Financial literacy is vital for individuals and households. Simply put, it’s the ability to understand and effectively use various financial skills: budgeting, managing debt, making sound investments, and understanding financial statements.
These skills are crucial for businesses, too – especially small and medium enterprises. Small and medium enterprises are widely recognised as the backbone of many low-income countries’ economies. The World Bank estimates that these businesses account for between 60% and 70% of jobs in sub-Saharan Africa and approximately 40% of low-income countries’ GDPs globally.
Ghana is one of the countries whose economy relies heavily on small and medium enterprises. Much emphasis has been placed on how important it is for these businesses to access finance. But far less has been discussed about the value of financial literacy. In Ghana, as is the case in many other countries, the reality is that many small and medium enterprises still fail to grow as expected, even when they have access to capital. This surprising outcome suggests that access to finance, while crucial, is not the sole factor determining business success. The missing piece of the puzzle? Financial literacy.
We conducted a study to find out whether managers at small and medium enterprises in Ghana believed that financial literacy would help them to improve their growth after accessing finance. CEOs and senior financial managers who self-identified as being financially literate told us that their businesses had grown as a result, explicitly linking growth and financial literacy.
It is clear from this study that financial literacy empowers the managers of small and medium enterprises to make informed decisions, make the best use of their resources, and avoid common pitfalls that can derail business growth. It enables them not only to access finance but also to use it effectively for sustainable growth and long-term success.
Our findings have wider implications. Small and medium enterprises are vital for economic growth. But their potential is being undermined by a lack of financial literacy. This isn’t just a problem for businesses themselves: it’s a problem for the entire economy they are part of. When small and medium enterprises fail to grow, job creation stalls, innovation slows down, and the economy as a whole suffers.
The study
There is no single public register for small and medium enterprises in Ghana. So we drew our participants from a range of resources, including the national company register, the Ghana Export Promotion Authority, the Association of Ghana Industries and the Ghana Business Directory.
We defined small and medium enterprises in the same way as Ghana’s Statistical Service does: companies that have 250 or fewer employees.
Ultimately, 201 firms across the manufacturing and services sectors took part in the study. The vast majority of responses were from CEOs and senior finance managers, which is important since people in these positions ought to have comprehensive knowledge about a firm’s growth and performance.
The respondents saw a clear link between financial literacy and access to finance for growing their businesses. One CEO said:
Understanding financial principles is the foundation of our business decisions. Without financial literacy, we wouldn’t have been able to secure the necessary funding to expand our operations. It’s not just about getting access to finance but knowing how to manage it effectively that drives growth.
A senior financial manager told us:
Before improving our financial literacy, we struggled to convince lenders of our potential. Learning how to present our financials clearly and manage our cash flow gave us the credibility we needed to secure financing and invest in our growth.
Some interviewees discussed how not being financially literate had hampered their ability to properly use funding. A finance manager said that, after securing an initial round of funding. “we quickly realised we couldn’t manage cash flow effectively”, adding:
It felt like we were putting out fires every day. I didn’t understand terms like ‘liquidity ratios’ or ‘debt management’ until I started learning about financial literacy. It was eye-opening.
These lessons happened in various ways, some more formal than others. One CEO, realising their own financial management skills needed work, hired a financial officer with strong abilities in this area and learned a great deal from them.
Some CEOs signed themselves up for financial management workshops; others organised short courses for their entire teams. One told us: “We took a financial literacy course designed for entrepreneurs, and it gave us new insights into how to manage loans and investments. It wasn’t just about survival but also about how to leverage what we had to grow. Now, we budget better, monitor our cash flow closely, and even started saving for unexpected expenses.”
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Addressing the issues
There are several ways to improve financial literacy among small and medium enterprises.
First, policymakers should incorporate mandatory financial literacy training into existing support programmes for these businesses. It should cover essential financial management skills such as budgeting, cash flow management and investment planning.
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Policymakers could also facilitate partnerships between banks, microfinance institutions and educational organisations to offer targeted financial literacy workshops for managers at small and medium enterprises. This would equip businesses to manage the financial support they receive.
Finally, policymakers should introduce incentives, such as reduced interest rates or preferential loan terms, for small and medium enterprises that complete certified financial literacy courses. This would motivate managers to enhance their financial management skills, leading to more sustainable business growth and improved economic outcomes.
