Municipality, Cameroon?
To what degree does financial behavior improve the performance of small-scale enterprises in Buea Municipality, Cameroon?
How do financial skills contribute to the performance of small-scale enterprises in Buea Municipality, Cameroon?
What challenges are obstructing the effective use of financial literacy in managing small-scale enterprises among operators in Buea Municipality, Cameroon?
1.5 Research Hypothesis
Ho: Financial literacy does not significantly affect the performance of small-scale enterprises in Buea Municipality, Cameroon.
Ha: Financial literacy significantly influences the performance of small-scale enterprises in Buea Municipality, Cameroon.
1.6 Significance of the study
The results of this research are expected to be valuable to various entities, including:
Researchers and Academics: This study will contribute significantly to the current body of knowledge, making it a valuable resource for researchers and academics interested in examining the role of financial literacy and other factors in the performance of micro and small enterprises in Cameroon or elsewhere.
The Government and Financial Regulators: One of the primary goals of any government is to foster innovation across various sectors within the country. Micro and small enterprises (MSEs), given their significant economic contributions, are a crucial focus for such efforts. Beyond their evident economic advantages, the development of MSEs has long been recognized by policymakers as a means to increase the income levels of economically disadvantaged groups. The findings of this research will offer valuable insights into effective strategies for addressing the issue of financial illiteracy among business owners. It will also provide potential approaches for enhancing financial education among entrepreneurs and small business proprietors. By implementing these strategies, the government can support efforts to boost the profitability and growth of MSEs, ultimately contributing to a more robust and inclusive economy. Additionally, this research will assist the government and financial regulators in integrating small and micro enterprises (MSEs) into their policies, particularly concerning access to credit and other financial benefits. This integration will ultimately create more opportunities for industry participants and individuals from lower-income backgrounds.
Investors and Financial Institutions: The study will be valuable to investors by demonstrating how acquiring financial literacy can offer significant benefits to their businesses. It will highlight how understanding and applying financial principles can enhance the performance and profitability of firms, making it an important consideration for investment decisions. These benefits will encompass effective financial management skills that can drive profitability for their businesses. Additionally, for investors who rely on external assistance, the study will underscore the significance of financial literacy, enabling them to better comprehend financial reports, understand asset allocation, determine appropriate debt-to-equity ratios, and identify opportunities for further profit. For financial institutions, the research will aid in evaluating the credibility of small and micro enterprises (MSEs) based on the financial knowledge of their owners.
1.7 Scope Of The Study
The study focuses specifically on assessing how financial literacy influences the profitability of small-scale enterprises in Cameroon. Empirically, the research will involve collecting and analyzing data related to financial literacy and its effects on business outcomes. Geographically, the investigation will be conducted among small-scale enterprise owners within Buea Municipality, Cameroon. This targeted approach will allow for a detailed examination of the relationship between financial literacy and business performance in this specific region.
1.8 Limitation of the Study
Like any human endeavor, this study faced its own set of challenges and constraints. During the research process, the researcher encountered several significant obstacles, including limitations in time, financial constraints, and language barriers. These factors posed difficulties in efficiently conducting the research and in gathering comprehensive data. Additionally, the attitudes of respondents varied, which could have affected the consistency and quality of the responses received.
Moreover, the issue of researcher bias also played a role. The researcher’s personal biases and preconceptions may have inadvertently influenced several aspects of the study. This includes the methods used for data collection, the criteria for selecting interviewees or samples, and the manner in which the gathered data was analyzed and interpreted. These biases could have impacted the objectivity and overall accuracy of the study’s findings. The possibility that these factors could affect the findings and conclusions of the study cannot be underestimated. Additionally, the results of this research are constrained by the sample population within the study area, which means they may not be applicable or relevant when compared to small-scale enterprises in other countries around the world.
1.9 Definitions of Terms
Small Scale Business: A small-scale business is defined as an enterprise that employs between ten (10) and forty-nine (49) individuals. This classification helps differentiate smaller firms from larger enterprises based on their workforce size, impacting their operational structure and capacity.
Financial Literacy: Financial literacy encompasses a comprehensive set of attributes, including awareness, knowledge, skills, attitudes, and behaviors that are essential for making informed and effective financial decisions. It involves the capability to apply financial knowledge and skills in managing resources wisely, with the goal of achieving long-term financial stability and well-being. In essence, financial literacy equips individuals to effectively handle their finances throughout their lives, ensuring ongoing financial health and success.