How Financial Literacy Affects SMEs

Grace Christos

3 years ago

Anybody can own an SME but not everyone who owns an SME would be considered financially literate. A business has different aspects and parts to it, and one of the most important is its finances. Unfortunately, many people are driven by the need to make money, so they start building a business, but very few people actually take out time to understand the concept of becoming financially literate.

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The common misconception is that the fact that you make a profit automatically means you understand how money works. Nothing is farther from the truth. You can make money easily if you have something of value to exchange, and also lose just as quickly as you make it, without requisite financial knowledge. Financial literacy is understanding basic financial concepts such as financial management, investing, income and expenditure etc, in a bid to build a sustainable and secure financial future. Financial literacy empowers us to make smart financial decisions. Financial literacy is acquired by learning financial principles and putting them into practice. Citing a 2015 Nigerian financial survey, it was highlighted that;

Financial illiteracy; 31.1% in urban areas 68.5% in rural areas.
Financial illiteracy among men; 48.5% of men in urban areas 50.3% of men in rural areas.
Levels of education are low across the country 50.7% of the adult population has either no formal education qualifications or has only completed sub-primary education.
The youth that drop out of school or that never enrolled in schools did not benefit from basic financial education interventions in the school curriculum.

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Benefits of Financial Literacy:

Financial literacy helps you have a sufficient grasp of the financial knowledge required to help meet your goals.
Financial literacy helps you stay proactive and reduces financial stress.
Financial literacy inadvertently helps you make better financial decisions.
You will also learn to manage money and come out of debt if you ever need to.
Financial literacy teaches you how to create a well-structured budget.

Financial literacy is critical to the building and sustainability of SMEs as it helps to improve the knowledge of business owners. It enlightens them on the available financial resources at their disposal, and which is most profitable for their business. Another area of financial literacy that is greatly appreciable is the knowledge of accounts and bookkeeping. Once you understand all of the concepts of finances that make it increase and inevitably grow your wealth, you would appreciate tracking financial progress. Bookkeeping does not only do you good, but it also increases your chances of being recognized by financial companies and formal loan sources. Once seeking to partner or receive sponsorship of any kind, the first thing that would be required for your consideration is the bookkeeping records that have been consistent over time. Financial literacy does not only increase your chance of gaining financial independence but also your chances of sustaining it. And it is always reflected in your business model or structure. Featured Image Source: iStock

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