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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Managers take various decisions as part of their routine arrangements. They are anticipated to decide many issues containing those apprehensive with firm‘s strategy, configurations, development systems, performance evaluation procedures and workflow, among others (Ireland & Miller, 2004). Notably, managerial decisions may have significant consequences for the firm performance and success (Hart, Milstein & Caggiano, 2003). These dealings have unsurprisingly financial features. Then to perform efficiently, it is important to be financially literate for the owners-mangers of the firms. The significance of financial decisions is evident from the higher failure rate among small firms because of their weak financial management (Van Praag, 2003). Owners of SMEs often do not have robust finance expertise and thus they may not completely comprehend the influence of their decisions on the firm. Financial literacy of owners for the growth of firms seems really crucial (Adomako, Danso & Damoah, 2015). Bad decisions threatens the firms sustainability and leaves the wide spread operational problems (Timmons and Spinelli, 2004).Certainly decisions of managers have significant impact on their firms, a decision can enhance firms‘ capability to respond to the competitive challenges or may lead to failure. Ayyagri, Beck and Demirguc-Kunt (2007) argued that if SME managers are not acquainted with proper knowledge about the need of the business, surely they will not satisfy them. This specifies the effect of financial literacy in taking right decision to mandate for effective services. SME managers and individuals with low financial literacy are likely to make wrong decisions regarding to capital structure of the firm, for instance contributing less in formal financial system and borrowing at higher rates of interest in relation to their financially literate counterparts (Lusardi and Tufano, 2009; Lusardi, Mitchell and Curto, 2010; Lusardi and Bassa Scheresberg 2013). Financial literacy explicates differences in financing decisions by the borrowers (Kidwell and Turrisi, 2004).

Current economic conditions have raised serious concerns about financial security, especially the managers and individual who lack the skills and resources to withstand financial market downswings and take advantage of upswings. Individuals and managers are taking responsibility for a growing number of financial decisions, the two most important arguably being the purchase and financing of their day-to-day financial activities. In recent years, financial literacy has gained the attention of a wide range of major banking companies, government agencies, grass-roots consumer and community interest groups, and other organizations. Interested groups, including policymakers, are concerned that consumers lack a working knowledge of financial concepts and do not have the tools they need to make decisions most advantageous to their economic well-being. Such financial literacy deficiencies can affect an individual’s or family’s day-to-day money management and ability to save for long-term goals such as buying a home, seeking higher education, or financing retirement. Ineffective money management can also result in behaviors that make consumers vulnerable to severe financial crises. From a broader perspective, market operations and competitive forces are compromised when consumers do not have the skills to manage their finances effectively. Informed participants help create a more competitive, more efficient market. As knowledgeable consumers demand products that meet their short- and long-term financial needs, providers compete to create products having the characteristics that best respond to those demands.

However, other researchers argue that financial literacy is a secondary concern when it comes to decision making, partly because evidence on financial education programs has been mixed. Early evaluations, notably by Douglas Bernheim and a series of coauthors, suggested that workplace financial education initiatives increased participation in savings plans (Bayer et al., 1996; Bernheim 2003), while financial education mandates in high school significantly increased adult propensity to save (Bernheim et al., 2001).

A large part of this debate may be linked to the fact that a great deal of variation continues to exist in how researchers define and measure financial literacy itself. Previous surveys that are purposively designed to measure financial literacy (such as the Washington Financial Literacy Survey, the Jump$tart Coalition Survey, or the Survey of Consumer Finances 2001 module) rarely also collect sufficiently detailed information on individuals’ financial education and variables related to financial decision making.

This research will exposed a lot of importance issues encompassed to the effect of the financial literacy and the manager’s performance. The reader will be knowledgeable about the impact of financial knowledge on decision making, those with the experienced makes relevant decision compare to those without having the financial literacy knowledge. The research exposed and highlighted different views from the scholars about the benefit and the essential reasons for the managers and individual most learn about financial literacy for their future life. Financial literacy, in the brightness of the new business reality, is the capability to adequately oversee financial resources over the life cycle and connect with effectively with financial products and services. Financial literacy is about discernment and makes effective decisions on utilization of financial management (Gavigan, 2010). This is an area that requires knowledge, skill, attitude and experience with goals to deal with the survival of the firm; profit maximization; sales maximization; capturing a particular market share; minimizing staff turnovers and internal conflicts; and maximizing wealth (Jacobs, 2001). It can be among the essential strategic tools to more organize allotments of financial resources and to a considerable financial strength. In a business, decision-making needs to be rational and be a premised on available information. This implies that it is imperative that manager of business and individual should have a reasonable degree of knowledge related to the available information to make good decisions. Remund (2010) opined that financial literacy is the degree to which one understands important financial concepts and possesses the capacity and confidence to handle personal funds of appropriate, brief period decision-making and solid long-term financial forethought. Therefore, the study tends to examine the financial literacy and the manager’s performance

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