Financial literacy in SMEs: A systematic literature review and a framework for further inquiry

ABSTRACT

It has been suggested that financial literacy plays a crucial role in the understanding of the overall performance of small and medium-sized enterprises (SMEs). Nonetheless, its impact remains underexplored, and the few existing findings are fragmented. This study conducts a systematic literature review focused on the antecedents and consequences of financial literacy in SMEs. The findings show that some educational, cultural, and specific contextual factors are antecedents of financial literacy; in turn, financial literacy influences the financial attitudes, financial behaviors, organizational capabilities, and performance of SMEs. Further research should analyze the uncovered lines of study suggested in our research agenda to consolidate the conceptualization of financial literacy in the context of SMEs, overcome the limitations of the current methodology, extend the current evidence about the antecedents and consequences of financial literacy in SMEs and analyze these relationships from behavioral economics and decision-making perspectives.

KEYWORDS:

• Financial literacy
• small and medium-sized enterprises
• systematic literature review

Acknowledgments

The paper is derived from the first author’s thesis. We gratefully acknowledge helpful comments and suggestions from Ricardo Malagueño, Laura Gomez-Ruiz (discussant), Vladimir Vega Falcon (discussant), and seminar participants at the 14th Congreso Iberoamericano de Control de Gestión (CIBEC) and the 7th Research Forum (2020). We would also like to express our gratitude to the Savings Banks Foundation (Fundación de las Cajas de Ahorros –FUNCAS–). The third author also acknowledges financial support from the Spanish national funds through the project PID2019-106677GB-I00 of the Ministry of Science and Innovation and from the Portuguese national funds through the project UIDB/04728/2020-FCT - Fundação para a Ciência e Tecnologia. In addition, the fourth author is grateful with the support of their collaborators Yannire Cid y Javiera García.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In this study, we considered FL in SMEs as a combination of financial knowledge and the ability to apply it to make decisions in SMEs (see the section on Financial literacy measues in an SME setting for further details).

² A recent stream of literature (for example, Croteau et al., 2021; Portuguez Castro & Gómez Zermeño, 2021; Purnomo et al., 2021; Sharma & Rautela, 2021) has used theoretical and qualitative approaches to provide insights into managerial practices in the current COVID-19 context. The main problems faced by any firm during the pandemic are related to financial liquidity. SMEs are more strongly affected because of their poorly sophisticated processes, lack of certain managerial skills, and limitations of obtaining external financing, accentuating the difficulties in adjusting to and reorganizing operations to the new situation. Overall, these articles signal that managers with higher management abilities are able to retool their operations in line with the long-term opportunities that emerge during the subsequent phases of economic recovery. Therefore, it is likely that FL is essential for SMEs to resist the new economic environment that the onset of the COVID-19 pandemic has triggered.

³ Any articles focusing on similar topics, such as international financial reporting standards, corporate governance, learning processes, tax evasion or economic crises in SMEs, were excluded from the analysis because they did not address FL. In addition, nonempirical investigations, such as literature reviews or descriptive studies, were excluded. Papers that did not include SMEs were also excluded.

⁴ The potential exclusion of these articles reporting observations from firms with more than 250 employees would not significantly change the results presented in our study.

⁵ The relevant literature spanning scientific studies (Faulkner, 2015; Huston, 2010; Lusardi & Mitchell, 2007a), policy-related documents (for example, Atkinson & Messy, 2011; BDC, 2017; Lentz et al., 2016) and relevant working papers (for example, Alperovych et al., 2020; Trombetta, 2016) agrees that financial knowledge forms the basis and more significant dimensions of FL. Financial knowledge and FL are not equivalent, but any article that aims to capture an approximation of FL should include in its metrics at least some questions about the core element, that is, financial knowledge.

⁶ We maintained nine articles in the review that operationalized a measure of FL that only contained the knowledge dimension. To reflect this casuistry, we indicate this set of papers with the subscript ₁ when they are mentioned in the text.

⁷ The first investigation that conceptualized FL in this way.

⁸ Despite some exceptions, most of both scientific and nonscientific literature acknowledges financial education as an antecedent of FL. Therefore, this metric is not a focus of discussion by researchers.

⁹ In addition, 62% of the reviewed articles capture FL exclusively using metrics of financial knowledge and its application. The remaining articles added some additional metrics associated with financial education, financial attitudes, and financial behaviors in their measures of FL.

¹⁰ Nevertheless, the prior relevant literature reviews of personal finance, such as Huston (2010), Hung et al., 2009), and Lusardi and Mitchell (2014), claim that prior research has interchangeably used the concepts of financial knowledge and financial literacy (including application). Checking the methods sections of Nitani et al. (2020) and Rostamkalaei et al. (2022), we acknowledge that the problem persists in the SME literature. These studies have called financial knowledge a measure that collects both dimensions that compound FL: knowledge and application (definitions available in Table 1). In fact, we found other articles, for example, Riepe et al. (2022), which used a very similar measure but labeled it FL. Thus, in Table 2, we ticked the knowledge and application boxes depending on the items that actually formed the measure, regardless of the label that the authors employed.

¹¹ Furthermore, the OECD (2020) argued that any measure that aims to properly capture managerial FL should necessarily employ metrics of financial knowledge and its application, while the metrics of financial attitudes and financial behaviors can be omitted to assure the simplicity of the measure.

¹² We thank one of the reviewers for pointing out this impact.

¹³ As usual in organizational studies, there should be a distinction between the mere sum of the individuals’ capabilities in an organization and the organization’s capability itself. These latter capabilities remain in the organization even when all of the individuals are substituted for a new set of individuals, and they are materialized in formal and informal procedures and routines – procedures repeated time after time – which is what we should refer to as organizational FL.

¹⁴ Hereafter, qualitative studies will be shown in italics.

¹⁵ CEO, manager, or another member of an organization’s founding team.

¹⁶ Reminder: the authors in italics performed qualitative studies.

¹⁷ “Financing methods other than the traditional debt and equity from financial institutions and personal equity” (Carter & Van Auken, 2005: p. 131). For example, these include personal credit cards, cross-subsidizing, advance payments and borrowing from family and friends (Jayawarna et al., 2011).

¹⁸ Kabo (2021) and Oggero et al. (2020) only found a positive correlation between FL and entrepreneurship in older and male individuals, respectively.

¹⁹ In particular, Agyapong and Attram (2019) and Ismanto et al. (2020) measured the effect of FL on growth, financial performance and nonfinancial performance.

²⁰ In case of the EU, article 2 of the annex within Recommendation 2003/361/EC of the European Commission and the User Guide clearly state that the classification of a firm as an SME is the combination of the number of employees AND annual turnover OR total assets. The annual work unit should be fewer than 250 employees, and annual turnover should not exceed €50 million OR annual balance sheet total should not exceed €43 million. Article 4.2 explains how to compute this information over time since it is required that the conditions be met consistently in at least two of the latest three fiscal exercises, which are particularly relevant in volatile markets. This requirement does not apply if the change is the result of a change in ownership following a merger or acquisition (European Commission, 2015).

²¹ We thank one of the reviewers for encouraging us to go beyond this work and include this approach.

²² Kahneman and Tversky (1974) defined this heuristic as a mental shortcut for making frequency or probability judgments based on “the ease with which instances or occurrences can be brought to mind”. For a more detailed discussion of heuristics and biases, see Appendix 4.

²³ A valid context is defined as one in which the clues are clear and unambiguously lead to a certain decision. In addition, Kahneman (1994) claimed that learning from experience is very slow since it requires a certain time from when the intuitive-based decision is made, and it produces a certain outcome, so the decision maker can realize all of the internal processes and clues that lead to such a decision. Financial markets seem far from being considered a valid context since they are very volatile.

²⁴ We should emphasize the idea that rationality means to behave as the theory predicts one should behave, so any deviation could be considered a nonrational or even an irrational behavior. Simon (1987) distinguished rational decision making as decision making that is consciously analytic, nonrational decision making as intuitive and judgmental decision making and irrational decision making as behaviors that respond to emotions or that deviate from action chosen “rationally”. Kahneman (1994: 18–19) stated that technical discussions of rationality are about “an individual’s beliefs and preferences are said to be rational if they obey a set of formal rules such as complementarity of probabilities, the sure thing principle or independence of irrelevant alternatives”. In academic instances, rationality “asks whether beliefs are grossly out of kilter with available evidence, and whether decisions serve or damage the agent's”.

Additional information

Funding

This work was supported by the Fundación de las Cajas de Ahorros (EF001-2018; EF003-2021); Fundação para a Ciência e Tecnologia (UIDB/04728/2020-FCT); Spanish Ministry of Science and Innovation (PID2019-106677GB-I00).