The Impact of Financial Literacy on the Profitability of Micro and Small Enterprises Owned By University Students in Kenya: A Case Study of United States International University- Africa

A Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirements for the Degree of Masters in Business Administration (MBA)The objective of the study was to investigate the impact of financial literacy on the profitability of micro and small enterprises owned by students of united states international university Africa. The study aimed at examining the effect of financial knowledge on the profitability of micro and small enterprises that are owned by the students of USIU-A, the effect of financial behavior on profitability of micro and small enterprises owned by the students of USIU-A and the effect of financial attitude on profitability of micro and small enterprises owned by the students of USIU-A. The study adopted a descriptive research method for obtaining necessary primary data to give clear understanding of the research objectives. This research design helped in observing the effects of financial knowledge, financial behavior and financial attitude on the profitability of micro and small enterprises owned by students of USIU-A. The study involved samples drawn from students of USIU- Africa that own or manage micro or small enterprises. To achieve the objectives, a deductive approach was used, where primary data was gathered through issuing of a set of structured questionnaires to a sample population of 52 students that have their own businesses. Probability sampling was used to randomly select respondents to collect data. A descriptive statistics and inferential statistics was employed for analyzing the impact of financial literacy on profitability of MSE’s. A Correlation analysis was used to find out the relationship between financial knowledge, financial behavior and financial attitude and profitability. Linear Regression analysis of variance, frequency distribution and cross tabulations was used to analyze the findings. These analyses were carried out using Statistical Package for the Social Sciences (IBM SPSS) statistical software and Microsoft excel and the report was presented using both frequency tables and graphs. The study examined how financial knowledge affects the profitability of micro and small enterprises that are owned by students of USIU-A. The finding suggests that most of the respondents are financially knowledgeable as the greater percentage of them answered the financial knowledge questions drawn from the OECD questionnaire on Time value of money, diversification, risk and return and inflation correctly except for the most effective sources of finance for startup businesses. The study, however, reveals that financial knowledge is not significant in profitability of micro and small enterprises owned by the students. v The study assessed the effects of financial behavior on the profitability of micro and small enterprises owned by students of USIU-A and found that financial behavior slightly affect the profitability of such businesses. The study also found that majority of the business owners are uncertain on budgeting and planning, debt management, savings and some aspect of retirement planning like the knowledge of economic concepts needed for decisions, long term goals to expand the business and having alternative sources of income. However, they recorded low on record keeping and long-term financial decisions that influence retirement planning. The study observed the effect of financial attitude of owners of micro and small enterprises and how it affects their profitability. It found that most the respondents have positive attitude when it comes to setting financial targets for the future. The study reveals that the business owners are neutral on aspects of time orientation being long-term and the influence of social environment on money management skills. The study also found that majority of the business owners do not believe in risk prevention as a way of ensuring security of their businesses and they do not have the attitude of attempting to acquire more financial skills through training programs. The study established that there is a meaningful relationship between profitability and financial attitude of micro and small enterprise owners. The study concludes that financial knowledge does not necessarily translate into profits unless it is applied in decisions and other activities of the business. For example, the knowledge of time value of money does not mean ones’ profits will increase unless the business owner applies this knowledge on decisions in running the business. It also concludes that good financial behavior such as budgeting, debt management, savings, record keeping and retirement planning contributes to profitability of MSE’s. Also, positive attitude towards future, risk management, social influences and pursuit for acquisition of skills translates into profits for micro and small enterprises. The study therefore, recommends financial education and training programs by the government along with other institutions, that will encourage application of financial knowledge on activities of business owners. These programs should also be able to motivate and encourage positive attitude toward future orientation and growth of the businesses. The study also recommends that the informal sector should be encouraged to keep records of their transactions to prevent losses and miscalculations