Financial Literacy and Financial Performance of Micro, Small and Medium Enterprises in Lagos City, Nigeria

Abstract

Micro, small, and medium-sized enterprises' (MSMEs') financial literacy and performance are critical to their overall survival in a competitive business environment. The study addressed the following specific objectives:

• To determine the level of financial literacy of MSME entrepreneurs;
• To determine the financial performance of MSMEs;
• To determine the relationship between financial literacy and financial performance, and
• To determine the problems encountered by MSMEs entrepreneurs in the management of their businesses

The study was guided by the upper echelon theory and competency theory. The study adopted a descriptive-correlational research design in which a total sample of 100 MSMEs was conveniently selected inside Alaba International Market, Lagos City, Nigeria. Questionnaires were administered as the main data collection tool, which included estimates of the MSME financial statements such as profitability, liquidity, and leverage for the years of 2017, 2018, and 2019. An inferential statistical tool, such as correlation analysis, was applied to test the relationship between the two main variables.

The study found that the majority of the entrepreneurs had appropriate levels of knowledge, behavior, and attitude in managing their business finances but were inconsistent in putting these concepts into practice while making decisions that affected their business operations. The study also found that the MSMEs for the three-year periods assessed were not profitable due to low sales, insufficient support from stakeholders had low liquidity due to poor sales and lack of cash flow management, and incurred more debts that were diverted to other activities that did not add value to their business operations. The null hypothesis was rejected, implying that financial literacy had a significant and positive effect on the financial performance of MSMEs. Moreover, poor access to bank financing was found to be the major problem impeding the expansion and growth of MSMEs in the study area. As a result, the study concluded that the proposed recommendations would serve as the foundation for addressing the issues raised in the study, thereby assisting MSMEs in improving their financial literacy and business performance in the long run.