Financial Literacy: Why it is important for Entrepreneurs in Guyana

Oct 22, 2017 News

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Dr. Terence Smith, Deputy Governor, Bank of Guyana

The need for entrepreneurs’ financial education
According to the Harvard Business Review, “fostering entrepreneurship has become a core

component of economic development in cities and countries around the world.” In fact, the research literature points to the big idea that governments around the world are recognizing that entrepreneurship can transform their economies. Nevertheless, most of their efforts to spark venture capital creation are wasted trying to achieve the impossible, but best practices are emerging.
Some researchers like Daniel J. Isenberg at Harvard suggests “to ignite venture creation growth, governments need to create an ecosystem that sustains entrepreneurs.” However, the research in general seems to indicate that this ecosystem must address several essential elements including the importance of entrepreneurship financial education.
Entrepreneurs face complex decisions in growing their businesses; these are identified as a lack of access to start-up capital, followed by lack of access to general business information and support with the development of business plans. The research indicates that these challenges are currently “preventing enterprises from moving over the cusp from micro/emerging to established/small and medium enterprises.” In this regard, there is certainly a need for financial education programs in the market. The need for financial education is largest among micro and emerging enterprises.

Defining financial literacy and education
When we talk about financial literacy, we are usually referring to a set of skills that allow people to manage money wisely. Financial literacy is a broad concept that includes both information and behaviour and it is relevant for all consumers including entrepreneurs regardless of their wealth and income. The Organisation for Economic Co-operation and Development (OECD) defines financial literacy as, “the combination of consumers’ and investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well being.”
Without an understanding of basic financial concepts and decision-making skills, entrepreneurs are not well equipped to make decision related to financial management of their enterprises. In fact, the literature indicates that people including those with some entrepreneurial skills when equipped with financial literacy skills are enabled to contribute to an improved understanding of financing options and the availability of financial support services.
Financial education for entrepreneurs
According to the literature, a financially literate SME owner/manager was defined as “someone who knows what are the most suitable financing and financial management options for his/her business at the various stages of his/her business; knows where to obtain the most suitable products and services; and interacts with confidence with the suppliers of these products and services. He/she is familiar with the legal and regulatory framework and his/her rights and recourse options.”
A substantial international study entitled “Measuring Financial Capability: A New Instrument and Results from Low-and-Middle Countries” performed by Kempson and others. It was found that, after controlling for other relevant variables, self-employed individuals in a sample of developing countries (Armenia, Colombia, Lebanon, Mexico, Nigeria, Turkey and Uruguay) performed worst that the general population on standardised assessments of their ability to monitor expenses, to budget, and to live within their means.
The World Bank’s 2014 Global Financial Development Report noted that “small and medium sized enterprises (SMEs), and particularly informed businesses or SMEs in emerging markets, face significant financing constraints that undermine their contribution to employment, productivity growth and innovation.” It also noted that financial sector practitioners saw financial education as the most effective means of addressing financial exclusion for households and businesses.
With an emphasis on greater financial inclusion and on improving the financial capability of entrepreneurs, the Association of Certified Accountants (ACCA) performed research and prepared a report that brings together evidence on the effectiveness of financial education. Its aim was to stimulate debate on alternative approaches while fully engaging the business world’s “real financial educators – professional accountants.” This article leverages the research performed by the ACCA, which highlights and presents the following list of “financial education needs” for entrepreneurs:
· to distinguish between personal business finances
· to be a competent buyer of financial services – understanding financial products, their costs and risks, and selecting what is suitable for the business
· to anticipate the business’ future financial needs under alternative scenarios
· to assess the risks to which the business is exposed and prepare appropriate responses
· to understand the decision-making process of finance providers, and thus appreciate how the business can become creditworthy or investment ready
· to relate the business financial needs to a country’s regulatory and fiscal framework – to appreciate the notions of regulatory and tax efficiency
· to exercise financial management, i.e. to use financial information to analyse business performance and create policies and controls that optimise this.
Based on the above list created by ACCA’s professional accountants in practice globally it is clear that they actively support and mentor many millions of entrepreneurs seeking finance every year. There are clearly private and public benefits of financial education. The research does provide evidence that, regardless of its other merits, financial education does produce better borrowers.
Concluding remarks
The terms financial literacy and financial capability are often use interchangeably by policymakers and stakeholders. In this article, financial literacy was assumed to encompass knowledge and cognitive skills, while financial capability was treated as a broader term that combines financial literacy with a set of desirable attitudes, behaviours and external enabling factors.
The evidence is clear that organisations like the ACCA and others clearly understand the relevance of financial literacy, capability and education in an entrepreneurial context with respect to limiting the social cost of failing small businesses. The need for financial education is largest among micro and emerging enterprises.
Even with the best-designed interventions, it is important to have realistic expectations of financial education and to measure success appropriately. Reducing small businesses mortality rates are likely motivation for policy makers to support financial education for entrepreneurs.
Next week we will examine some more aspects of financial education for entrepreneurs. Please send your comments or questions to [email protected]

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