Republic of the Philippines

Department of Education
REGION VIII-EASTERN VISAYAS
SCHOOLS DIVISION OF NORTHERN SAMAR
PAMBUJAN NATIONAL HIGH SCHOOL
PAMBUJAN, NORTHERN SAMAR

EFFECTS OF FINANCIAL LITERACY ON FINANCIAL PERFORMANCE

OF SMALL AND MEDIUM ENTERPRISES IN
PAMBUJAN, NORTHERN SAMAR

A Research Study
Presented to the
Senior High School
Pambujan National High School

In Partial Fulfillment
Of the Requirements of the SHS
Accountancy, Business and Management

By
MISCHA CASSANDRA ACEDERA
MARINOLD NEBRIAGA
YVONNE PEARL TAN
KATE PADEROG
JEMAR BALANQUIT
EVER DANE PETALBO

KRISTINE A. DULAY
Research Adviser

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 TABLE OF CONTENTS
1.0 Introduction Page
Context and Rationale -------------------------------- 3-5
Quantitative Research Questions ---------------------- 5-7
Null Hypothesis -------------------------------------- 7
Scope and Limitation of the Study -------------------- 7-8
Importance of the Study ------------------------------ 8-9
Theoretical Framework -------------------------------- 9-10
Conceptual Framework --------------------------------- 10
Paradigm --------------------------------------------- 11
Definition of Terms ----------------------------------11-15

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 CHAPTER 1

INTRODUCTION

CONTEXT AND RATIONALE

Financial literacy provides knowledge and understanding

of financial concepts and the skills, motivation and
confidence to apply such knowledge and understanding in
order to make effective decisions across a range of
financial contexts and to improve the financial well-being
of SMEs (Hogarth, 2002). Small and Medium-size Enterprises
(SMEs) sector has the crucial role to increase economic
growth in emerging countries. According to Senate Economic
Planning Office (SEPO) small and medium enterprises (SMEs)
have a very important role in developing the Philippine
economy. They help reduce poverty by creating jobs for the
country’s growing labor force. One of the challenges
affecting these SMEs is financial illiteracy as noted by
Wanjohi (2012) and Joo and Grable (2000) affirmed 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/services. Therefore, strategic efforts
are needed to improve the performance and sustainability of
SMEs. One of the ways that can be done is by enriching the
knowledge of SMEs people on financial expertise so that

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management and accountability can be better (Adomako et al.,
2016; Sadat & Lin, 2018).

Over the last two decades, scholars and policymakers in

both developed and developing countries have accepted that
financial literacy is critical for the establishment and
survival of small businesses (Wise, 2013). According to
Bosma and Harding (2006), many SMEs firms fail because they
lack financial literacy, insufficient business acuity, as
well as poor financial literacy. Financial literacy has a
significant effect on the performance and growth of SMEs
Eniola & Entebang (2017). In the previous research, there is
an impact of financial literacy and access to finance on the
performance of SMEs. According to Kimani & Ntoiti (2015),
financial literacy allows entrepreneurs to make projections
of income and expenditure, thus concluding that debt
management, budget planning. Financial literacy would bring
important implications for financial behavior; For instance,
people with low financial literacy are more likely to have
problems with debt (Lusardi and Peter, 2009).

Several researches has already been conducted to

determine the effect of financial literacy on financial
performance of small and medium enterprises (SMEs). In
foreign study, according to Cherugong (2015) there is a
strong positive effect of financial literacy on performance
of SMEs. SMEs that are more successful are run by
entrepreneurs who are financial literate. We conducted a
preliminary interview among business owners who owns small
and medium enterprises in Pambujan Northern Samar, the study
shows that financial literacy has a significant effect on

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financial performance of small and medium enterprises here
in Pambujan Northern Samar. One of the business owners we
interviewed, she said that her business is not doing well
and she is having a hard time to run her business, she has
many financial challenges such as her unpaid debt, net loss.
On the other hand, the other business owner we interviewed,
she said that her business is doing well. She explained that
financial literacy is important in running a business. She
explained that the reason why her business is doing well is
because she knows how to budget her expenses in running her
business so that it won’t lead her to being heavily in debt.

The general objective of the study is to find out the

effect of financial literacy on financial performance of the
small and medium enterprises. The target respondents are
business owners in small and medium enterprises in Pambujan,
Northern Samar. The Quantitative Research Design will be
used and collecting data is through survey questionnaires
that will be given to selected business owners.

The significance of this study is to determine the

effect of financial literacy on financial performance of
small and medium enterprises in Pambujan Northern Samar.
This study is pivotal to the researchers because it gives
them further information about the effect of financial
literacy on financial performance of small and medium
enterprises (SMEs). Also, it will help to identify areas for
improvement in financial management practices, informs LGU
on the effectiveness of financial literacy programs, and
ultimately contributes to the growth and sustainability of
SMEs.

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QUANTITATIVE RESEARCH QUESTIONS

This study aims to determine the effect of financial

literacy on financial performance of small and medium

enterprises (SMEs) in Pambujan Northern Samar. This study

will be able to answer the following qualifications.

1. To determine the profile of respondents in terms of;

1.1 Age

1.2 Sex

1.3 Educational Attainment

1.4 Civil Status

1.5 Type of business

1.6 Number of years of being a business owner

1.7 Business Status

1.8 Starting Capital

1.9 Monthly Income

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2. To determine the effect of financial literacy on

financial performance of small and medium enterprises (SMEs)

in terms of;

2.1 Financial Literacy

2.2 Financial Performance

2.3 Financial Behavior

2.4 Debt Management

2.5 Business Status

3. Identify the specific financial literacy skills and

knowledge areas that significantly impact the financial

decision-making processes within SMEs, and how these factors

contribute to their overall financial performance.

NULL HYPOTHESIS

Ho¹ There is no significant relationship between the profile

of business owners to their financial performance

Ho² There is no significant relationship between financial

literacy on financial performance of small and medium

enterprises

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Ho³ There is no significant relationship between the

financial literacy of SME managers/owners and their

financial decision-making processes, as well as their

overall financial performance.

SCOPE AND LIMITATIONS

The primary goal of this study is to look into how

financial literacy affects the performance of small and

medium-sized businesses (SMEs). It will look at how

financial literacy levels among SME owners and managers

relate to key performance factors like profitability,

growth, and sustainability. The study will look into the

relationship between financial literacy and SMEs performance

and business performance in Pambujan Northern Samar.

This study is limited to determining the relationship

between financial literacy and the financial performance of

small and medium enterprises (SMEs). It is limited only to

the small and medium enterprises (SMEs) owners in Pambujan,

Northern Samar. Another limitation of this study may be

constraint on time. Data Collection is time-consuming and

sometimes difficult to access, and which could affect the

data quality. reliability and accuracy of the collected

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data is crucial. This study's sample size may be limited by

the availability of suitable participants within the

Poblacions of Pambujan Northern Samar.

IMPORTANCE OF THE STUDY

LOCAL GOVERNMENT UNIT they can tailor effective training

programs for business owners. These programs can empower

entrepreneurs with crucial financial skills, fostering

better decision-making, risk management, and resource

allocation.

BUSINESS OWNERS understanding the impact of financial

literacy on SME performance can help business owners make

more informed decisions about managing their finances,

allocating resources, and identifying growth opportunities.

It can lead to improved financial management practices,

better risk assessment, and ultimately, enhanced

profitability and sustainability for their businesses.

FUTURE RESEARCHERS It provides a foundation for conducting

more in-depth studies, exploring specific aspects of

financial literacy, and investigating its interaction with

other factors affecting SMEs. Future research can contribute

to the development of practical strategies, policies, and

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interventions aimed at enhancing financial literacy among

SME owners and improving the overall performance of small

businesses in the economy.

THEORETICAL FRAMEWORK

Various Theories are introduced to explain the effect

of financial literacy on financial performance of small and

medium enterprises (SMEs) one of these is the human capital

theory.

Human Capital Theory - According to economist Gary Becker

(1962) who pioneered this theory, which argues that

investments in financial literacy such as training, skills

development, and represent investments in human capital.

In relevance to the effect of financial literacy on

financial performance of small and medium enterprises in

Pambujan Northern Samar, investments in financial literacy

can be seen as investments in the knowledge and skills

necessary for effective financial management within SMEs. By

enhancing the financial literacy of SME owners, the human

capital theory suggests that they can make more informed

decisions, and ultimately improve financial performance

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Financial management theory provides a framework for

understanding how businesses make decisions regarding

investments, financing, and dividends to maximize

shareholder value. When relating this theory to the study of

the effect of financial literacy on the financial

performance of small and medium enterprises (SMEs), several

key concepts come into play:

Investment Decisions (Capital Budgeting):

Financial management theory emphasizes the importance of

making optimal investment decisions to ensure long-term

profitability and growth. For SMEs, financial literacy among

business owners and managers is crucial in making informed

investment decisions. An understanding of financial

statements, cash flow analysis, and risk assessment enables

SMEs to evaluate potential investments more accurately and

choose those that promise the best returns relative to the

risks involved.

Financing Decisions:

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The theory highlights the significance of choosing the right

mix of debt and equity to finance operations and growth.

Financially literate SME owners can better assess the cost

of capital and understand the implications of different

financing options. This allows them to avoid over-leveraging

and to find the most cost-effective means of funding their

activities, thus improving their financial stability and

performance.

Working Capital Management:

Effective management of working capital ensures that an

enterprise maintains sufficient liquidity to meet its short-

term obligations. Financial literacy helps SME managers

understand the importance of managing inventories,

receivables, and payables efficiently. By optimizing their

working capital, SMEs can enhance their operational

efficiency and avoid cash flow problems that might impede

their performance.

Risk Management:

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Financial management theory includes strategies for managing

financial risks, such as market risks, credit risks, and

operational risks. SMEs with higher financial literacy are

better equipped to identify, assess, and mitigate these

risks. They can use tools like hedging, insurance, and

diversification to protect their business from potential

financial setbacks.

Financial Planning and Forecasting:

The ability to plan and forecast financial performance is a

critical aspect of financial management. SMEs with strong

financial literacy skills can develop more accurate

financial plans and forecasts, enabling them to set

realistic goals, allocate resources effectively, and monitor

their financial health over time.

Performance Measurement:

Financial management theory stresses the importance of

measuring and analyzing financial performance through

various metrics such as return on investment (ROI), net

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present value (NPV), and internal rate of return (IRR).

Financially literate SME managers can utilize these metrics

to evaluate their company's performance, make informed

decisions, and implement strategies to improve profitability

and growth.

Empirical Evidence and Studies

Empirical studies have shown a positive correlation between

financial literacy and the financial performance of SMEs.

For instance, research indicates that SMEs with higher

levels of financial literacy are more likely to engage in

sound financial practices, such as effective cash flow

management, strategic investment, and prudent financing

decisions. This, in turn, leads to better financial

outcomes, including higher profitability, improved growth

prospects, and greater resilience during economic downturns.

In conclusion, financial management theory provides the

underlying principles and tools that enable businesses to

make informed financial decisions. Financial literacy equips

SME owners and managers with the knowledge and skills needed

to apply these principles effectively. Consequently,

enhancing financial literacy among SME stakeholders can

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significantly improve their financial performance, leading

to more successful and sustainable business operations.

CONCEPTUAL FRAMEWORK

The Conceptual framework is based on the assumption

that there is a correlation between financial literacy to

the financial performance of small and medium enterprises.

This shows the paradigm of the study. For the independent

variable the researchers included the profile of the

respondents, as well as determining the effect of financial

literacy on financial performance of small and medium

enterprises (SMEs) in terms of;

2.1 Financial Literacy

2.2 Financial Performance

2.3 Financial Behavior

2.4 Debt Management

2.5 Business Status

Identify the specific financial literacy skills and

knowledge areas that significantly impact the financial

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decision-making processes within SMEs. The dependent

Variable is how this will affect the financial performance.

Lastly, the expected outcome of true study is to know the

effect of financial literacy on financial performance in

Pambujan Northern Samar.

PARADIGM

IV DV

Financial Financial
Performance
Literacy

DEFINITION OF TERMS

AGE

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Conceptually, it refers to a number of years a person has

lived on earth

Operationally, In this study the term is used to identify

the business owners profile.

BUSINESS OWNER

Conceptually, one person who is in control of the

operational and monetary aspects of a business

Operationally, refers to the business owners that operates

businesses in Pambujan, Northern Samar.

BUSINESS STATUS

Conceptually, it refers to the status of a business, current

state in terms of its financial condition and overall

performance

Operationally, it means the business' current status of

small and medium enterprises in Pambujan Northern Samar.

EFFECT

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conceptually, it refers to the outcome or consequence that

occurs as a result of an action, event, or phenomenon

operationally, in this study, it used to determine the

relationship between financial literacy on financial

performance of small and medium enterprises in Pambujan

Northern Samar.

EDUCATIONAL ATTAINMENT

Conceptually, it is the highest level of education that a

person has successfully completed

Operationally this is to find out the highest level of

education that the business owner had successfully completed

and their knowledge and skills in the field of business.

FINANCIAL LITERACY

Conceptually, it refers to the understanding of various

financial concepts, such as budgeting, saving, investing,

and managing debt.

Operationally, it involves the practical application of

these concepts to make informed financial decisions in

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everyday life of business owners in Pambujan, Northern

Samar.

FINANCIAL PERFORMANCE

Conceptually, it refers to how well a company generates

profits and manages its resources to achieve its goals.

Operationally, it involves analyzing financial statements,

ratios, and other metrics to assess the small and medium

enterprises profitability, efficiency, and overall financial

health.

LOCAL GOVERNMENT UNIT (LGU)

Conceptually, a local government unit (LGU) refers to an

administrative division of a country established by law to

handle specific governmental functions within a defined

area.

Operationally, in this study, they are responsible for

delivering basic public services such as training programs,

education.

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MONTHLY CAPITAL

Conceptually, it refers to the amount of money or resources

available for investment or operational expenses within a

given month

Operationally, in this study it is used to determine whether

the business is small or medium enterprises according to

their monthly capital. 5,000 PHP to 20, 000 PHP is

considered small enterprise,while 25,000 PHP to 30,000 PHP

to 70,000 PHP is considered a enterprise.

MONTHLY INCOME

Conceptually, this represents the total income generated by

a business every month.

Operationally, it means the total calculated revenue for a

month.

STARTING CAPITAL

Conceptually, starting capital refers to the initial funds

or resources needed to establish a business or venture.

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Operationally, starting capital encompasses the tangible

assets, such as cash, equipment, inventory, need for

building a business

SEX

Conceptually, sex refers to the biological and physiological

characteristics that differentiate organisms into male and

female categories.

operationally, in this study, sex can be determined through

the physical attributes of business owners who owns small

and medium enterprises.

SMALL & MEDIUM ENTERPRISES (SMEs)

conceptually, it refers to businesses that are characterized

by their relatively small size, limited resources, and

typically independent ownership.

operationally, in this study, small and medium enterprises

are determined by the business' monthly capital.

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