Research Anastasia (1)

University of Eastern Africa, Baraton
Malawi Adventist university
Lakeview Campus
Business Department
Relationship between Financial Literacy, Profitability and Growth of Small Scale Enterprise
in Mzuzu, Malawi
By:
Anastasia Nyirenda (SNYIAN 01)
A Dissertation Submitted to the faculty of Business in Partial Fulfilments of the Requirement
for the Award of Bachelor’s Degree in Business Administration majoring in Accounting
Mr Titani Mtonda
(Supervisor)
May, 2016

i
DECLARATION
This research paper was conducted to the best of my ability and knowledge. All the
information provided in this study is of other authors which have been respectfully cited as
been from other sources. I hereby declare that this research paper was done in good
conscience and hence can be deemed to be reliable.
Declared by:
ANASTASIA NYIRENDA
(SNYIAN 01)
Signature………………………… Date………………………………..…
Certified by:
MR. T. P MTONDA
(Supervisor)
Signature………………………… Date………………………………..…
Approved by:
MR. C. NGALA ……………………………………………..
(Instructor)
Signature………………………… Date………………………………..…
This research project has been submitted for examination with my approval as the University
Supervisor.
……………………………… …………………………. ……………………………
Supervisor Supervisor‟s Signature Date

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ACKNOWLEDGEMENT
I owe a debt of gratitude to many people who helped me complete this thesis. I would like to
acknowledge the help of all. First and foremost I would like to thank Almighty God for
everything. I want to express my deepest acknowledgement to my supervisor, Mr T.P Mtonda
for his valuable advice and recommendations.
I acknowledge the instructor of the course who is also the Head of Business Department Mr
C. Ngala for his valuable advice, Mr Ishmael Nyirenda, for his support with statistical
techniques and data analysis. I also acknowledge Mr Robert Banda and Mr D Kasoti for their
comments on sentence construction in earlier drafts of my thesis.
I would particularly like to thank the following people for their support related to my
dissertation: My best friend Tchiyiwe Dube who encouraged me in everything, My sisters
Carolyne Nyirenda and Gertrude Nyirenda who were always there for me in terms of
financial support not forgetting my class mate Yamikani Matunga who helped me in selecting
the topic before it was approved. To my parents (Mr Charles Nyirenda and Mrs Fayness
Simwaka) and all my relatives, I wish to extend my loving thanks for their encouragement.
Finally, my greatest debt of gratitude is to, Mr James Jombole Nyirenda who made it possible
for me to study at Malawi Adventist University. This thesis could not have been written
without this entire people.

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DEDICATION
I dedicate this paper to my loving family as well as a man who made it possible, James
Jombole Nyirenda, for unwavering support and my Sisters Carolyn, Patricia and my twin
sister Gertrude Nyirenda not forgetting my aunt Salome Banda (Mrs Nyirenda) for their
moral support, understanding, perseverance and inspiring me during my study period. They
have been of constant encouragement during the entire period.

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ABSTRACT
Malawi is an entrepreneurial country and the Small Scale Enterprise sector is one of the key
drivers of Malawi economy. Majority of Malawian whether educated or not want to be
entrepreneurs by engaging in various business activities ranging from farming to offering
professional services such as lawyers and doctors. However, not all entrepreneurs succeed in
growing their small enterprises to successful business. In fact most of new businesses end up
as a failure within the first five years after the commencement. The objective of this paper is
to find out whether there is a relationship between financial literacy and SSEs profitability
and growth by using a study instrument which was a questionnaire. A sample of 50
entrepreneurs was selected where questions in both financial literacy growth and SSEs
profitability were asked. The data collected was then analyzed using SPSS and Frequency
analysis using Ms Excel in order to establish relationship between financial literacy and SSEs
profitability and growth. From the research findings, all the SSEs entrepreneurs who filled
the questionnaires were found to have some level of financial literacy and on average most
entrepreneurs scored well above average in financial literacy. Highly successful
entrepreneurs scored highly in financial literacy and demonstrated high understanding of
finance. In contrast, less successful entrepreneurs showed negative and no growth at all and
low level of financial literacy majority of who were found to be in lower level of education.
This study concludes that there is a positive relationship between financial literacy and
profitability as well as growth of SSEs in Mzuzu City. It further suggests that financial
literacy plays a key role in SSEs success.
Keywords; Financial literacy, Financial performance, Small Scale Enterprises (SSEs),
Profitability, Growth, Frequency analysis, Statistical Package for Social Sciences(SPSS)

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Table of Contents
DECLARATION.....................................................................................................................................i
ACKNOWLEDGEMENT ...................................................................................................................... ii
DEDICATION....................................................................................................................................... iii
ABSTRACT........................................................................................................................................... iv
CHAPTER ONE.....................................................................................................................................1
1.1. Background of the study .............................................................................................................1
1.2 Purpose of study................................................................................................................................3
1.3 Statement of the problem..................................................................................................................3
1.4 Research objectives...........................................................................................................................3
1.4.1 General objective .......................................................................................................................3
1.4.2 Specific Objectives ....................................................................................................................3
1.5 Research questions............................................................................................................................4
1.6 Significance of the study...................................................................................................................4
i. Malawi government ....................................................................................................................4
ii. Commercial bank and Micro Finance institution........................................................................4
iii. Academicians and Researchers...............................................................................................4
1.7 Theoretical Framework.....................................................................................................................5
1.7.1 The Knowledge Spillover Theory..............................................................................................5
1.7.2 Theory of Behaviour and Personal Finance Education..............................................................5
1.8 Conceptual Framework.....................................................................................................................6
1.9 Research Hypothesis.........................................................................................................................6
2.0 CHAPTER TWO ..............................................................................................................................8
2.1.1 General review...............................................................................................................................8
2.1.2 Small Scale Enterprises (SSEs)..................................................................................................8
2.1.3 The role of Small Scale Enterprises...........................................................................................9
2.1.4 Challenges and problems faced by SSEs in Vietnam ................................................................9
2.1.5 Problems of Small Scale Enterprises (SSEs) in Malawi..........................................................10
2.1.2 Focus review................................................................................................................................11
2.2.1 Financial Literacy ....................................................................................................................11
2.2.2.2 Levels of financial literacy....................................................................................................12
2.2.2.3 Measuring financial literacy..................................................................................................12
2.2.3 Specific review.............................................................................................................................13
2.2.3.1 Business Growth Potential of Small Scale Enterprises (SSEs).............................................13

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2.2.3.2 Small Scale Enterprise (SSE) Profitability ...........................................................................13
2.2.3.3 Measuring profitability .........................................................................................................14
2.2.3.4 Factors influencing profitability............................................................................................15
2.2.3.5 Relationship between Financial literacy growth and Profitability........................................16
3.0 CHAPTER THREE ........................................................................................................................17
3.2 Introduction.................................................................................................................................17
3.2.1 Research Design...........................................................................................................................17
3.2.2 Research Population.....................................................................................................................17
3.2.3 Research Sample..........................................................................................................................17
3.2.4 Sampling Techniques...............................................................................................................18
3.2.5 Research Area..........................................................................................................................18
3.2.6 Design of Research Tools (Instruments)......................................................................................18
3.2.7 Data Collection Methods .............................................................................................................19
4.0 CHAPTER FOUR...........................................................................................................................20
4.1 DATA ANALYSIS, RESULTS AND INTERPRETATIONS.......................................................20
4.2.1 Rate of Respondents ................................................................................................................20
4.2.2 GENERAL INFORMATION..................................................................................................21
4.2.2.3 Nature of the Business ......................................................................................................23
4.2.2.4 Position in the Business ....................................................................................................23
4.2.2.5 Years in the Business........................................................................................................24
4.2.2.6 Number of employees.......................................................................................................25
4.2.2.7 Additional Employees.......................................................................................................26
4.2.3 MEASURING SMALL SCALE PROFITABILITY...............................................................27
4.2.3.1 Profit trends of the Small Scale Businesses......................................................................28
4.2.3.2 The trend in the losses.......................................................................................................29
4.2.3.3 Area of investing profits ...................................................................................................30
4.2.3.4 Profit Investing Areas ......................................................................................................31
4.2.4 BASIC FINANCIAL LITERACY...........................................................................................32
4.2.4.1 Training on financial reporting .........................................................................................32
4.2.4.2 Owner‟s monthly salary....................................................................................................33
4.2.4.3 Sources of income for emergency.....................................................................................34
4.2.4.4 Financial plan and budget practices..................................................................................35
4.2.4.5 Monitoring financial plan and budget prepared................................................................36
4.2.4.6 Consequences of Financial illiteracy on Small Scale Businesses.....................................37

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4.2.5 BASIC GROWTH OF THE BUSINESS.................................................................................37
4.2.5.1 Access to financial Assistance ..........................................................................................38
4.2.5.2 Factors considered when acquiring a loan ........................................................................39
4.2.5.3 Perception of Debt burden ................................................................................................40
Table 4.21: Perception of debt burden..................................................................................................41
4.2.5.4 Relationship between financial literacy and profitability .................................................41
4.2.5.5 Relationship between financial literacy and Growth ........................................................42
5.3 Summary.........................................................................................................................................44
5.5 Recommendation for Further Research ..........................................................................................45
5.6 Limitations of the Study..................................................................................................................45
REFERENCES .....................................................................................................................................46
Appendix I: Questionnaire....................................................................................................................49

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LIST OF TABLES
Table 1:Summary of sample and retrival rate..........................................................................20
Table 2: Gender........................................................................................................................21
Table 3:Level of Education......................................................................................................22
Table 4:Nature of Business......................................................................................................23
Table 5:Position is the Business: .............................................................................................24
Table 6:Years in the Business..................................................................................................25
Table 7:Number of Employees ................................................................................................26
Table 8:Employees Added.......................................................................................................26
Table 9:Profit made for the past 3 years ..................................................................................28
Table 10:Profit trend................................................................................................................28
Table 4.11:Losses trend ...........................................................................................................29
Table 12:Investment of Profits.................................................................................................30
Table 13:Area of investing profits...........................................................................................31
Table 14:Training on business.................................................................................................32
Table 15:Owners monthly salary.............................................................................................33
Table 16:Sources of income for emergency ............................................................................34
Table 17:Plan for the business.................................................................................................35
Table 18:Monitoring plan/financial budget .............................................................................36
Table 19:Growth rate...............................................................................................................38
Table 20:Access to Loan:.........................................................................................................38
Table 21:Factors on acquiring loan..........................................................................................39

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LIST OF FIGURES
Figure 1:Conceptual framework ................................................................................................6
Figure 2: Summary of sample and retrieval rate......................................................................20
Figure 3: Gender ......................................................................................................................21
Figure 4:Level of Education ....................................................................................................22
Figure 5: Nature of the Business..............................................................................................23
Figure 6: Position in the Business............................................................................................24
Figure 7: Years in the Business ...............................................................................................25
Figure 8: Number of Employees.............................................................................................26
Figure 9: Employees Added.....................................................................................................27
Figure 10: Profit made for the past 3 years..............................................................................28
Figure 11: Profit trend..............................................................................................................29
Figure 4.12: Losses trend.........................................................................................................30
Figure 13: Investment of Profits ..............................................................................................31
Figure 14: Area of investing Profits........................................................................................32
Figure 15: Training on Business Course..................................................................................33
Figure 16: Owners monthly salary...........................................................................................34
Figure 17: Sources of income for emergency..........................................................................35
Figure 18: Plan for the business...............................................................................................36
Figure 19: Monitoring plan or financial budget………..........................................................37
Figure 20: Growth rate.............................................................................................................38
Figure 21: Access to Loan .......................................................................................................39
Figure 22: Factors considered before acquiring loan...............................................................40

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LIST OF ACRONYMS
MS Microsoft Excel
SSEs Small Scale Enterprises
MDGs Millennium Development Goals
SPSS Statistical Package for Social Sciences
SEDA Small Enterprises Development Agency

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DEFINITION OF OPERATIONAL TERMS
Financial literacy
Is the ability to use knowledge and skills to manage financial resources effectively for a
lifetime of financial well-being (PACFL, 2008).
Kempson (2009) defined financial literacy as a combination of awareness, knowledge, skill,
attitude and behaviour necessary to make sound financial decisions and ultimately achieve
individual financial wellbeing.
Profitability management
According to McMahon (2005) profitability management is concerned with maintaining or
increasing a business‟s earnings through attention to cost control, pricing policy, sales
volume, stock management, and capital expenditures
Financial management
Meredith (2008) defined financial management as all areas of management which involve
finance not only the sources and uses of finance in the enterprise, but also the financial
implications of investment, production, marketing or personnel decisions and the total
performance of the enterprise.
Efficient financial management
In this research, is defined as financial management that achieves financial management
objectives without wasting financial resources.
Performance
Chabwana (2015) defined performance as the ability of the business to meet the required
standard, increased market share, improve facilities, ensuring return on profitability and total
reduction in costs.
Data:
Facts, opinions and statistics that have been collected together and recorded for reference or
for analysis
Dependent variable:
Variable that changes in response to changes in other variables in this study we have Growth
and profitability
Independent variable: Variable that causes changes to a dependent variable or variables
Hypothesis: Hypothesis is a testable proposition about the relationship between two or more
events or concept.

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CHAPTER ONE
1.0.INTRODUCTION
This chapter presents the background of the research study. It also focuses on the research
problem and the questions that have to be tackled by the research study. It describes the
significance of the study,
1.1. Background of the study
Like little drops of water that forms a mighty ocean, the littleness of small scale businesses
from the foundation has been the basis of industrialization in developing countries of the
world (Burns, 2001). Globally, small scale enterprises have contributed extremely in
improving the living standard of the people by providing jobs to relieve the society of social
embarrassment, stimulating indigenous entrepreneurship and utilizing scarce resources.
Millennium Development Goals (MDGs) are making effort to reduce poverty rate in
developing countries and also reducing the dependency of people on government hence this
is achieved through the growth and development of small scale enterprises which is being
supported by MDGs. (Abor and Quartey 2010).
Small Scale Enterprises (SSEs) play important roles in the economic growth and
development of every nation. They are considered to be a genuine vehicle for the
achievement of national macro-economic objectives in terms of employment generation at
low investment cost and enhancement of internship training (Burns, 2001). Small Scale
Enterprises are widely recognized across the world for their role in the social, political and
economic development. The importance of small business is mostly the ability to provide
reasonably priced goods, services income and employment to a large number of people
Kauffmann (2006). In Malawi, small scale enterprises play a vital role in a way that, they are
a source of income for many individuals who have failed to acquire employment elsewhere.
Though the Small Scale Enterprises have a large market of their goods from the large
population, they need to develop, manage and monitor their businesses effectively to enhance
their market performance for the increase of their profitability and business growth FinScope
(2012).Profitability and growth of small scale enterprises can be affected because of
inefficient financial literacy due to inability to keep complete accounting records and
awareness of managing business.

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Most Small Scale Enterprises have often failed due to lack of knowledge and skills of
efficient financial management. It is important to encourage financial literacy among small
scale enterprises so as to enable them be able to supply complete and relevant financial
information needed to improve on decisions made by them, and to also enhance their growth
and profitability Vuong (2005).Above all, financial literacy also improves a business goal of
financial profit in which it has played a key role in the success and failure of our nation‟s
business for the past centuries. Companies and businesses are therefore being encouraged to
ensure that adequate and proper books of accounts are being kept so as to ensure reliability of
their financial statements. This will in the long run help improve their level of profitability
and growth. (Davidson, 2005).
According to Nelson and Onias (2011) Profit is being viewed as the life-blood of a profit
making business, organisation as well as a company hence the accounting bases, concepts
and principles must be adopted in order to capture and report all the relevant information to
ensure reliability accuracy in its measurement .Enikanselu and Oyende (2009) also made it
clear that no business can run effectively without the owner or employees being financially
literate and also having one form of accounting records or the other. It can therefore be
assumed that appropriate financial literacy is an important tool for successful management of
any business, either big or small. Furthermore financial literacy is being encouraged among
small scale enterprises so as to enable them be able to supply complete and relevant financial
information needed to improve on decisions made by them, and to also enhance their
profitability (Bernheim 2008).
In Malawi FinScope (2012) studied the effects of working capital management practices on
financial performance of small scale enterprises in Malawi. In his study, he established that
majority of business operators lack working capital management that affects financial
performance in which he did not have business management knowledge and further
suggested a study to unravel the impact of training on performance of business. Simeyo
(2011) and Osinde (2013) in their study on effects of working capital management and
business development services on SSEs established a positive relationship between business
training and performance. Entrepreneurs with training on business skills were found to
perform better than their counterparts with no business management knowledge.

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1.2 Purpose of study
This study was conducted to determine financial literacy levels of Small Scale Enterprises
(SSEs) owners and to establish if there is a relationship between financial literacy and
profitability and growth of the small scale businesses.
1.3 Statement of the problem
Financial literacy is a global concern. Complicated financial products, low level of
awareness, lack of knowledge and skills about financial matters makes the need of financial
literacy significant according to Abor and Quartey (2010). The relevance of financial skills to
successful entrepreneurship remains subject for discussion. In a dynamic and uncertain
business environment entrepreneurs are faced with many challenges that can be overcome by
acquiring financial knowledge. As the adage goes “knowledge is power “and so financial
literacy is power. Ideally business education would give an entrepreneur an upper hand in
making financial or investment decisions when compared to a counterpart with no basic
financial education (FinScope 2012).Many studies have mainly dwelt on importance of
financial literacy and its effects on household or personal financial behaviour with little or no
theoretical and empirical study on financial literacy and entrepreneurial success (profitability
and growth). Therefore in this study we deep further in an attempt to find out whether
financial literacy has a positive relationship between profitability and growth of small scale
enterprises.
1.4 Research objectives
1.4.1 General objective
The general objective of this study is to determine the relationship of Financial Literacy on
the profitability and growth of Small Scale Enterprises in Mzuzu, Malawi. To achieve the
general objective, the following specific objectives will guide the study;
1.4.2 Specific Objectives
 To determine the relationships between financial literacy and profitability of Small
Scale Enterprise
 To determine the relationships between financial literacy and growth of Small Scale
Enterprise
 To evaluate financial literacy levels on Small Scale Enterprise
 To determine the profit trends on Small Scale Enterprise for past three years

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1.5 Research questions
The research problem defined above leads to the following research questions:
i. What are the relationships between financial literacy, profitability and the growth of
Small Scale Enterprise?
ii. How is financial literacy affecting growth and profitability of Small Scale Enterprise
in Malawi?
iii. What are financial literacy levels of small scale enterprise owners?
iv. Have the SSEs been making profit for the past three years?
1.6 Significance of the study
The significance of this study is as follows:
i. Malawi government
Considering that the vast majority of Small Scale Enterprises(SSEs) are small who happen to
be in the informal sectors where entrepreneurs has no or only basic education, through the
results of this study government policy makers will see that basic financial education have a
bearing to SSEs success, hence need to emphasise on basic financial education . In addition,
government policy makers and its development partners may use the results of this study as a
basis for introduction of financial literacy programs amongst SSEs in a bid to stimulate
growth in the sector.
ii. Commercial bank and Micro Finance institution
Financial institutions such as commercial banks will understand risk profile of financially
literate entrepreneurs as compared to their illiterate colleagues. Furthermore, micro finance
institutions and NGOs will establish whether there is need to build financial literacy capacity
in an effort to reduce poverty through entrepreneurship.
iii. Academicians and Researchers
The study will add to the body of attention and knowledge to both researchers and
academicians who pursue to discover or examine relationship between financial literacy and
profitability and growth of small scale enterprise in Mzuzu or any other area in Malawi. In
addition, it will lay the basis of other studies to be carried out on the same topic. Furthermore,
it will also be a partial fulfilment of the requirement by the University of Eastern Africa-
Baraton for the award of a Bachelor‟s Degree in Business Administration.

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1.7 Theoretical Framework
Entrepreneurship has been observed little more than an applied trade as opposed to an
academic area of study. For a long period of time there was no research accomplished
because it was thought that those who could not attend college would simply practice the
concept of new business start-up (Kuratko 2009). Due to Small Scale Enterprises critical role
in economic growth, many research studies have now been carried out to deepen
understanding of entrepreneurship. In this study the knowledge Spillover theory and
Behaviour and Personal Finance Education theories were being used.
1.7.1 The Knowledge Spillover Theory
In this theory the creation of new knowledge expands the set of technological opportunity.
The knowledge spillover theory of entrepreneurship holds individual characteristics as given
but rather lets the context vary. In particular, high knowledge contexts are found to generate
more entrepreneurial opportunities, where the entrepreneur serves as a channel for knowledge
spillovers. By contrast, poor knowledge contexts are found to generate fewer entrepreneurial
opportunities. By serving as a channel for knowledge spillovers, entrepreneurship is the
missing link between investments in new knowledge and economic growth. Thus, the
knowledge spillover theory of entrepreneurship provides not just an explanation of why
entrepreneurship has become more established as the factor of knowledge has emerged as a
crucial source for reasonable advantage, but also why entrepreneurship plays a vital role in
generating economic growth. Entrepreneurship is an important mechanism permeating the
knowledge filter to facilitate the spill over of knowledge and ultimately generate economic
growth. (Zoltan et al 2008).
1.7.2 Theory of Behaviour and Personal Finance Education
Braunstein and Welch (2002) pointed out that acquiring additional information can lead to
improved financial behaviour and it cannot be counted on to do so automatically. Research
has shown that individuals and households do not always act in ways consistent with their
best financial interests even when they have accurate financial information. Although there
are a few notable examples of programs with a behavioural component (e.g.,Lusardi et al.
2009; Sherraden et al. 2009), financial education has frequently been focused on enhancing
knowledge (or knowledge, attitudes, and skills) related to specific personal finance topic
areas, such as money management, banking, credit, saving, investment, insurance, and taxes
rather than behaviour (Coussens 2006; McCormick 2009; Vitt et al. 2005).When the
importance of behaviour is acknowledged, financial behaviour is often presumed to follow

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from improved understanding of financial concepts. Definitions for the field reflect the
importance of action, but also commonly reflect an implied link between knowledge and
action. This theory will help in understanding the effect of financial literacy on entrepreneur‟s
behaviour and its relationship to business performance (Growth and profitability).
1.8 Conceptual Framework
A conceptual framework explained the study variables and the presumed relationships among
them (Miles et al, 1994). It also represented a synthesized and integrated way of
understanding of issues which enables the researcher to address the research problem
(Liehr et al, 1999).
Figure 1: Conceptual framework
1.9 Research Hypothesis
H0: There is a negative relationship between financial literacy, profitability and growth of
Small Scale Enterprises
H1: There is a positive relationship between financial literacy, profitability and growth of
Small Scale Enterprises
INDEPENDENT VARIABLE DEPENDENT VARIABLE
Financial Literacy
SSE Profitability
and Growth
Measurements
 Record Keeping
 Saving
 Budgeting
 Financial skills
Measurements
 Sales
 Expansion
 Business Survival
 Increase in Capital
 Increase in # of
employees

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1.10 Organisation of the study
The research study was conducted into five chapters as follow; Chapter one looked at the
background to the study and explained the concept of public infrastructure and taxation. The
chapter also presented a problem statement, purpose of the study, research questions and
hypothesis, significance of research, research limitation and assumption made in the course of
research. Chapter two outlined the literature review under the research. Chapter three looked
at research methodology and data analysis tools that were being used. Analysis of the data
collected and discussion of the research findings was done in chapter four. Chapter five
presented the discussion of the research results, conclusion and recommendations of the
study.

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2.0 CHAPTER TWO
2.1 Literature Review
Introduction
This chapter contained a broad review of literature related to the issues and variables under
study. Literature review is defined as the use of ideas in the literature to justify the particular
approach to the topic, the selection of methods, and demonstration that the research
contributes something new to the overall body of knowledge or advances the research field‟s
knowledge-base (Hart, 2000).The study discussed an outlook based on three reviews; general,
specific and focused reviews.
2.1.1 General review
2.1.2 Small Scale Enterprises (SSEs)
In Malawi definitions of Small Scale Enterprises differs in accordance with employment
criteria. Small businesses are categorised in the following ways according to Finscope
(2012); 5-20 employees (small), 21-100 employees (medium) and 101- Above (Large). The
Ministry of Industry and Trade (MoIT) categorizes these businesses into „micro‟, „small‟,
„medium‟ and „large‟ based on employment criteria.
Small businesses are a vehicle for employment to the majority of citizens in Malawi.
FinScope (2012) indicated that 73% of people work in small businesses which employ less
than 50 workers. Moreover, 45% of people work in small businesses which employ less than
10 workers, as indicated by the Ministry of Industry and Trade (MoIT) in the report: Small
business development in Malawi (2009). Therefore, there is a great need to provide much
needed support to these developing small businesses to change them from informal economy
to formal economy of Malawi. It is important to ensure that these businesses have the
necessary skills, innovation and productivity to make them profitable and viable for a long
period of time.
Small Scale Enterprises commonly employ temporary and unpaid family members than full
time employees. As enterprises grow, the nature of employment becomes more full-time and
paid. Employment is the key determining factor for classifying Medium Small Scale
Enterprises in Malawi Cohen (2000).

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2.1.3 The role of Small Scale Enterprises
The role of small scale enterprises in the technological and industrial development of any
nation justifies the need for greater attention to this sector. The foundation of growth in
developed countries of the world is usually attributed to the contribution of the small scale
enterprises.Creswell (2003) summarized the contribution of Small Scale Enterprises in
developing the economy. Small Scale Enterprises in Vietnam have:
i. Provided a large number of diversified products, representing 26 % of GDP and
30 % of industrial outputs.
ii. Created jobs for some 4.5 million people mobilized unused resources such as land,
capital, labour, and management skills into development of the economy and
contributing to increase of export volume.
Atkinson (2005) found that Small Scale Enterprises annually contribute approximately 31%t
of the total industrial output and create jobs and income for 4.2 – 4.5 million people.
According to Vuong (2005), during the period of 1991 – 1997, the private sector capitalized
almost USD3 million, created 3.5 million jobs and made a significant contribution to
Vietnam‟s GDP growth, in which 90 % come from SSE contribution, and only 10 % from
large firms.
2.1.4 Challenges and problems faced by SSEs in Vietnam
Small Scale Enterprises in Vietnam are faced with many problems irrespective of their
process of development. In their interview of 14 SSE manufacturers Ebashi, Sakai and
Trersky (2001) found the main challenges that SSEs in Vietnam have to face as listed below
by the order of serious concern.
i. Rise of funds– A large number of the interviewed Small Scale Enterprise owners
saw financial shortfalls as one of the biggest problems. They needed funds
primarily to finance plant and equipment investment and for securing working
capital to cover expenses involved in exporting their products until they could
receive payments from exporters.
ii. Export licenses– Companies who wanted to export goods directly to foreign
countries were required to obtain a direct export license. Companies who were not
eligible for the license had no choice except to export goods on consignment
through government enterprises. Even those who had the license were required to
visit Hanoi every year to renew their licenses.

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iii. Industrial land– Interviews also found that in cities such as Hanoi and Ho Chi
Minh City, there was increasing concern for pollution problems because of the
mixture of residential and industrial areas. Moreover, urban areas were
increasingly short of industrial estates.
2.1.5 Problems of Small Scale Enterprises (SSEs) in Malawi
While there are various opportunities presented to people within the SSE sector, in Malawi
numerous challenges have been identified that are obstacles to progress and inhibiting the
development of small business. The following highlight some of the problems facing small
business owners (Barr and Minten, 2001).
i. Poor Accounting System: The accounting system of most small scale business
enterprises lack standard and does not make room for the assessment of their
performances. That creates opportunity for mismanagement, which therefore may
lead to enterprise failure.
ii. Inadequate Information Base: Small scale business enterprises are usually
characterized by poor record keeping and that result to lack of necessary
information which is required for planning and management purposes. This
usually affects the awareness of the sector.
iii. Poor Management Expertise: Management has always been a problem in this
sector as most small scale businesses do not have the required management
expertise to carry them through once the business start growing. The situation gets
compounded as training is not usually accorded priority in such establishments.
iv. Lack of Continuity: most small scale establishments are sole proprietorship and
such establishment often ceases to function as soon as the owner loses interest or
dies. This raises the risk of financing such business.
v. Poor Capital Outlay: inadequate capital outlay has often affected small scale
business adversely. Financiers often regard the sector as a high risk area and
therefore they feel doubtful about committing their fund to it.

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2.1.2 Focus review
2.2.1 Financial Literacy
Financial literacy is defined as the understanding and knowledge of the financial principles
needed to make informed financial decisions and products which affect one's financial
welfare (Basu, 2005). It includes the ability to make informed judgments and to take effective
decision regarding financial matters (Worthington, 2005). Organisation for Economic Co-
operation and Development (2008) also said that financial literacy must involve not only the
investors but also the customers, both having the knowledge of financial products, concepts
and their ability to consider financial risks in their decision making and to make other
effective actions to improve their financial statements.
Financial literacy is essential in helping individuals to identify vital financial issues and
behaviours that support effective management of financial resources
(Hilgert and Hogath, 2003). It enables one to have the knowledge of critical financial
concepts for instance, types of interests, risks and returns of investments, diversification of
investments, among others. Hence it prepares the ability to understand important financial
products needed in life including various bank products, basic investments, ideas and saving
plans. It improves how individuals are able to examine and appreciate money and financial
issues. This aids greatly in making effective financial decisions regarding financial
managements (Greenspan, 2001).
Financial literacy not only enables one make decisions while confident and sure, but also
assists individuals to respond knowledgeably to changes that affect their everyday financial
wellbeing including events in the general economy like collapse of financial markets, rising
unemployment and the threat of rapid inflation (Hilgert and Hogath, 2003). Hereafter for any
financial system to be effective, financial literacy is required in order to avoid penalties and
to take appropriate actions to improve the firm's present and future conditions
(Quartey, 2010).
Having the numeracy and capacity to do calculations, understanding the financial systems
and understanding the risks of financial decisions are some of the fundamental concepts
about financial literacy. Common measures of financial literacy can be in form of money
basic knowledge, financial management, debt, savings, insurance and investment literacy
(Lusardi, and Alessie 2007).

12
2.2.2.2 Levels of financial literacy
As argued by Mandell (2008), there should be more emphasis on rising up the level of
financial literacy as this would help in achieving many objectives of organizations such as
increase in profitability and growth. Complicated financial products, low level of awareness
and lack of knowledge about financial matters makes the want of financial literacy
noteworthy.
The level of financial literacy differs from individual to individual. Gender gap also plays an
important role is deciding the level of financial literacy. A woman‟s decision or relationship
with money is often determined by her personal life experience. Emotion, money and family
are interlinked in the life of a woman (Creswell, 2003). Lack of equipped access of
consistent information to make informed decision leads to low level of confidence and
knowledge about financial issues. Life changes like new employment, divorce or separation,
demise of the partner are some of the stressful stimulators in an individual‟s life Hilgert and
Hogath (2003).
2.2.2.3 Measuring financial literacy
Financial literacy such as record keeping, budgeting, personal finance and savings were
viewed to be more important to lower-income individuals. This suggests that financial
educators should not only teach how to save or ways to save, but also the why saving is
important (Rhine and Comeau, 2000). In this study the researcher will also use these four
topics to measure the financial literacy of micro entrepreneurs.
Record keeping is a fundamental skill a business person must possess. It is the source of
important information vital to critical decision-making, and responsible for minimizing risks
(Cohen and Stack, 2009). This measure of financial literacy suggests the effective record
systems considered to be critical in business operation since business owners cannot rely on
their memory to summarize all transactions of the day.
Savings is another component which serves as economic security and also for accumulation
of wealth for an improved living standard (Braunsten and Welch, 2002). However, micro
entrepreneurs are lack of necessary discipline and willingness in advancing their business
skill including saving ethics (Karides, 2005).

13
The financing skill, the third measure of financial literacy, is the ability to obtain capital
from outside sources with minimal cost and payoff obligation. Assibey (2010) found out that
most micro entrepreneurs are illiterate with respect to business financing. Without knowing
that their obligation is getting bigger because of interest and high debts will lead to business
reversal Worthington (2004). Budgeting, on the other hand, refers to the expenditure planning
and cash flow analysis which is very important to the success of the business operation and
processes Bragg and Burton (2006). However, Torres (2008) found that small business
owners are not concerned about budgeting; their concern is more on the cash flow. Lusardi,
(2008) also argued that financial literacy differs between men and women. Males are more
knowledgeable financially than females and lastly those who have low financial literacy have
low education.
2.2.3 Specific review
2.2.3.1 Business Growth Potential of Small Scale Enterprises (SSEs)
According to Bains (2011), business growth potential refers to the state of the business
having the potential to progress far. This potential progress can be measured by increase in
capital, increase in number of employees, sales, business survival and expansion in terms of
branches and product lines. Bains (2011) continued saying that, in order to realize that
business potential growth, there is a need for the government to create conducive
environment for Small Scale Enterprises. For instance, simplifying loan conditions provide
access to finance, create markets for products, assist in the creation of business groups, ease
the regulations controlling business, reform tax system, improving skills and training and
provide business development services.
Therefore to create conducive environment for owned enterprises in Malawi, microfinance
institutions should revisit its policy to ease the credit access and there should be a room to
provide credit without group formation if the customer has an equivalent asset for collateral
as also suggested by Finscope (2012).
2.2.3.2 Small Scale Enterprise (SSE) Profitability
Defining Profitability
According to Jaggi and Considine (2000), profitability is a crucial indicator for determining
the financial position of the firm. The firm is considered financially weak when its
profitability is sliding or the profitability is weak compared to other firms in the industry. In
their study, they also used return on assets as the indicator to reflect profitability.

14
Importance of Profitability
Profitability is one of the most important objectives of financial management because one
goal of financial management is to maximize the owner‟s wealth (McMahon, 2001). Thus,
profitability is very important in determining the success or failure of a business. At the
establishment stage, a business may not be profitable because of investment and expenses for
establishing the business. When the business becomes mature, profits have to be produced.
Due to the importance of profitability, Edmister (2010) among other researchers have
suggested that small firms need to concentrate on profitability. Jen (2004) found profitability
to be a significant determinant of a small firm‟s credit risk. Thomas and Evanson (2000)
stress the aim of a business is not only the generation of sales, but also generation of profits.
Profit is especially important because it is necessary for the survival of a business. Low
profitability contributes to under-capitalization problems because it leads to fewer dollars as
retained earnings and therefore to a reliance on external capital Davidson and Dutia, (2005).
2.2.3.3 Measuring profitability
One of the most difficult attributes of a firm is to measure is profitability (Ross 2001). In a
general sense, accounting profits are the difference between revenues and costs. However, the
problem with accounting-based measures of profitability is that they ignore risk. In the
economic sense, a firm is profitable only if its profitability is greater than its costs and when
investors can achieve independently in the capital market. In their text, Ross et al. (2001)
suggest some methods to measure profitability including profit margin or return on sales,
return on assets, and return on equity.
 Profit margins are computed by dividing profits by total operating revenue and thus
express profits as a percentage of total operating revenue.
 Return on assets is the ratio of income to average total assets, both before tax and
after tax, and measures managerial performance.
 Return on equity is defined as net income divided by average stockholders‟ equity,
and shows profit available for stockholders.

15
Cohen (2000) stated that measures of profitability are essential in any business. In his text, he
indicated many different ratios to measure profitability of the business. They included asset-
earning power, return on the owner‟s equity, net profit on sales, and return on investment
 Asset earning power is determined by the ratio of earnings before interest and tax to
total assets. It indicates how much operating profit each dollar of total assets earns.
 Return on the owner‟s equity is computed by dividing net profit by average equity,
and shows return that the business received in exchange for investment.
 Net profit on sales is determined by the ratio between net profit and net sales, and
measures the difference between what the business takes in and what it spends in the
process of doing business.
 Return on investment is simply computed by dividing net profit by total assets. This
measure is very useful for measuring profitability.
2.2.3.4 Factors influencing profitability
Based on the profitability measures presented by Weinrauch (2000), the main factors
influencing profitability include revenue, costs and capital. In general, revenue is determined
or influenced by marketing, sales management and new product development, whereas cost
and capital are mainly affected the financial management practices. When analysing factors
affecting profitability, Burns (2001) found out that profitability could be affected by many
different economic factors. Lev (2005) also added that variability of profit measures over
time is affected by type of product, degree of competition, degree of capital intensity as well
as firm size.
The effect of size on Small Scale Enterprise profitability was also discussed by Kirchhoff and
Kirchhoff (2000), in which they examined family contributions to productivity and
profitability in small businesses. The evidence showed that family members are more
productive than other employees. However, in his study family member‟s productivity did
not increase profitability his results showed the opposite. It was noted that as paid family
labour increases, profitability also decreases. As family member participation increases, wage
and salary expense also increase which affects percentage of revenue, thereby causing profit
as a percentage of sales to drop. Generally, there are many factors affecting Small Scale
Enterprise profitability. However, there is need to analyse how financial literacy is affecting
the profitability and growth of Small Scale Enterprises.

16
2.2.3.5 Relationship between Financial literacy growth and Profitability
The use of growth as a measure of firm performance is generally based on the belief that
growth is an originator to the attainment of sustainable competitive advantages and
profitability (Markman, 2002). According to Cohen (2000), larger firms have higher rates of
survival and may have the benefits of associated economies of scale. The alternative view is
that fast growing firms may encounter difficulties associated with growth that leads to
reduced profitability and perhaps financial difficulty. Overall, it is difficult to imagine
sustained growth without profitability. Without funding growth through retained earnings, the
firm must rely on additional debt or equity finance.
The relationship between growth and profitability is therefore an important consideration and
to date there has been little agreement on the relationship between these two measures.
Evanson (2002) considered that rapid growth could lead to higher profitability based on
evidence that new firms become more profitable when they enter markets quickly and on a
large scale. On the other hand, Thomas and Evanson (2002) concluded that the pursuit of
high growth may be minimally or even negatively correlated with firm profitability. Burns
(2000) found that firm profitability was correlated with sustainable growth and sales growth
and profitability were not correlated.
Furthermore Marris (2010) considered the relationship between these measures and suggests
that there is an identifiable growth profit trade-off, where in order to finance growth, the firm
must forego profits. Cowling (2004) investigated this relationship between growth and
profitability and found little evidence of the growth versus profit trade-off. He suggested that
there is potential for a cumulative type effect whereby profits provoke growth and growth
causes future profit that allows some firms to continually face increasing returns to scale.

17
3.0 CHAPTER THREE
3.1 RESEARCH METHODOLOGY
3.2 Introduction
This chapter outlined the methods that were adopted by the study in obtaining information on
the relationship between financial literacy and profitability as well as growth of Small Scale
Enterprises in Mzuzu City, Malawi. The chapter also described and explained the research
instruments that were used in the study. The chapter is structured into research design, target
population, data collection and data analysis techniques.
3.2.1 Research Design
A research design is the logical sequence or blue print that connects the empirical data to a
study‟s initial research questions and, ultimately, to its conclusions (Yan, 2003). This study
was conducted using descriptive research design as it seeks to determine the level of financial
literacy among Small Scale Enterprise.The design was appropriate as it enabled
understanding of the exact nature of the two variables of the study; financial literacy and
profitability and growth of SSEs in Mzuzu City, Malawi. Moreover it enabled the researcher
to be able to describe the characteristics of these variables.
3.2.2 Research Population
The study target population consisted of owners of SSEs operating within Mzuzu City. For
data collection purposes, the target population was estimated using the estimated sample size
based on a proportion of the population. According to the formula 80% proportion of the
population having the characteristic was being used in the study.
3.2.3 Research Sample
Sample Size Calculation: The sample size was calculated based on the sample required to
estimate a population mean with an approximate 95% confidence level by using the
following formula; = pq
Where : = required sample size
p = proportion of the population having the characteristic
q = 1- p
d =the degree of precision (margin of error that is acceptable)
Therefore; Estimated proportion of population was at 95% confidence level, then p= 0.8 and
then q= 1- 0.8 and margin of error to be accepted in this study was 10% so d= 0.1

18
= (0.2) (0.8)
= 3.8416*0.16
0.01
= 61
A sample of sixty one small scale enterprises will randomly be selected in Mzuzu city,
Malawi.
3.2.4 Sampling Techniques
This study used simple random sampling technique to select a sample of 61 SSEs. The
sample size was manageable in terms of time and cost and satisfactory according to
Chamwana (2015) recommendation. The study respondents were the SSE owners who are
expected to be in a position to give credible information.
3.2.5 Research Area
The study was conducted in Mzuzu city located in the Northern Region of Malawi. The
researcher chose the city to be an area of study because she believes that, data will be found
easily, it is an area where most of the economic researches are frequently done and it is also
where most concerned individuals are located. The study involved business owners,
Managing Directors, Managers and some employees only.
3.2.6 Design of Research Tools (Instruments)
Due to the nature of this study, primary data was appropriate; the researcher used
questionnaire as a tool for conducting research with respondents. These questionnaires were
formed particularly to promote accuracy and avoid biasness simultaneously. The
questionnaire had both open and closed ended questions. The study used primary data which
was collected from semi structured questionnaires.
The structured questions assisted the researcher for easier analysis as they will be in
immediate usable form and easily analysed using quantitative measures; the unstructured
questions was used to encourage the respondent to provide an in-depth and felt response
without feeling held back in disclosing information thereby providing data that was
qualitative in nature. Questionnaires were adopted by the study as they were useful in
obtaining objective data since the respondents were not manipulated in any way by the
researcher.

19
3.2.7 Data Collection Methods
Primary data was used for the study. Primary data is mainly used as it enables the researcher
to obtain the required data for the study (Cooper and Schindler, 2011). The data was collected
using questionnaires. The questionnaire consisted structured questions, un-structured
questions with space provided for selection of choices and explanatory answers. Alessie and
Lusardi (2011) declares that close ended questions have the advantage of collecting viable
quantitative data while open-ended questions allow the respondents freedom of answering
questions and the chance to provide in-depth responses. The questionnaires were
administered through drop and pick. The questions in the questionnaire were short and
precise so that the respondents could not to have challenges in filling them.

20
4.0 CHAPTER FOUR
4.1 DATA ANALYSIS, RESULTS AND INTERPRETATIONS
4.2 Introduction
In this chapter the researcher analyzed data which was collected from 50 Small Scale
Enterprise in Mzuzu City, Malawi. Profitability and growth are measured by scores from
answers to the questions that are related to determine the level of them. Financial literacy data
is measured by scores obtained from financial literacy questions that tests knowledge in
financial market. The researcher made use of SPSS, Regression and frequency analysis to
present the result in tables and figures.
4.2.1 Rate of Respondents
From a sample size of 61, 50 samples were collected while 11 samples were discarded for
having no useful information. Out of the 11 samples, 8 questionnaires were not completely
filled by respondents and 3 respondents refused to give their business information. The total
rate of retrieved sample was 82 % and therefore considered successful.
Table 4.1: Summary of sample and retrieval rate
Sample Size Questionnaires
Distributed
Questionnaire
retrieved
Total
percentage
SSEs 61 61 50
Total 82%
Figure 4.2: Summary of sample and retrieval rate
61% 61%
50%
82%
0
10
20
30
40
50
60
70
Frequency(%)
SUMMARY OF SAMPLE AND
RETRIEVAL RATE

21
4.2.2 GENERAL INFORMATION
4.2.2.1 Gender
To avoid biasness the researcher distributed the questionnaires randomly. Information
gathered from the study as shown in Table 4.2 and Figure 4.2 shows that 27 respondents were
males representing 54% of the sample size whereas 23 respondents were females representing
46% of the sample size.
Table 4.3: Gender
Figure 4.4: Gender
Lusardi and Mitchell (2008) said that gender differences play an important role in deciding
individuals‟ levels of financial literacy. They also argue that men are more likely to perform
better than women on various literacy tests. According to the study the results shows that
both male and female entrepreneurs participated in the study hence gender bias was being
avoided. The results show that the majority of respondents were Male representing 54%
meaning that more small scale businesses in Mzuzu are being managed by Males than
women.
54%
46%
40
45
50
55
Male Female
frequency(%)
Gender
Gender
Description Frequency %
Male 27 54.0
Female 23 46.0
Total 50 100.0

22
4.2.2.2 Educational Level of Small Scale Business Owners.
The researcher was interested in the level of education to determine the skills, expertise and
the competence level of the respondents both in answering the questionnaire and in managing
the finance of their businesses. Information gathered from the study indicated that 13
respondents holds JCE/MSCE, 21 respondent holds diploma and 16 respondent holds a
degree representing 26%, 42% and 32% respectively. This shows that all small scale
enterprise owners have at least basic education with majority holding a diploma.
Table 4.2: Level of Education
Figure 4.3: Level of Education
According to Lusardi and Mitchell (2006).Level of education is positively correlated with
financial literacy, they argued that those individuals who have completed university or
college degree are more likely to be financially knowledgeable than those with low education
level. Therefore it can be argued that above 74 % (diploma and degree holders) of the small
scale businesses in Mzuzu City have the ability to keep proper financial records and prepare
financial reports to manage the finances of their business.
26%
42%
32%
0
10
20
30
40
50
JCE/MSCE Diploma Degree
Frequency(%)
Level of Education
Level of Education
DESCRIPTION FREQUENCY %
JCE/MSCE 13 26.0
Diploma 21 42.0
Degree 16 32.0
Total 50 100.0

23
4.2.2.3 Nature of the Business
Table 4.3 represents the distribution of the sample of responding firms in terms of nature of
the business. 64 % of businesses in the study sample are service providers, seventeen % are
manufacturing while one percentage is merchandising.
Table 4.3: Nature of Business
Figure 4.4: Nature of the Business
The study shows that more small scale enterprises in Mzuzu City are service providers.
4.2.2.4 Position in the Business
The researcher was much interested in the position the respondents hold in a business to
make sure that data is collected from people who are aware with the business operational.
The researchers target was to the owners. Information gathered from the study indicated that
31 respondents are owners, 12 respondents are Directors, managers are 6 and 1 respondent
was an employee representing 62%, 24% ,12% and 1% respectively.
64%
34%
2%
100%
0
20
40
60
80
100
120
Frequency(%)
Nature of the business
Nature of the Business
Service provision 32 64.0
Manufacturing 17 34.0
Merchandising 1 2.0
Total 50 100.0

24
Table 4.4: Position is the Business:
Figure 4.5: Position in the Business
This indicates that more small scale businesses in Mzuzu are being managed by the owner
representing 62% who happens to be responsible for making financial decisions and
controlling the business. Training owners of the business will be a great advantage to the
contribution of business operation since most of the work will be done by them. It is therefore
necessary for the owners of the business to have financial literacy for them to know how to
handle the business and increase their profitability and growth.
4.2.2.5 Years in the Business
The study aimed at establishing the duration of the SSEs based on the number of years they
have been operating. The findings show that 30% have been operating for a period of 5-8
years, 30% for less than 2 years, 26% for 2-4 years, 8% for less than 2 years and 6% for more
than 10 years as shown in figure 4.5.
62%
24%
12%
2%
0
10
20
30
40
50
60
70
Owner Director Manager Employer
frequency(%)
Position in the Business
Position in the Business
Owner 31 62.0
Director 12 24.0
Manager 6 12.0
Employer 1 2.0
Total 50 100.0

25
Table 4.5: Years in the Business
Figure 4.6: Years in the Business
In summary, this indicates that there is an increase in the number of entrepreneurs venturing
in SSEs around Mzuzu Township. Despite this, more small scale businesses in Mzuzu do not
reach more than 10 years‟ operating according to the results on the figure above. It may be
due to lack of financial literacy on how to manage a business or some other various reasons
that makes them not to exist for more than 10 years.
4.2.2.6 Number of employees
The study sought to determine the number of employees in the SSEs. The findings as shown
in table below show that 25 (50%) had 4-5 employees, 13 (26%) had 6-7 employees, 12
(24%) had over 7 employees while no SSE was established to have more than 20 employees.
30%
26%
30%
8%
6%
0
5
10
15
20
25
30
35
Less than 2
years
2-4 years 5-8 years 9-10 years More than
10 years
Frequency(%)
Duration of Business
Duration of the Business
Less than 2 years 15 30.0
2-4 years 13 26.0
5-8 years 15 30.0
9-10 years 4 8.0
More than 10 years 3 6.0
Total 50 100.0

26
Table 4.6: Number of Employees
Figure 4.7: Number of Employees
Malawi‟s definition of Small Scale Enterprises differs in accordance with employment
criteria. Finscope (2012) categorised SSEs as follows; 5-20 employees (small), 21-100
employees (medium) and 101- Above (Large).From the results in figure 8, all the 50
respondents have employees between 4 to 10 and not more than 20 employees. This implies
that most small scale businesses in Mzuzu are under a category of small. Number of
employees may also tell the growth of the business in such a way that, when a business is
having a lot of employees it shows that the owner is able to make more money which meets
the salary expenses of them.
4.2.2.7 Additional Employees
Table 4.8 reports the number of employees added within the operating business. Twenty five
respondents agreed representing 50%, 20 respondents denied representing 40% and 5
responded said that they add but replacing other employees that have resigned or those that
have been downsized.
4-5 25 50.0
6-7 13 26.0
Over 7 12 24.0
Total 50 100.0
50%
26% 24%
0
10
20
30
40
50
60
Frequency(%)
Number of Employees
Number of Employees

27
Table 4.7: Employees Added
Figure 4.8: Employees Added
The study shows that most of the businesses added employees during their business
operational. With pressure in work, looking for expert to manage the business as two reasons
most entrepreneurs gave implies that there is growth in some SSEs that made them to add
employees in order to overcome pressure on work and they also have financial literacy since
someone to know that the business needs to be operated by someone who has knowledge and
skills (Expert) they financial literacy has to be there. When a business has been operating for
more than 2 years but did not add any employees it gives a doubt on the growth of the
business that means they do not have pressure on them or they cannot manage to meet salary
expenses.
4.2.3 MEASURING SMALL SCALE PROFITABILITY
This subsection analyses profitability on Small Scale Enterprises in relation to Level of
knowledge, skills necessary to make sound financial decisions. This will help to determine
how financial literacy affects profitability of SSEs. Table 4.9 shows that businesses from 32
respondents are profitable representing 64% while 18 respondents they make losses
representing 36% in the sample size.
40%
50%
0
10
20
30
40
50
60
Yes No
Frequency(%)
Response
Employees Added
Yes 25 50.0
No 20 40.0
Constant 5 10.0
Total 50 100.0

28
Table 4.8: Profit made for the past 3 years
Figure 4.9: Profit made for the past 3 years
In Figure 10 most of the Small Scale enterprises show that they are making profit in their
business representing 64% which is a good figure to argue that despite the size of the
business, owners at least have something in return as in profits.
4.2.3.1 Profit trends of the Small Scale Businesses
Although 64% agreed that they are making profit in their businesses table 4.10 shows the
profit trends of SSEs as follows; 20% said they have a rise in their profits for the past 3 years,
34% said that they have a decline in the profits while 31% have a constant profit trend and
7% said they are not sure.
Table 4.9: Profit trend
64%
36%
0
20
40
60
80
Yes No
Frequency(%)
Response
Profit made for the past 3 years
Percent
Yes 32 64.0
No 18 36.0
Total 50 100.0
Rising 9 28.0
Declining 11 34.0
Constant 10 31.0
Not Sure 2 7.0
Total 32 100.0

29
Figure 4.10: Profit trend
This implies that even though 64% agreed that they are making profits, there profit trends is
not that of impressing since 34% complained that their profits are declining and about 31%
have a constant profit trend. This may be due to lack of financial literacy on how to manage
the profits they have in the business or they encounter other expenses in the business. The 7%
of the respondents who responded that they are not sure clear shows that they lack financial
literacy and cannot handle a business. This is because an entrepreneur cannot stay in business
without knowing whether he or she is making profit or not.
4.2.3.2 The trend in the losses
The Table 4.11 below shows the losses trend of respondents out of 50 respondents, 18
respondents representing 100% said they are running a business but they are not making
profits. 6 respondents representing 33.3% said that their losses are increasing, 10 respondents
representing 55.6% responded that their loss is decreasing and 2 of the respondents
representing 11.1% responded that their losses are constant.
Table 4.10: Losses trend
28%
34%
31%
7%
0
5
10
15
20
25
30
35
40
Rising Declining Constant Not Sure
Frequency(%)
Profit trend
Profit trend %
Rising
Declining
Constant
Not Sure
Rising 6 33.3
Declining 10 55.6
Constant 2 11.1
Total 18 100.0

30
Figure 4.11: Losses trend
This implies that not all the small scale businesses are making profits hence some small scale
enterprises are also making losses. Most of the entrepreneurs complained that they have a lot
of expenses such as Lent and for them to raise the prices in order to meet the expenses
becomes a problem since there in a competitive world. They only look at winning customers
on the market not considering how they can improve and increase their profits. This shows
that they lack financial literacy on how to handle their business.
4.2.3.3 Area of investing profits
Table 4.12 below shows the agreement level of the respondents on whether they invest the
profits into the business or not. 20 respondents said they invest the profits representing 62.5%
and 12 respondents denied representing 37.5%.
Table 4.11: Investment of Profits
33.30%
55.60%
11.10%
0
10
20
30
40
50
60
Rising Declining Constant
Frequency(%)
Losses trend
Losses trend for the past 3 years
Percent
Yes 20 62.5
No 12 37.5
Total 32 100.0

31
Figure 4.12: Investment of Profits
From the figure 4.13 above 65.5 % agreed that they invest the profits, this implies that they
are aware of how to manage the business. For an entrepreneur to invest the profits it takes one
to have skills, knowledge, attitude and behavior necessary to make sound financial decisions.
4.2.3.4 Profit Investing Areas
Table 4.13 below: shows the results of how the profits are being used by assessing the
knowledge of an entrepreneur on how he or she manages the profits. 19 of the respondents
representing 59.4% responded that they invest the profits back into the business, while 8 of
the respondents said that they use the profits for their personal projects and 5 respondents
representing 15.6% responded that they use profits by starting a new business.
Table 4.12: Area of investing profits
62.50%
37.50%
0
10
20
30
40
50
60
70
Yes No
frequency(%)
Response
Investment of Profits Percent
Yes
No
Investing back into business 19 59.4
Personal projects 8 25.0
Starting a new business 5 15.6
Total 32 100.0

32
Figure 4.13: Area of investing Profits
This indicates that 24 respondents representing 75% small scale businesses in Mzuzu shows
that they have the knowledge on how to use the profits in a business. Investing back into a
business can help the business have an increase in inventory since the money will be used
back into the business and this will indicate growth. Those people who invest back said that
this helps them to have an increase in capital at the same time increase in goods and services
provided. It becomes easier to identify profits and losses in a business when you are investing
back. Those respondents who use profits for personal projects show that they lack financial
literacy in them since they do not know how to use profits from the business.
4.2.4 BASIC FINANCIAL LITERACY
4.2.4.1 Training on financial reporting
According to Lusardi, and Alessie (2007), Entrepreneurs are required to have knowledge and
skills on how to handle the business in order for them to make profits and grow. The
respondents were asked whether they have ever been trained on any related business course.
Table 4.14 shows the results obtained by the researcher as follows; 37 representing 74% said
yes while 13 representing 26% denied.
Table 4.13: Training on business
Yes 37 74.0
No 13 26.0
Total 50 100.0
59.40%
25%
15.60%
0
10
20
30
40
50
60
70
Investing back
into business
Personal
projects
Starting a new
business
frequency(%)
Area of investing profits
Area of investing profits Percent
Investing back into
business
Personal projects
Starting a new business

33
Figure 4.14: Training on Business Course
Lusardi and Alessie (2007) argued that someone to have numeracy and capacity to do
calculations, understanding the financial systems and understanding the risks of financial
decisions he or she must have financial literacy and can be obtained through training. 74% of
respondents have financial literacy and 64% are making profits in their businesses, therefore
it can be argued that those entrepreneurs who are financial literate are making profits in their
business than those who are illiterate on financial matters. On the question of how training
helped the business most of respondent said that the application they use in business is
obtained from the training.
4.2.4.2 Owner’s monthly salary
Table 4.15 below presents the results of respondents on whether they give themselves salary
or not in every month end. The results show that 12 respondents said yes representing 24%
while 38 respondents denied representing 76%.
Table 4.14: Owners monthly salary
74%
26%
0
10
20
30
40
50
60
70
80
Yes No
Frequency(%)
Response
Training on Financial Courses
Yes
No
Yes 12 24.0
No 38 76.0
Total 50 100.0

34
Figure 4.15: Owners monthly salary
According to Kolter (2014) accounting principles are being recommended to be applied in
any business transactions one of them is Business Entity principle which states that the
transactions associated with a business must be separated from personal affairs. This can be
argued that most of the owners of small scale businesses in Mzuzu do not apply business
entity principle. This is more dangerous since the owner sometimes may think the business is
making losses not knowing the money is used on other things apart from the business itself.
There should be a gap between the owner and Business to someone who has financial literacy
since he or she will be aware of how important it is.
4.2.4.3 Sources of income for emergency
Table 4.16 below: shows the results of how the entrepreneurs manage personal emergencies
together with their businesses. 38 of the respondents representing 76% responded that their
source of income for emergency is from business while 12 of the respondents representing
24%.
Table 4.15: Sources of income for emergency
From Business 38 76.0
Personal Savings 12 24.0
Total 50 100.0
24%
76%
0
10
20
30
40
50
60
70
80
Yes No
Frequency(%)
Response
Owner’s monthly salary Percent

35
Figure 4.16: Sources of income for emergency
The figure 4.17 shows that most of the business owners use the finances from the business on
their personal emergencies.76% of the respondents show that they do not have salary from
their business and 76% of them also said that they use income from the business for personal
expenses. This implies that there is a problem in the business owners on how to manage the
business due to lack of financial literacy or they have personal problems since they depend
much on the business than personal savings.
4.2.4.4 Financial plan and budget practices
To determine financial plan and budget practices, respondents were asked questions related to
frequency of preparing and monitoring financial budgets, kinds of financial budgets prepared.
The percentage of SSEs in the sample that monitors their plans and prepared budgets is
presented in table 4.17 below. Out of 50 SSEs owners asked 38 representing (76%) had
prepared sales budgets and have plans for the business, representing the highest percentage,
while only 12 (24%) do not prepare any budget balance sheets or financial statement. In line
with prior expectations, only 24 % of SSEs in the sample do not prepare any kind of financial
budgets.
Table 4.16: Plan for the business
76%
24%
0
10
20
30
40
50
60
70
80
From Business Personal Savings
Frequency(%)
Sources of Income
Sources of income for emergency
Percent
From Business
Personal Savings
Yes 38 76.0
No 12 24.0
Total 50 100.0

36
Figure 4.17: Plan for the business
This implies that a majority of SSEs in the sample accept that they prepare financial budgets
during business operations and monitor it regularly. This is consistent with the reported
situation that SSEs in Mzuzu prepare budget balance sheets and other statements though most
of them do not follow accounting principles when preparing.
4.2.4.5 Monitoring financial plan and budget prepared
Although plans and budgets are being made in business they also need to be monitored
regularly to improve its accuracy and be sure if they are being used in the business. Table
4.18 shows that 25 of the respondents representing 65.8% do monitor their plans and budgets
regularly while 13 respondents representing 34.2% do not.
Table 4.17: Monitoring plan/financial budget
76%
24.%
0
10
20
30
40
50
60
70
80
Yes No
Frequency(%)
Response
Plan for Business Percent
Yes 25 65.8
No 13 34.2
Total 38 100.0

37
Figure 4.18: Monitoring plan or financial budget
The results from figure 19 show that even though 76% of the respondents from figure 18 said
that they make financial plans and budget not all of them manage it properly. The 34.2%
implies that they lack knowledge and skills on how to manage financial plans and budgets
which can contribute to poor performance of the business since following your plans and
budget in a business is much important it helps one to use income in the right place and at the
right time.
4.2.4.6 Consequences of Financial illiteracy on Small Scale Businesses
Financial literacy such as record keeping, budgeting, personal finance and savings were
viewed to be more important to lower-income individuals. This suggests that financial
educators should not only teach how to save or ways to save, but also why saving is
important Atkinson (2005).
4.2.5 BASIC GROWTH OF THE BUSINESS
Respondents were asked on the potential progress of the business in the coming years. Table
4.19 below presents the results of growth rate for the past 3 years, 2% representing 4.1% of
respondents responded that they have exceptional growth on their business, 23 respondents
representing 46.9 % said that they have satisfactory growth while 10 respondents
representing 20.4% responded that they have negative growth and 14 (28.6%) of respondents
said that they have no growth.
65.8%
34.2%
0
10
20
30
40
50
60
70
Yes No
Frequency(%)
Response
Regularly monitoring of the plan
Percent

38
Table 4.18: Growth rate
Figure 4.19: Growth rate
The 46.7% being the highest percentage implies that there is an increase in the business
survival.
4.2.5.1 Access to financial Assistance
When respondents were asked whether they get assistance from financial institutions in terms
of loan.13 respondents representing 26.5% agreed while 36 respondents representing 73.5%
denied. This shows that the majority do not have access to receive financial assistance from
lending institutions.
Table 4.19: Access to Loan:
4.1%
46.9%
20.4%
28.6%
0
10
20
30
40
50
frequency(%)
growth rate for the past 3yrs
Growth rate for the past 3yrs
Exceptional Growth 2 4.1
Satisfactory Growth 23 46.9
Negative Growth 10 20.4
No Growth 14 28.6
Total 49 100.0
Yes 13 26.5
No 36 73.5
Total 49 100.0

39
Figure 4.20: Access to Loan
Cohen (2001) concluded that access to credit is considered to be an important factor in
increasing the development of SSEs. It can therefore be argued that 73.5% of the respondents
who had insufficient access to credit may have negative consequences for their businesses.
Although others agreed that they have access to loans, majority also added that they had to go
through difficult processes in order for them to have access to it. When inquired for the
process they go through in getting the assistance, majority said that they had to present
comprehensive financial statements, business plan and provide collateral security in which
the 73.5% in figure 21 failed to meet this. This implies that majority of the entrepreneurs in
SSEs lac financial literacy which affects the profitability and growth of their businesses.
4.2.5.2 Factors considered when acquiring a loan
Table 4.21 below shows that 5 of the respondents representing 38.5% responded to all the
above factors, 3 respondents representing 23% responded that they only consider rate of
interest when acquiring loan while 2 respondents representing 15.4% said repayment amount
is what they consider and 1respondent representing 8% said he considers payment period and
cost of loan.
Table 4.20: Factors on acquiring loan
26.5%
73.5%
0
20
40
60
80
Yes No
frequency(%)
Response
Access to loan Percent
Yes
No
Payment Period 1 8.0
Repayment amount /month 2 15.4
Rate of interest 3 23.0
Cost of loan 1 8.0
All the above 5 38.5
Total 13 100.0

40
Figure 4.21: Factors considered before acquiring loan
4.2.5.3 Perception of Debt burden
The respondents were asked to indicate their level of agreement with each statement in the
table to best describe their current debt position. Table 4.24 shows the results of the
respondent such that, 45 of entrepreneurs representing 90% denied having too much debt, 3
entrepreneurs representing 6% were neutral, 2 entrepreneur representing 4% agreed of having
too much debt and find it difficult in paying it off. On the right amount of debt 44 of the
respondents representing 43.8% denied having the right amount of debt, 2 entrepreneurs
representing 4.2% were neutral and 2 entrepreneurs agreed of having right amount of debt
and they have no problem with it. Lastly, 45 respondents representing 91.8% denied having
too little debt right now, 3 of the respondents representing 6.1% are on the neutral side while
1 respondent representing 2% agreed that he has too little debt right now and wish to get
more.
A few entrepreneurs were allowed to acquire loan since they had financial reports. This
implies that financial report is a major tool in securing financials supports from the
institutions; private and government.
8%
15.40%
23%
8%
38.50%
0
10
20
30
40
50
frequency(%)
Factors considered
Factors on acquiring loan
Percent
Payment Period
Repayment amount
/month
Rate of interest
Cost of loan
All the above

41
Table 4.21: Perception of debt burden
4.2.5.4 Relationship between financial literacy and profitability
To assess the relationship between financial literacy and profitability a regression analysis
was done, Table 4. 23, 4.24 and 4.25 shows the results.
Table 4.23 provides R and .The R value is 0.79 which represents the simple relationship. It
indicates a higher degree of relationship. The value how much of the dependent variable
“profitability” can be explained by the independent variable “financial literacy”.
Table 4.22: Regression of financial literacy and profitability
Regression Statistics
Multiple R 0.790332
R Square 0.624625
Adjusted R Square 0.616804
Standard Error 0.274284
Observations 50
When R value is greater than 0.5 it shows that there is a strong positive relationship between
the 2 variables. Table 4.23 shows that R is 0.8 which is greater than 0.5 therefore there is a
strong relationship between financial literacy and profitability .R squire is 0.624625, this
means that independent variable (financial literacy) explains 62 % of the dependent
(profitability).
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
I have too much debt now and I
have or may have difficulty paying
it off
28 17 3 1 1
56% 34% 6% 2% 2%
I have the right amount of debt
right now and I face no problems
with it
21 23 2 1 1
43.8% 47.9% 4.2% 2.1% 2.1%
I have too little debt right now and
I wish I could get more
28 17 3 1 0
57.1% 34.7% 6.1% 2% 0%

42
Table 4.23: ANOVA for financial literacy and profitability
ANOVA
df SS MS F
Significance
F
Regression 1 6.008889 6.008889 79.872 8.77706E-12
Residual 48 3.611111 0.075231
Total 49 9.62
a. Dependent variable : Profitability Score
b. Predictors: (Constant), Financial literacy Score
Table 4.23 indicates that the model predicts the outcome variable significantly well. The
Significance column indicates the statistical significance of the regression model that was
applied. Here, P < 0.0005, which is less than 0.05, and indicates that, overall, the model
applied can statistically significantly predict the outcome variable.
Table 4.24: Coefficients of financial literacy and profitability
Table 4.24, Coefficients, provides information on each predictor variable. This gives us the
information we need to predict profitability from financial literacy.
Dependent Variable: Profitability Score
When P value is less than alpha which is 0.05 then the researcher will reject the null
hypothesis and when is greater than alpha the researcher will accept the null hypothesis.
Table 4.23 shows the P-value of 0.02 which is less than 0.05 therefore the researcher will
reject the null hypothesis. The results show that there is a relationship between financial
literacy and profitability in a business.
4.2.5.5 Relationship between financial literacy and Growth
Table 4.26 provides R and . The R value is 0.79 which represents the simple relationship.
It indicates a higher degree of relationship. The value how much of the dependent variable
“Growth” can be explained by the independent variable “financial literacy”.
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.277778 0.116548 2.383374 0.021159 0.043442097 0.512113 0.043442 0.512113
X
Variable
1 0.722222 0.080812 8.937114 8.78E-12 0.559739662 0.884705 0.55974 0.884705

43
Table 4.25: Regression for financial literacy and growth
Regression Statistics
Multiple R 0.791476684
R Square 0.626435341
Adjusted R Square 0.618652744
Standard Error 0.273621241
Observations 50
When R value is greater than 0.5 it shows that there is a strong positive relationship between
the 2 variables. Table 4.25 shows that R is 0.79 which is greater than 0.5 therefore there is a
strong relationship between financial literacy and profitability .R squire is 0.626435, this
means that independent variable (Financial literacy) explains 63% of the dependent (Growth).
Table 4.26: ANOVA for financial literacy and Growth
ANOVA
Df SS MS F Significance F
Regression 1 6.026308 6.026308 80.4918121 7.8E-12
Residual 48 3.593692 0.074869
Total 49 9.62
a. Dependent variable : Growth Score
b. Predictors: (Constant), Financial literacy Score
Table 4.26 indicates that the model predicts the outcome variable significantly well. The
Significance column indicates the statistical significance of the regression model that was
applied. Here, P < 0.0005, which is less than 0.05, and indicates that, overall, the model
applied can statistically significantly predict the outcome variable.
Table 4. 27: P-value for financial literacy and Growth
Coefficients
Standard
Error t Stat P-value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 2.097402597 0.101041 20.75787
0.044E-
25 1.894245 2.30056 1.894245 2.30056
X
Variable
1
-
0.373840445 0.041669 -8.97172
7.8047E-
12 -0.45762
-
0.29006 -0.45762
-
0.29006
Dependent Variable: Growth Score
Table 4.28 shows the P-value of 0.044 which is less than 0.05 therefore the researcher
rejected the null hypothesis. The results show that there is a relationship between financial
literacy and growth in a business.

44
5.0 CHAPTER FIVE
5.1 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.2 Introduction
This chapter presented a summary of the key elements of the study, discussion of major
findings and interpretation of the results. This chapter further presents the conclusions drawn
from the research findings as well as recommendations for improvement and suggestions for
further research.
5.3 Summary
The main objective of this study was to establish whether there is a relationship between
profitability, growth and level of financial literacy. From the research findings, it is evident
that there is a positive relationship between profitability‟ growth and the level of financial
literacy exists. The findings shows that more successful SSEs employs more than 4
permanent employees, have been in business for more than 2 years, has satisfactory revenue
growth of and are basically financial literate. Majority of these SSEs are service providers
and are managed by well-educated businessmen that understands financial concepts etc. On
the other hand, the SSEs whose business profitability and growth score were low also scored
low in financial literacy. These SSEs are mostly small enterprises run by one and have
employees between ranges of 4-5 employees and runs small shops such as internet cafe,
spare part shops, Restaurants etc, and have recorded minimal or no growth over the years.
5.4 Conclusion
This study concludes that there is positive relationship between profitability, growth and
financial literacy. SSEs that are more successful are run by entrepreneurs who are financial
literate and understand key financial concepts .Financial literacy disclosures entrepreneurs to
better decision making skills that lead to borrowings, risk taking, diversifications, and
investments. The study also concludes that there is a higher a chance for financially literate
entrepreneurs to be more successful than those with low level of financial knowledge.
Nevertheless, the findings suggest that, majority of Mzuzu entrepreneurs have some level of
financial literacy and majority especially in SSEs are highly financially literate. Financial
literacy also seems to go hand in hand with formal education; entrepreneurs that scored high
in financial literacy seemed to be well educated, while in contrast, entrepreneurs with low
level of financial literacy demonstrated low level of formal education. This further implies
that the business education taught in schools has bearing to ones success in business.

45
5.5 Recommendation for Further Research
This study recommends training of Small Scale Enterprises (SSEs). Most of these businesses
survive for many years but with minimal or no growth at all, perhaps due to lack of financial
knowledge. If trained, SSEs in this sector would hold more risk ventures, diversify
investments and raise capital to grow and transform into more solid enterprises. Since this
study covers only Mzuzu, there is need for further study by the researcher that will cover
other urban and rural areas in the country and indeed the entire country. It is also
recommendable to conduct the same study in Large Scale Enterprises or different sectors
alone. Since this study only covers basic financial literacy, it is also recommendable to
further study relationship between advanced financial literacy and firm performance.
5.6 Limitations of the Study
This study was limited by some respondents not willing to disclose their financial
information in terms. Some entrepreneurs were not available and were represented by their
employees who would have different financial literacy level than the owners of business.

46
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