Entrepreneurs on their financial literacy: evidence from the Netherlands

ABSTRACT

Using a representative survey of Dutch entrepreneurs and self-employed individuals, (i) we measure their subjective financial knowledge and the extent to which they ask for advice when managing their companies, and (ii) we examine whether subjective financial knowledge and the demand for advice are related to the firm economic performance. We find that the respondents feel more comfortable with accounting subjects than they do with strategic ones, of which they feel that they know the least. Entrepreneurs with a greater extent of financial knowledge are more likely to report a higher gross margin and higher revenue growth for their firm. These entrepreneurs are also less likely to seek advice and to delegate financial decisions. Seeking professional advice does not increase the likelihood of an entrepreneur having better performance. Our results suggest that entrepreneurs’ degree of financial knowledge is related to the success of their businesses, while seeking advice is not significantly correlated with better firm performance.

KEYWORDS:

• Entrepreneurs’ financial knowledge
• firm performance
• financial advice

Acknowledgments

We would like to thank Chiara Monticone for her great contribution to the paper. We also thank Fabio Bertoni, Andrea Hasler, Annamaria Lusardi, Armin Schwienbacher and the participants to the Second emlyon-GFLEC Workshop on Financial Literacy of Entrepreneurs (Paris, June 2018), and to the Asia-Pacific Institute on Financial Education (Singapore, September 2019).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13691066.2023.2234078

Notes

1. For example, in most OECD economies, MSMEs account for over half of all the employment and value added of the business sector and represent more than 90% of all the firms (OECD 2018a).

2. This survey was an internal consulting project with the intent to understand the needs for advice among the members of the Chamber. We depart from this very narrow perspective in this paper.

3. We use the terms “entrepreneur” and “business owner” interchangeably throughout this paper to indicate the individual directly involved in making the main decisions of the company.

4. In untabulated but available on request results, we also find that entrepreneurs’ levels of knowledge regarding the four topics examined in the survey (accounting, strategy, firm financing, and taxation) are positively correlated with their firms’ economic performance, with the partial exception of owners’ knowledge of taxation issues.

5. The advice of professionals is easily accessible in a country with highly developed financial and consulting services such as the Netherlands.

6. For example, in the 2009 U.S. Financial Capability Study, 70% of respondents gave themselves score of 4 or higher (out of 7), but only 30% of the sample could answer the factual questions correctly (Lusardi 2011).

7. Indeed, we cannot establish our respondents’ degree of overconfidence, because the survey does not provide data on their objective financial knowledge.

8. The higher development of the credit and of the financial markets and the easier access to professional advice, which both differ across developed and developing countries, are probably among the main determinants of MSMEs performance.

9. Because the types of knowledge and skills that are important for entrepreneurs in terms of managing the finances of their businesses may overlap to some extent but are not necessarily the same as those needed by consumers and households to manage personal or family finances (see for example Lusardi and Mitchell (2014)), we cannot extrapolate the results obtained from the large body of literature on households’ financial literacy to entrepreneurs.

10. van der Sluis, van Praag, and Vijverberg (2005) find that entrepreneurship educational programs in developing countries strongly impact enterprises’ economic outcomes, suggesting that certain targeted education can be extremely effective.

11. Entrepreneurs who seek advice may also learn from professional advisers, similarly to the way in which households learn from advisers (Stolper and Walter 2017).

12. The English translation of the original survey (in Dutch) is included in the submission separately for refereeing purposes and named as Appendix C.

13. The Netherlands’ Chamber of Commerce entrepreneurs panel was set up so that surveys of requirements could be conducted regularly. With a difference of 9%, only the consultancy, research and other specialised business service sector is somewhat over-represented in the sample. The sample is representative in terms of scope, sector, age and gender, with a bias for men in a slightly older age group. For further details on the representativeness of the sample, please refer to Appendix 2 in Lentz et al. (2016), also available from the authors upon request.

14. Some respondents did not provide answers to all questions, which is why some of the variables have missing data. We indicate the number of available data points per variable in Table 2.

15. Since we do not use these financial ability measures in our empirical models, we will not comment further on them.

16. The survey also gives the respondents the possibility to answer “I do not know” to the question about the gross margin in 2015. To estimate the ordered logit models (see below), we dropped the respondents who did not know their gross margin in 2015 from the analyses. However, we also estimated multinomial logit models (unreported but available on request) in which we kept these respondents. Both methodologies yielded very consistent results.

17. In general, the higher the degree of self-assessed knowledge, the less the respondents feel that they need help on a given topic.

18. According to Burke et al. (2018) entrepreneurial experience enhances the firm performance of employer firms. The prevalence of entrepreneurs with extensive experience in our sample might bias it towards well-performing firms.

19. In the untabulated analyses, we used the multinomial logit specification to estimate the effect of Subjective financial knowledge on the respondents’ entrepreneurial outcomes. The results, available from the authors on demand, were fully consistent with the ones reported here, and are thus omitted for brevity.

20. In the robustness checks, we show that the results we obtain here are confirmed if we consider only professional advice.

21. The Logit model (1) illustrated in Table 6 excludes respondents who fully delegate the financial decisions related to their business to another person (e.g., the CFO of the company).

22. For comparison, in the 2005 DHS representative sample of Dutch households, the investors who rated their financial literacy as high are 17.5% less inclined to seek advice than those who rated their literacy as low (Kramer 2016).