Article

SME Managers and Financial Global Business Review

18(3) 1–18
Literacy © 2017 IMI
SAGE Publications
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DOI: 10.1177/0972150917692063
http://gbr.sagepub.com

Anthony Abiodun Eniola1

Harry Entebang1

Abstract
The aim of this study is to examine the level of small and medium enterprises (SMEs) business owners–
managers’ financial literacy and its impact on firm’s performance. The article applied a random sample
and structural equation modelling (SEM) approaches in assessing the influence of SME business owners–
managers’ level of financial literacy within the three states in the southwest Nigeria. The findings show
the complete effect of business owner–manager’s financial knowledge, financial awareness and financial
attitude in converting financial literacy to increase in firm performance. Also, they confirm that financial
knowledge and awareness of SME business owners–managers are obviously not a prerequisite for
the performance of SMEs, but entrepreneur characteristics in decision-making and relationship to
financial attitude have a comparison with financial literacy. The research limitation evolves from cross
section information observation that solely covers the southwestern part of the country. Additionally,
inspired to meet the analysis gap is panel data analysis. Training courses through strategic orientation
on the attitudinal perception of SME business owner–manager and basic business management skills,
capacity-building aspect, leadership development as well as networking via relationship marketing and
management on financial literacy may have significant effect on SMEs’ performance and growth for the
managers in general in Nigeria. The article is one of the first to examine the level of financial literacy
of SME business owners–managers in Nigeria. The article therefore sets an important benchmark for
further research in this area.

Keywords
SMEs, SEM, financial literacy

Introduction
Managers make many decisions as part of their everyday actions. They are expected to resolve a variety
of issues, including those concerned with a firm’s strategy, structures, quality-improvement systems,

1
Department of Business Management, Universiti Malaysia Sarawak (UNIMAS), Kota Samarahan, Sarawak, Malaysia.

Corresponding author:
Anthony Abiodun Eniola, Department of Business Management, Universiti Malaysia Sarawak (UNIMAS), 94300 Kota Samarahan,
Sarawak, Malaysia.
E-mail: tony42003@yahoo.co.uk
2 Global Business Review 18(3)

performance-appraisal systems and workflow, among many others (Ireland & Miller, 2004). Importantly,
managerial decisions may cause important consequences for firm performance and success (Hart,
Milstein & Caggiano, 2003). These procedures have naturally financial characteristics. Then to act
effectively, it is said that every owners–managers need to be financially literate. Within this context,
making a decision on the choice of financing provision to a certain business represents one of the key
elements in the financial decision-making process—a decision that can critically enhance their
institution’s ability to react to competitive challenges, undertake innovation, overcome financial setbacks
and most importantly, create value (Narayanan & Nanda, 2004).
All entrepreneurs are small and medium enterprise (SME) owners but not all entrepreneurs are
financially literate. Ayyagari, Beck and Demirguc-Kunt (2007) contended that if SME managers are not
familiar or comfortable with products, they will not need them. This indicates the impact of financial
literacy in making the right decisions to demand for services. Kidwell and Turrisi (2004) viewed that
financial literacy explains variances in financing decisions by borrowers. Moreover, Lusardi and Bassa
Scheresberg (2013), Lusardi, Mitchell and Curto (2010) and Lusardi and Tufano (2009) also stated that
individual and SME managers with low levels of financial literacy tend to make wrong decisions by
participating less in the formal financial system and borrow at higher interest rates relative to their more
financially literate counterparts.
Nowhere is financial literacy more important than in the micro, small and medium business
community. Small businesses are the embodiment of the Nigerian dream and the backbone of the Nigeria
economy. Small and medium enterprises represent 97 per cent of the Nigerian economy, accounting for
70 per cent of industrial employment and 95 per cent of its manufacturing business in Nigeria (Kauffmann,
2005). Likewise, in 2002, SMEs supplied 76 per cent of the workforce and 48 per cent of all the industrial
output in terms of value added and employed 87.9 per cent of the workforce in the private sector (Eniola
& Entebang, 2014). Small and medium enterprises play a key part in the growth and success of the
national economy. Therefore, it is necessary to develop the SME sector, especially managers who can
influence running the business of their enterprises as well as their employees in terms of knowledge,
awareness and attitude.
Nevertheless, despite their many performance contributions to Africa’s continent, especially Nigeria,
SMEs are still bedevilled by the high level of miscarriage and substandard performance. In 2008, the
Department for International Development’s (DFID, 2008) study showed that financial literacy levels
are quite low in African countries compared to other countries. In seven African countries, only half of
the adult population has knowledge and skills of basic financial products, and about 50 per cent did not
use both formal and informal financial products. Only one-third of the examined population of adults
had a bank account. Nearly 60 per cent of the people in South Africa who were surveyed were not
familiar with the term ‘interest’.
According to Beck and Cull (2014), African financial systems including that of Nigeria are low and
shallow, which pointed to the fact that financial literacy among SME managers in Nigeria is low.
According to Fadahunsi (1997), the failure rate of SMEs is about 85 out of every 100 in African
companies due to the lack of managerial decision skills and low financial literacy levels. Likewise, in
Nigeria, about 59 per cent of SME owner–managers report difficulties in making use of financial services
(Isern et al., 2009). These poor financial literacy challenges lead to SME owner–manager’s poor
performance and premature firm failure (Adegoke, 2014; Tushabomwe-Kazooba, 2006).
Available studies on the status of financial inclusion in Nigeria show, with some fluctuations, that
financial penetration rate is close to a tertiary of the adult population. The World Bank Findex survey
conducted in 2011 shows that nearly 30 per cent of the adult population make use of financial services.
This reporting is low compared to 50 per cent of the world average, 54 per cent in South Africa,
Eniola and Entebang 3

42 per cent in Kenya, and only a little above the average of 24 per cent for developing nations in sub-
Saharan Africa (Carlson, Dabla-Norris, Saito & Shi, 2015).
According to Ketley, Lightfoot, Jakubec and Little (2012) and CBN (2012), Nigerians lack financial
literacy, and more than 46.3 per cent did not have access to financial services and lag behind some
developing and developed countries. This has been a concern with intense challenges faced by SME
firms in the country with the acknowledgement that poor financial literacy was one of the elements
causing ill-informed financial decisions and that these decisions could, in turn, have tremendous negative
spillovers (OECD, 2013). A series of tangible trends underpin the rising global interest in financial
literacy as a key life skill.
The United States has the Consumer Financial Protection Bureau (CFPB) and the Office of Financial
Education (OFE) with mandates of promoting financial knowledge and skills for assisting SME firm
managers and owners in making the right financial decision. In India, the government established
Financial Stability and Development Council (FSDC) with responsibilities of educating and counselling
entrepreneurs and individuals on different sources of financing initiatives. Likewise, Ghana government
in 2009 approved national strategy in collaboration with international agencies on financial literacy and
consumer education in assisting SME firms’ owners and managers. The Malaysian government adopted
a three-pronged approach by establishing a financial working committee to oversee the financial literacy
programmes for SME firm owners and individuals in (i) proper sensitizing and disseminating of
information on financial products using the print media, booklets, internet via different websites and
third party publications; (ii) institutional programmes in all facets of educational systems about money
management; and (iii) outreach programmes targeting rural folks, women and disabled people with
regular workshop and briefing sessions (Ketley et al., 2012). Yet, the level of financial literacy in most
of the developing countries is still low.
The contribution of financial literacy has garnered increasing attention in both the developed and
developing world as a driver of human development and emancipation. Several researchers, such as
Drexler, Fischer and Schoar (2014), pointed out that SME owner-managers are asked to make difficult
financial decisions in many aspects of business life as business owners. According to Freiling and
Laudien (2013), dearth in skills contributes notably to the failure of new businesses. However, Oseifuah
(2010) applied financial attitude, financial knowledge and financial behaviour to measure financial
literacy among the youth entrepreneurs. Fatoki (2014) used financial planning, analysis and control,
bookkeeping, understanding of funding sources, business terminology, finance and information skills,
technology and risk-management (insurance) among owners of new micro-enterprises, while in the
Nigerian context, Nigeria Deposit Insurance Corporation (NDIC, 2012) used money management,
financial planning and personal financial behaviour to measure financial literacy among the adults in
insurance usage. Also, Ebiringa and Okorafor (2010) applied personal financial knowledge, financial
concepts and terms and financial skills to investigate financial literacy and financial decision-making
capacity in the gender balance issue among Nigerian university students. Research revealed that no study
has empirically investigated the financial literacy in areas such as knowledge, awareness and attitude of
the SME managers in Nigeria.
The failure rate of SMEs is very high in Nigeria. A healthy financial literacy is essential to the
performance, survival and well-being of businesses of all kinds. The advantageous feature of the financial
literacy of SME managers contributes to economic and social liberation in increasing productivity,
investment, income, savings and consumption. Financial literacy is essential to study financial decisions
by SME managers. Thus, this study was aimed at assessing the influence of financial literacy on the SME
firms’ performance in Nigeria. The survey identified areas of deficiencies and proposed recommendations
to improve the financial literacy level.
4 Global Business Review 18(3)

Review of the Literature

Theory Development—Resource-based View

Adapted from USAID (2009), a financially literate SME owner/manager was defined as someone who
knows what are the most suitable financing decisions for the business performance at the various growth
stages of the business, knows where to obtain the most suitable products and services and interacts with
confidence with the suppliers of these products and services.
Financial literacy, in the brightness of the new business reality, is the capability to adequately oversee
financial resources over the life cycle and connect effectively with financial products and services. In a
business, decision-making needs to be rational and premised on the available information. This implies
that it is imperative that a manager of business and individual should have a reasonable degree of
knowledge related to the available information to make good decisions. Remund (2010) thought that
financial literacy is the level to which one understands important financial concepts and possesses the
capacity and confidence to handle personal funds through an appropriate, brief period of time for
decision-making and strong long-term financial care.
Joo and Grable (2000) stated that the reasons why business people make inappropriate, inadequate
and ineffective financial decisions are because of the lack of personal financial knowledge, lack of time
to learn about personal financial management, complexities in financial transactions and the extensive
variety of choices in financial products and services. Lack of business management skills can magnify
financial barriers for SMEs. Lack of financial literacy can be harmful. On the other hand, a low degree
of financial literacy can prevent the performance level of SMEs from adequately assessing and
understanding different financing provision and for exploring the advanced loan application process.
Financial illiteracy will subject associated unwitting being to boundless debt, rapacious financing, and
specious speculations. Financial literacy was created to offer the entrepreneur with all the information
and skills necessary for their organizations (Fitzgerald, 1991). Financial literacy is central in today’s
commercial centre. Small and medium enterprise owners and managers are confronted with sophisticated
managerial, financial decisions that may hold immense implications for their firms.
This study supports the resource-based view (RBV) theory that emphasized the manners in which
firms use their resources to gain performance. The theory examined the operation of the firms from the
broader point of view towards universal sustainability. The RBV suggested that deficiency of financial,
human, organizational resources and capabilities reduce the firm’s innovation activities (Hewitt-Dundas,
2006). The inaccessibility of financial resources is a major hindrance to SME development, especially
because it prevents them from obtaining the new technology that would make them more productive and
more competitive (UNCTAD, 2002). Dundas took a panel data analysis of Irish firms and revealed that
lack of financial resources as a result of literacy majorly constrained the firm’s innovation activities.
Further, Wiklund and Shepherd (2005) and Ihua (2009) stated that access to financial resources is an
important resource for firm performance. This is empirically proven that small business performance is
positively, through financial literacy, determined by external financing facility available to firms.
Wernerfelt (1984, as cited in Eniola & Entebang, 2014) posited that resources are anything that might
be conceived of as a strength or weakness of a given firm, comprising tangible and intangible assets.
Tangible resources include financial capital (e.g., equity capital, debt capital and retained earnings) and
physical capital (e.g., machinery and buildings). Intangible resources consist of entrepreneurial knowledge,
skills, experiences, organizational procedures and reputation, among others (Eniola & Entebang, 2014).
Current research in both strategic business management and finance has started out to study the
relationship between firm strategy and its capital structure (Eniola & Entebang, 2014). Eisenhardt and
Eniola and Entebang 5

Martin (2000) used the resource-based theory to demonstrate the importance of financial capital to the
performance of SMEs. In maintaining and sustaining a firm’s competitive advantage, access to financial
capital to acquire fixed and current assets is important.
Balakrishnan and Fox (1993) stated that a ‘firm’s ability to make out its relationships with lenders...
becomes a central source of competitive advantage’. Most theories of capital decision, however, jettison
the function of the suppliers of financial resources. According to Eniola and Entebang (2014), physical
resources such as the production technology, machinery, equipment, plant and capacity contribute
positively towards SMEs’ competitive advantage and eventually result in superior firm performance.
Moreover, human resources in terms of experience and capabilities, trust, managerial skills, practices
and procedures of top and middle management and administrative and production employees were also
able to elucidate the extent of firm’s competitive advantage and the resulting SME firm’s performance.
Experiential resources such as product reputation, manufacturing experience and brand name can account
for the variation in firm’s competitive advantage and performance (Ainuddin, Beamish, Hulland &
Rouse, 2007; Morgan, Kaleka & Katsikeas, 2004).
Wright and McMahan (1992) bestowed the theoretical framework that underlines the relation and
also the coherence of deciding through firm strategy, resources practices and firm-level outcomes. They
introduced six models that are theoretical from the area of organizational concept, finance and economics.
Foremost, firm resources like physical capital, human capital and financial capital, from the resource-
based viewpoint, help the firm to enhance its performance and competitive advantage. Its resources
ascertain the forte of a firm in the continued term. According to Barney (1991, 2001), for a firm’s
resources to create sustained competitive advantages, they must have four attributes: valuable, rare,
imperfectly imitable and another resource by competing firms.
Barney (1991, 2001, 2002) and Barney and Hesterly (2015) stated that human capital resources
include the training, knowledge, experience, judgement, intelligence, attitude, relationships and insights
of individual managers in a firm. Evidence from previous empirical studies of organizational and
entrepreneurial learning suggests that investment decision-making in SMEs is on the basis of experiential
learning, rather than formalized methods (Ekanem & Smallbone, 2007). Donzelli, Alfaro, Walsh and
Vandermissen (2006) noted that by linking human resource processes to desired competencies,
organizations can structure the capabilities of its labour pool and produce better results. These competent
employees will be in a position to identify when it is appropriate for the organization to acquire the
financing provision that is necessary to meet the organization’s activities.
Experience and knowledge are extremely important, as they provide time to recognize opportunities,
develop contacts and learn how to access and to interact with funders, including bank managers and
venture capitalists. Thus, a large part of entrepreneurial learning is experiential (Deakins & Freel, 1998).
Although some studies report that only a few of SME managers employ the resulting knowledge
proactively to build competitive advantage (Matlay, 2000), while other studies find that as firms move
from a higher-level learning style, this is accompanied by competence enhancement that can lead to
greater organizational capability (Chaston, Badger, Mangles & Sadler–Smith, 2001). On these lines,
human capital regarding knowledge is an indispensable source of keeping competitive advantage for a
firm, because it cannot be replicated or bought within the market by competitors, independent of the four
listed criteria. Using RBV to knowledge means that acquiring skill can provide financial knowledge for
business owners and managers, sequentially; this may prompt higher firm performance.
Entrepreneurial attitudinal behaviour assumes an imperative part as a go-between strategy and firm
performance as mentioned by Schuler and Jackson (1987) and Schuler (1989). The models do focus
on organization’s attitudinal behaviours, not on knowledge, skills or abilities of firms because the
business owners’ and employees’ attitudes, behaviours and commitments may have an effect on firm’s
6 Global Business Review 18(3)

performance. Hence, the business owner’s role and behaviour are instrumental in the creation of a
competitive advantage (Thang, Quang & Buyens, 2010). Attitude has a lot to do with business owners’
and managers’ financial decision-making and their financial situation. However, there are a ton of factors
that influence entrepreneurs’ attitude, including their emotions and environment. Entrepreneurs who are
impatient tend to have quick and snappy attitudes that are horrible for good decision-making because
often that person will act on an impulse instead of rational thinking.
According to Bosma and Harding (2006), many SME firms fail because they lack financial literacy,
insufficient business acuity, as well as poor financial literacy and this undermines entrepreneurial activ-
ity. Management of financing is listed as one of the critical managerial competencies in SME firms’
development (Spinelli, Timmons & Adams, 2011). Most scholars agree that entrepreneurs, regardless of
their age, are consistently engaged in decision-making activities concerning resource procurement, allo-
cation and utilization. Such activities almost always have financial consequences and thus, in order to be
effective, entrepreneurs must be financially literate (Oseifuah, 2010).
Drexler et al. (2014) posited that entrepreneurs usually suffer from sufficient financial literacy to
make the complex financial decisions they face. This is unfortunate. According to Oseifuah (2010),
financial literacy contributes meaningfully to their entrepreneurship skills. Entrepreneurs wanting to
grow need to feel confident with their finances, as well be adequately informed (Kotzè & Smit, 2008b).
If owners/managers are illiterate concerning their organizational finances, the financial knowledge of
their firms will also be lacking and will lead to reduction in innovation that can transform into competitive
capability, inability to access different sources of finance provision due to non-awareness, and this
attitude will lead to possible failures of SMEs (Kotzè & Smit, 2008a). What these perspectives all seem
to agree on is that entrepreneurs suffer from a lack of financial literacy and such deficiency undermines
the probability of getting different sources of financing that can result into competitive capability and the
firm’s superior performance.

Research Design

Operational Definition
The operational model definition of the terms and variables adopted for the study are given in this
section. The model proposed in Figure 1 was created as a way to respond to the research question,
linking financial literacy and performance. The argument is that the financial literacy has a positive
effect on firm performance and that the combined effect of the three; knowledge, attitude and awareness
is greater than the sum of individual effects.

1. Small and Medium Enterprise: The criteria of SMEs follow the Nigerian regulation, as defined
by National Policy on Micro, Small and Medium Enterprises (MSMEs), which states that micro-
enterprises are those employing 1–9 employees with assets (excluding land and buildings) of less
than N5 million, small enterprises as between 10 and 49 employees and assets between N5 and
N50 million, while medium enterprises are those with between 50 and 199 employees and assets
between N50 and N500 million. Hence, SMEs refer to a firm with assets between N5 million and
500 million and sales between N10 million and 500 million.
2. Firm performance (FP) can be characterized as the firm’s ability to create acceptable outcomes
and actions: sustainable profitability is associated with some measure items, which are the return
on sales (ROS), return on assets (ROA) and return on equity (ROE). Hence, equity would be the
Eniola and Entebang 7

Figure 1. The Framework of the Study

Source: Prepared by the authors.

first alternative source of financing provision. Where an SME owner-manager lacked adequate
equity financing, in top-up, debt would be applied. Likewise, in SME owner/manager business
expansion, a debt would be applied. The ratio of equity to debt would thus be indicative of the
owner/manager’s choice of sources of financing provision at a given period (Abouzeedan, 2010;
Diagne & Zeller, 2001; Eniola & Entebang, 2015; Mac an Bhaird, 2010).

Financial knowledge (FK) refers to understanding basic financial concepts of how business
performance and business condition is measured using the mental model to facilitate, support or enrich
decision-making (Lusardi & Bassa Scheresberg, 2013; Lusardi & Michell, 2007a, 2007b; Moore, 2003).
Literate people are more engaged in the financial markets because they are well acquainted and
enlightened with financial issues. Financial knowledge is required to establish a measure of financial
competence for competitive advantage, that is, to stay knowledgeable about financial matters (Lusardi &
Michell, 2006). As SMEs’ owners and managers become more literate, they become increasingly more
financially sophisticated and it is conjectured that this may also mean that an individual may be more
competent (Hung, Parker & Yoong, 2009). Financial knowledge would affect in increase in the firm’s
total source of financing (Marcolin & Abraham, 2006). Moore (2003) and Huston (2010) stated that an
individual is financially literate if he or she is competent and is able to apply this knowledge. Moore
(2003) explained that literacy or knowledge is acquired through practical experience and active
integration of knowledge. In other words, people will become more sophisticated in terms of finance
when they are more literate. Huston (2010) also emphasized an important finding, that is, an individual
or organization who had financial literacy, knowledge and ability to put to use this knowledge may not
show the assumed behaviour or enhance his or her financial well-being as a result of other influences
such as cognition and behaviour that is biased, self-control problems, family, peers, economic and
institutional conditions that may affect the financial habits and financial well-being. However, both
scholars, Moore (2003) and Huston (2010), concurred in explaining that financial literacy cannot be
measured directly, and there is no established instrument engaged to measure financial literacy.
The researcher suggested that there is a moderation correspondence between knowledge and attitudes
(Eagly & Chaiken, 1993). Jacobs-Lawson and Hershey (2005) examined the extent to which individuals’
knowledge of retirement planning, future time perspective and financial attitude (risk tolerance) influence
retirement saving practices. That is, knowledge affects the direction and/or strength of the relationship
between attitudes and firm performance (Baron & Kenny, 1986). Studies in the United States reveal low
8 Global Business Review 18(3)

levels of financial knowledge via attitudinal behaviour among youth (Lusardi et al., 2010; Mandell,
2007). However, despite the conventional wisdom that financial knowledge is a prerequisite for positive
financial attitude (Hathaway & Khatiwada, 2008), the empirical relationship between financial
knowledge and attitude is not well established.
Financial attitude (FAT) refers to the capacity to assess the new and sophisticated financial instru-
ments and build sophisticated judgements in each option of instruments and degree of utilization that
may be in their own best long-term interests (Mandell, 2007). Attitude towards decision-making
approaches has become characteristic of many firms that are successful. This can be concerning strategic
posture that permits companies to draw on entrepreneurial skills and capabilities in order to seize chance
(Covin & Slevin, 1989).Small and medium enterprise managers and business owners with more note-
worthy attitudinal mentality have a tendency to take risks, initiate and act proactively, while conservative
business managers and owners like better to avoid risk and are reluctant to initiate and act responsively
(Lumpkin & Dess, 1996; Sabri & MacDonald, 2010). While attitude is relating to risk-taking, it is the
firm consciously committing resources to projects with chance of high returns but may also entail a high
possibility of failure (Miller & Friesen, 1982; Lumpkin & Dess, 1996). Nevertheless, risk-taking is also
usually linked with entrepreneurial behaviour and that mainly successful entrepreneurs are risk takers
(Kuratko & Hodgetts, 2001). Lusardi and Tufano (2009) likewise concentrate on a particular pattern of
financial literacy—debt literacy. Moore (2003) goes so far as to incorporate handy experience on the
argument that it provides the basis for knowledge and different perspectives financially related profi-
ciency. Cude (2010) examined effective factors on people’s financial literacy. He observed that more
work experience, higher levels of education, risk appetite, parental occupation, higher age, family
income and attending training classes will boost financial literacy. Bond and Meghir (1994) opined that
credit terms also determined the extent to which SMEs access finance. They noted that when credit terms
are favourable, the SMEs’ managers’ attitudes towards accessing that credit tend to be positive and they
are encouraged to borrow, and therefore expansion of the capital base leading to increased business
activity takes place. In this research, it is expressed that people with higher financial literacy are more
successful in their business and personal lives. Their financial concerns were well lower and they had
longer-term savings and investments and triggered a better future with a more long-term vision. Financial
literacy is reported to have a negative relationship with financial constraints (Sabri & MacDonald, 2010).
Financial awareness (FAW) is the capability to understand and to handle various financial mix
strategies, know more and be aware about the external service providers. It is the conceptual knowledge
of financial product offerings by financial institutions and the ability to make responsible investments
(decisions) to facilitate the achievement of one’s financial goal. The capacity empowers business owners
to be mindful, set and actualize new systems to meet the firm’s performance as organization’s objective
through reacting to the changing economic situation (Sulaiman, 2014). Awareness comes under the sector
of the managerial, where it is the duty of the manager to look after organization for the well-being of the
business. The ability to read, analyze, manage and discuss various financial conditions eventually leads
to individuals’ economic well-being (Lusardi & Tufano, 2009; Rahmandoust, Shah, Norouzi, Hakimpoor
& Khani, 2011; Vitt et al., 2001). Deakins, Logan and Steele (2001) found that owners–managers have
different approaches concerning business planning. Fundamentally, planning was indispensable to those
firms under periods of growth and rapid changes. However, Mandell (2007), Lusardi and Tufano (2009)
emphasized on ability and decision-making aspect of financial literacy. Berman and Knight (2008)
definitely stated that financial literacy needs to become part of every business culture. Audet and St-Jean
(2007) discovered that the SME owner/managers, who perceived more and are aware about the external
service providers, make use of those services more than SME owner/managers who did not hold any
information about these services. Financial awareness needed an entrepreneur level of the basic concept
Eniola and Entebang 9

of finance and their capacity to manage the financing through an appropriate, brief period of decision-
making and solid long-term financial forethought (Remund, 2010). Firms that understand and are familiar
with comprehension of financial products offered by relevant institutions and maintain these financial
products with financial institutions reduce the likelihood of financial problems for it says something
about firm awareness of financial facilities and their ability to make use of financial products. Hence,
financial awareness has a positive relationship on financial attitude.

Methodology

Sample and Data Collection Method

The study was carried among the MSMEs within Ekiti, Ondo and Osun states located in the south-
west region of Nigeria. This analytical study uses a quantitative methodology with cross-sectional
design. Questionnaire distribution was to 600 respondents, with 250 returned respondents, resulting in
37.8 per cent response rate, while major references adapted from are employed for the construct measures.
Small and Medium Enterprises Development Agency of Nigeria’s (SMEDAN) definition of micro-
enterprises as employing as between one and nine people with assets (excluding land and buildings) of
less than N5 million, small enterprises as between 10 and 49 employees and assets of N5–N50 million,
while medium enterprises as those with between 50 and 199 employees and assets between N50 and
N500 million was used for the study. These are enterprises that have been in existence for up to five
years. A pilot test involving 25 owners of SMEs in the trade and commerce sector was performed in
order to evaluate the reliability of dependent and independent variables. The data preparation processes
involve the data entry into a database, data filtering and finding any missing responses.
From some major references, the six latent variables are tailored. Small and medium enterprise
performance is adapted from the work of Mac an Bhaird (2010) and Diagne and Zeller (2001). Financial
knowledge is referred to in Lusardi and Bassa Scheresberg (2013). Financial awareness is referred to in
Oseifuah (2010) and Sulaiman (2014). Financial attitude is referred to in Covin and Slevin (1989),
Lumpkin and Dess (1996), Cude (2010) and Sabri and MacDonald (2010) as illustrated in figure 1.
In the analysis, two statistical techniques were used to analyze the survey data. The Statistical Package
for Social Sciences (SPSS) version 21.0 was used to generate descriptive analyses while partial least
squares approach to structural equation modelling (PLS-SEM) was used in the measurement and
structural model. Partial least squares is regarded and carried into account with the flexibility to the
analysis of outer model or latent variable analysis. Partial least squares (PLS) affect the analysis model
that is structural inner model analysis, which examines the relationship between latent variables. To manage
such predisposition and estimation, every construct’s average variance extracted (AVE) ought to be bigger
than the square correlation among the constructs; from bootstrapping, part coefficients should originate
and ought to be in situ and is the report of t-value, p-value and indicating weight (Hair, Sarstedt, Ringle
& Mena, 2012). The final model was decided after dropping out insignificant factors, having factor
loadings of less than 0.5; the model was analyzed by using SmartPls.3.0 software.

Empirical Results
Data collection indicates that the empiric firms represent SMEs in three states in Nigeria. Sixty per cent
of the observed firms were with assets of more than N5 million. This suggests that most of them represent
10 Global Business Review 18(3)

small firms. Moreover, from a number of sales, the data indicate that 61 per cent of them hold a sales
turnover less than N10 million, which suggests that the ascertained data comes from micro-firms. Mean,
standard deviation and correlation among the observed variables are described in Table 1.
The moderate company performance average at degree of 2.976 has its range from 1 to 5. FAW and
FK exhibit reasonable, moderate level with average rate range at 3, whereas FAT exhibits an average
of 2. Reliability test embraces quality criteria, made of composite reliability (CR) and Cronbach’s alpha
(CA). The CR measurement implies that all variables have a coefficient greater than 0.7. This outcome
infers that all variables have acknowledged reliability.
Likewise, the measure of AVE demonstrates that all variables have a greater number than 0.6 (Hair,
Black, Babin & Anderson, 2010). This result indicates that all variables have adequate convergent
validity. Moreover, VIF is calculated as ‘1/Tolerance’. As a rule of thumb, we necessitate to take in a VIF
of 5 or lower (i.e., tolerance level of 0.2 or higher) to avoid the collinearity problem (Hair et al., 2010).
It shows there is no collinearity (see Table 2).
According to Hair et al. (2010), the correlation coefficient between each pair of independent variables
in the Pearson’s correlation should not exceed 0.90. In Table 3, the highest correlation coefficient was
0.879, which is between FAT and SOF.

Table 1. Descriptive Statistics and Correlation

Mean Std. Deviation 1 2 3 4

1 Financial attitude (FAT) 2.840 0.980 1.000
2 Financial awareness (FAW) 3.088 0.878 0.883*** 1.000
3 Financial knowledge (FK) 3.454 1.138 0.349*** 0.368*** 1.000
4 Firm performance (SOF) 2.976 0.649 0.538*** 0.622*** 0.719*** 1.000
Source: Authors’ findings.
Note: ***Significant with alpha = 0.01 level.

Table 2. Significance of Factor Loading

No of Items VIF AVE Composite Reliability R2 Cronbach’s Alpha

FAT 4 0.984 0.992 0.510 0.984
FAW 5 0.779 0.876 0.000 0.719
FK 8 0.758 0.862 0.000 0.691
FP 8 0.674 0.911 0.567 0.881
Equity 2.021
Debt 1.864
Source: Authors’ findings.

Table 3. Latent Variable Correlations for Debt

FAT FAW FK SOF

FAT 1
FAW 0.897 1
FK 0.836 0.847 1
FP (SOF) 0.879 0.773 0.827 1
Source: Authors’ findings.
Eniola and Entebang 11

Table 4 shows that in equity, the highest correlation coefficient is 0.711, which is between financial
knowledge (FK) and financial awareness (FAW). In addition, significant correlations among the four
independent variables were observed, which indicated that they measured the intended concepts.
Table 2 presents the results of the analysis in this study. The R2 value was 0.56, suggesting that 56 per
cent of the sample variance in the firm performance can be explained by the financing literacy dimen-
sions, which are the financial knowledge, financial attitude and financial awareness and 51 per cent of
the financial knowledge and financial awareness together explained financial attitude. When the critical
ratio (CR) is > 1.96 for a regression weight, that path is significant at the 0.05 level or better (i.e., its
estimated path parameter is significant) (Bian, 2011).
The results in Tables 5–7 show that the impact of FAT by using both sources of financing for FP and
using only equity for FP with t-statistics of 3.009 and p < 0.003 for both sources and 2.105 and p > 0.036
for equity is significant. The result is accepted for both sources of financing and equity source of
financing, while the FAT of seeking debt financing for FP with t-statistics of 0.962 and 0.337 is not
significant. Thus, the result is rejected for debt source of financing.

Table 4. Latent Variable Correlations for Equity

FAT FAW FK SOF

FAT 1.000
FAW 0.709 1.000
FK 0.702 0.711 1.000
FP (SOF) 0.477 0.320 0.333 1.000
Source: Authors’ findings.

Table 5. Path Coefficient (inner modelling analysis)

Original Sample Standard Error t-statistics

Sample (O) Mean (M) (STERR) (|O/STERR|) p-values
FAT → FP −0.301 −0.306 0.100 3.009 0.003
FAW → FAT −0.882 −0.883 0.019 47.040 0.000
FAW → FP −0.638 −0.640 0.083 7.731 0.000
FK → FAT −0.015 −0.014 0.027 0.550 0.583
FK → FP −0.600 −0.601 0.037 16.107 0.000
Source: Authors’ findings.

Table 6. Path Coefficient (inner modelling analysis) for Debt

Original Sample Standard Error t-statistics

Sample (O) Mean (M) (STERR) (|O/STERR|) p-values
FAT → FP −0.112 −0.120 0.116 0.962 0.337
FAW → FAT −0.733 −0.725 0.073 10.081 0.000
FAW → FP −0.852 −0.863 0.095 8.928 0.000
FK → FAT −0.243 −0.252 0.079 3.074 0.002
FK → FP −0.270 −0.267 0.059 4.582 0.000
Source: Authors’ findings.
12 Global Business Review 18(3)

Table 7. Path Coefficient (inner modelling analysis) for Equity

Original Sample Standard Error t-statistics

Sample (O) Mean (M) (STERR) (|O/STERR|) p-values
FAT → FP −1.290 −1.032 0.613 2.105 0.036
FAW → FAT −0.899 −0.900 0.018 49.161 0.000
FAW → FP −1.145 −0.960 0.435 2.633 0.009
FK → FAT 0.060 0.063 0.025 2.361 0.019
FK → FP −0.482 −0.447 0.172 2.810 0.005
Source: Authors’ findings.

Figure 2. Path Analysis

Source: Authors’ findings.

Figure 2 and Tables 5–7 show the path analysis indicates that there is a significant relationship
between FAW and FAT for the three groups in using both sources of financing and each source likewise.
The t-test is 47.040, 10.081 and 49.161 respectively and the p < 0.000 for the three groups accordingly.
Thus, the result is accepted.
Tables 5–7 results show that there is a significant relationship between FAW and FP for the three
groups at t-test level of 7.731, 8.928 and 2.633 respectively and the p < 0.000 and 0.009, respectively.
This indicates that the significant level of the relationship is accepted, which implies there is a direct
effect between FAW and FP. Tables 5–7 show a different variance on the relationship between FK and
FAT for the three groups, the results show that there is a significant relationship between FK and FAT
towards using debt and equity for firm performance at t-test of 3.074 and 2.361 and p < 0.002 and 0.019,
respectively. Thus, results are accepted. There is no significant relationship in the FK and FAT towards
Eniola and Entebang 13

using both sources of financing as t-test indicates 0.550 and p < 0.583 for FP. Hence, the significant
relationship between FK and FAT is rejected.
Tables 5–7 bootstrap output and show the impact of FK and FP for the three groups with the t-statistics
of 16.107, 4.582 and 2.810 for the three groups and (p < 0.000 and 0.005), respectively. This indicates
that financial knowledge direct effect on firm performance and the result is accepted for the three groups.

Discussion
This study provides evidence that there is no direct effect of FAT on FP towards decision-making about
debt source of financing. The earlier research is in conformity with the results and asserts that the
insignificant relationship between FAT and FP lays on some factors, together with a business cycle time
frame and risk aversion (Sadler-Smith, Hampson, Chaston & Badger, 2003; Simpson, Padmore &
Newman, 2012; Sulaiman, 2014). Outweighing the effect of other variables could be another basis for an
insignificant relationship (Runyan, Droge & Swinney, 2008). Likewise, managerial effect like lack of
professionalization of management, lack of diversification of the owner’s human capital and the
emotional bond that the owner has with the firm, the majority are unwilling to dilute the ownership of
the business so that they can maintain control over operations and assets. Moreover, the level of borrowing
cost is not nearby, the size and legal structure of the responding firms are factors considered in the
application procedures which serve as a deterrent and created the attitudinal lack of interest in getting
debt as a source of financing. Therefore, the reason for the significant impact of FAT on FP towards
decision-making about equity sources of financing (Michaelas, Chittenden & Poutziouris, 1998).
While the managers and business owners are willing to apply both sources of financing for effective
firm performance, but they opted otherwise in the presence of the above-stated factors. Though FAW is
significant to FP, it is surprising that the awareness level of the entrepreneur in sourcing of debt for firm
performance is higher compared to the awareness created in sourcing for equity and combining both.
This implies that firm owners and managers are fully aware of the differences and the several financial
products that are advantageous to them. However, external financial support will not be tried if there is
an effect that is difficult to access and will not be pursued by business owners–managers, despite whether
or not the perception is accurate and will be beaten from developing a perfect scheme. Thus, their
attitude in exploiting them is constricted due to supply-side behavioural factors.
Business owners and managers might have robust and acceptable FK, but they require FAT to
transform those human resource assets into business practical viable products or services. Earlier, studies
confirm the argument that managers FAT can bring positive result in the firms (Reijonen & Komppula,
2007) and FK has a significant impact on FP (Sulaiman, 2014).
The significance of this effect suggests that SME manager and business owners should pay more
attention to their attitude towards financing provision. Having a positive attitude and not being a short-term
thinker and not being easily tempted does more to prevent financial problems than having financial skills.
The research limitation evolves from cross section information observation, which signifies on snapshot
observation. Additionally, inspired to meet the analysis gap is panel data analysis. The information source
hinges on the business owner/managers. Various sources of information from the observed firms, like the
owner, workers, suppliers and other stakeholders, should be applied in the future research.

Conclusion
The relationship between financial literacy and FP is wide. A great deal can, therefore, be done by focus-
ing more closely on attitudinal perception towards of SME business owners and managers and how to
14 Global Business Review 18(3)

change it, especially in training courses through strategic orientation. The supply-side behavioural atti-
tude should tend towards transparency and encouraging training of business owners and managers in
basic business management skills, capacity-building aspect, leadership development as well as network-
ing via relationship marketing and management.
Our insights lead to the conclusion that life or people solve problems by themselves better than any
sophisticated technical and scientific engineering. For thriving business and entrepreneurship, it is
necessary to have a favourable climate and environment which will enable that life and business people
solve their problems, grow and advance further. This necessarily poses the question whether the higher
level of financial intelligence and knowledge significantly prevents demise and closure of SMEs or
makes successful companies even more successful. The government should be in the forefront in the
need to create a positive attitude towards entrepreneurship favourable to climate and environment.
The study equally gives a significant expansion to the viewpoint of resource-based theory, which
explains on the whatever way it is paramount for firm’s business owners and managers that human
capital, such as the entrepreneur’s skills, experience and other personal characteristics, are key resource
endowments. Managers’ and business owners’ strategic choices, behaviours and performances are to a
large extent influenced by the demographic characteristics, their social connections, their perceptions of
the environment and their decision-making styles. Attitude influences business owners’ and managers’
selection of actions and reactions to challenges, motivators and performance. From the advanced RBV
theory, this study obtains the support that accentuates the position of capability to manage the resources.
Business managers with the right attitude and capacity to manage distinctive resources and to handle the
business force have a lot of competitive advantages to achieve superior profit.

Acknowledgements
The author is grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the
quality of the article. Usual disclaimers apply.

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