Financial education for entrepreneurs: what next? About ACCA This report considers how the global agenda on financial literacy, capability and education relates to entrepreneurs, and reviews the latest global evidence on the effectiveness of such interventions. ACCA (the Association of Chartered Certified Accountants) is the global body for professional It advocates a ‘plan first’ approach accountants. We aim to offer business-relevant, first- to financial education that puts choice qualifications to people of application, ability and ambition around the world who seek a rewarding business planning and professional career in accountancy, finance and management. advisers at the heart of support Founded in 1904, ACCA has consistently held unique programmes. core values: opportunity, diversity, innovation, integrity and accountability. We believe that accountants bring value to economies in all stages of development. We aim to develop capacity in the profession and encourage the adoption of consistent global standards. Our values are aligned to the needs of employers in all sectors and we ensure that, through our qualifications, we prepare accountants for business. We work to open up the profession to people of all backgrounds and remove artificial barriers to entry, ensuring that our qualifications and their delivery meet the diverse needs of trainee professionals and their employers. We support our 162,000 members and 428,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 89 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. FOR MORE INFORMATION CONTACT Rosana Mirkovic Head of SME Policy, ACCA [email protected] Emmanouil Schizas Senior Economic Analyst, ACCA [email protected] © The Association of Chartered Certified Accountants J2anuary 2014 Introduction Financial inclusion was the main theme As the most trusted financial advisers of of the World Bank’s 2014 Global SMEs around the world (Schizas et al. Financial Development Report (World 2012), professional accountants in Bank 2013). To no one’s surprise, the practice and in business actively report noted that small and medium- support and mentor many millions of sized enterprises (SMEs), and entrepreneurs seeking finance every particularly informal businesses or SMEs year. ACCA believes that, while global in emerging markets, face significant leaders remain engaged with the financing constraints that undermine matter of entrepreneurs’ financial their contribution to employment, education, it is important to set out the productivity growth and innovation. It views of the people who actually also noted, however, that financial provide most of it – the global sector practitioners saw financial accountancy profession. education as the most effective means of addressing financial exclusion for This report brings together evidence households and businesses. from ACCA research as well as the most recent reviews of the literature on the The call for more widespread financial effectiveness of financial education. Its education is not a new agenda. It is old aim is to stimulate debate on alternative enough to have developed a substantial approaches that build on the policy following, and has withstood experience of the past decades while (with some concessions) a great deal of also fully engaging the business world’s well-documented criticism over the real financial educators – professional years. Yet the financial crisis and its accountants. aftermath have renewed interest, from the G20 leaders downwards, for greater financial inclusion, and with it an emphasis on improving the financial capability of consumers and entrepreneurs. FINANCIAL EDUCATION FOR ENTREPRENEURS: WHAT NEXT? 3 1. Defining financial literacy, capability and education As concepts, financial literacy and regulation possible while also reducing It is important to note that almost all capability typically refer to consumers. the potential for mis-selling and the widely used definitions treat financial In developed countries, the rising cost of marketing to and servicing education as a process that develops indebtedness of households, low levels consumers. financial capability, not merely literacy of retirement savings and increasing (OECD 2005), even though in practice complexity of financial products The terms financial literacy and financial curricula can be more or less ambitious prompted calls to improve levels of capability are often used in scope. In any case, the assumption is financial literacy and capability even interchangeably by policymakers and that financial education can achieve before the financial crisis of 2008–9. stakeholders. For the purposes of this significant and persistent change in the Meanwhile, changes in policy have review, and following the distinctions learners’ financial behaviours by raising increasingly meant that the risk drawn by Lusardi (2012), among others, their levels of financial capability. associated with retirement saving and financial literacy will be assumed to insurance has shifted from the state and encompass knowledge and cognitive employers to consumers and skills, while financial capability will be employees, further emphasising the treated as a broader term that need for financial literacy (OECD 2013a). combines financial literacy with a set of Meanwhile, in the developing world, desirable attitudes, behaviours and persistent evidence of financial external enabling factors. exclusion and precarious self- employment, particularly among Having made this distinction, it is under-represented groups such as possible to draw on recent reviews such women or young people, has prompted as de Meza et al. (2008), Remund (2010), a similar response (Xu and Zia 2012; PACFC (2010), Bank of Zambia (2012) IBRD 2013). In both cases, greater and OECD (2012) for a list of the core financial literacy and capability were elements that define these concepts expected to reduce the social cost of (Table 1.1). financial innovation by making lighter Table 1.1: Elements of consumer financial literacy and capability Financial literacy Financial capability (elements in addition to financial literacy) Knowledge of financial concepts Ability to access financial services Ability to communicate about financial concepts Ability to access advice and support services Aptitude in managing personal finances Motivation and confidence to apply financial literacy skills to future financial needs Skill in making financial decisions appropriate to one’s circumstances Ability to work around cognitive biases when making financial decisions 4 2. What is different about entrepreneurs? Following the 2008–9 financial crisis, the is to highlight and remedy illiteracy, Financial institutions want continued experience of financial setting out an implied curriculum; in the entrepreneurs as their customers and exclusion in developing countries and former, the aim is to distinguish governments want them to be able and the severe credit rationing to SMEs in between different levels of literacy, willing to access external finance. Yet, at developed countries revived interest in setting out criteria for eligibility. The the same time, entrepreneurs are seen how the concept of financial capability consumer approach to financial literacy as responsible for the survival of might relate to agents in the business seeks inclusion (for example, turning vulnerable entities whose needs they world – entrepreneurs, managers, or individuals into confident and reliable may not fully understand, and with company directors. From a theoretical consumers of financial services) while greater use of external finance comes perspective, some complications are the business approach seeks exclusion greater risk. At 8–14% per annum, bound to arise. (for example, avoiding majorities of business mortality rates are substantial financially ‘illiterate’ directors on even in the developed world and were As Bay et al. (in press) explain, the way company boards). Perhaps uniquely still on the rise until recently (OECD financial literacy is discussed in the among the many target groups at which 2013b). Entrepreneurs’ lack of financial business world can be very different financial education is aimed, capability is often portrayed as part of from the way it is discussed in a pure entrepreneurs sit astride this the reason for the substantial churn in consumer setting. In the latter, the aim distinction. the sector (New Vision 2011), even though many business exits are arguably not ‘failures.’ Figure 2.1: Business mortality rates from 2005 to 2010: a candlestick visualisation Even entrepreneurs with unlimited liability who could, in theory, argue that their businesses are theirs to make or 0 20 break, may be putting the livelihoods of 1 o 20 18 employees, family members, suppliers 005 t 16 afinnadn ccuiaslt odmeceirssio ants r;i sukn tdherro mugahn yt heir 2 s, 14 bankruptcy regimes they could do so e ath rat 1120 wcoitsht o(Mute itnztgeernr a2l0is1in0)g. Hmeonscte o tf hteh ec assoec ifaol r e d financial education is, if anything, % 8 e stronger when it comes to s pri 6 entrepreneurs. nter 4 e As a result of the differences between al 2 u consumers and entrepreneurs, notions n An 0 of financial capability and literacy as Australia Austria Belgium Brazil Bulgaria Canada zech Republic Denmark Estonia Finland France Hungary Israel Italy Korea Latvia Lithuania Luxembourg Netherlands New Zealand Norway Portugal Romania ovak Republic Slovenia Spain United States abdcupoerpmurilncioedund ltsa ott roo ab vtteehe resdl,a i tfipwnfe toserue rgbnnrsato.tt uaAionpsnts iTa aaalllrlybye la eaapn l2spdo.1l i t ehde re C Sl is broad consensus that they should include an understanding of financial and risk management, record keeping Note: Red fill denotes a country where the death rate fell over this period; yellow denotes a country where and compliance, and of the main the death rate rose. The height of the stalk denotes the range of movement between opening and end values. The height of the thin line denotes the range between maximum and minimum value. finance providers and their Observations are not available for all countries throughout the period. ‘Open’ figures are based on the requirements. earliest available figures, while ‘end’ figures are based on the latest available. Source: OECD (2013) FINANCIAL EDUCATION FOR ENTREPRENEURS: WHAT NEXT? 5 Table 2.1: Examples of widely used financial education curricula aimed at entrepreneurs ‘Money smart for small business’ – US FDIC/SBA SME Toolkit – IFC/IBM EFS/BDS model – USAID Organisation types Legal basics / incorporation Financial management Financial management Statements and forecasts Record keeping Bookkeeping and cash flow Cash flow and financial systems Banking services for SMEs Finding financing Funding options and providers’ expectations Credit reporting Credit and collections Selling a small business Buying a business Insurance and risk management Insurance Tax planning and reporting Regulations and policies Succession planning Time management By integrating the consensus areas • to assess the risks to which the discussed above with the earlier business is exposed and prepare definition of financial capability, it is appropriate responses possible to derive a new definition that would be appropriate in an enterprise • to understand the decision-making setting. Such a definition would include process of finance providers, and the ability: thus appreciate how the business can become creditworthy or • to distinguish between personal and investment-ready business finances • to relate the business’s financial • to be a competent buyer of financial needs to a country’s regulatory and services – understanding financial fiscal framework – to appreciate the products, their costs and risks, and notions of regulatory and tax selecting what is suitable for the efficiency business • to exercise financial management, ie • to anticipate the business’s future to use financial information to financial needs under alternative analyse business performance and scenarios create policies and controls that optimise this. 6 3. What do entrepreneurs know, and how? In a very substantial international study, Although the study was not designed to • living within one’s means includes Kempson et al. (2013) found that, after assess financial capability in an the ability to avoid needing credit in controlling for other relevant variables, entrepreneurial setting, the general the short-term owing to self-employed individuals in a sample of headings above conceal more detailed overspending, to borrow only within developing countries (Armenia, Colombia, components of financial capability that affordable levels and not to require Lebanon, Mexico, Nigeria, Turkey and are readily transferable to an enterprise credit for buying food or repaying Uruguay) performed worse than the context: debts. general population on standardised assessments of their ability to monitor • monitoring expenses includes the These findings are not surprising. As a expenses, to budget, and to live within ability to keep up to date, in a rule, self-employed individuals are less their means (Figure 3.1). rigorous manner, on what one has educated than employees, typically spent and how much one has obtaining only school-level education available to spend or less (van der Sluis et al. 2005). This is true even in developed countries. At • budgeting includes the ability to the global level, however, schools are plan one’s spending frequently and not currently effective settings for accurately as well as to adhere to entrepreneurial education, with the one’s spending plans Global Entrepreneurship Monitor (GEM) identifying primary and secondary education as one of the weakest links of the enterprise-support infrastructure of all but a handful of countries among the 69 that it reviewed (Xavier et al 2013). Figure 3.1: Financial capabilities of the self-employed in developing countries – comparisons with the general population n betweeulation 32 n capability general pop –110 ence id the –2 differed an –3 sed ploy –4 dim –5 ndarelf-e –6 Stas s g s e g n e n g s s Monitoring expense Budgetin Living within mean Not being impulsiv Not overspendin Using informatio Attitude toward the futur Achievement orientatio Savin ering unexpected expense Choosing product v o C FINANCIAL EDUCATION FOR ENTREPRENEURS: WHAT NEXT? 7 By default, then, most of the financial Figure 3.2: ‘Second generation’ entrepreneurs as a share of self-employed with capability of today’s entrepreneurs is staff in Europe and the Eastern Neighbours likely to originate either from past trial and error or from their experience of Western Mediterranean entrepreneurship in the family. This is Greece and Cyprus obvious when looking at entrepreneurs who have achieved some threshold of Scandinavia and Nordics business growth and survival, whether Italy and Malta proxied by employment or turnover. Austria, Germany and Switzerland ACCA’s review of the 2008 European Values Study (EVS 2011) reveals that Benelux between one in three and one in five Turkey business principals with staff in market UK and Ireland economies grew up with parents who also owned their own businesses and Slovenia, Croatia and Bosnia employed staff (see Figure 3.2). Serbia and Montenegro Albania, Kosovo and FYROM Similarly, Delta Economics (2012) revealed that repeat entrepreneurs Caucasus account for between 30% and 50% of Russia, Belarus and Ukraine the founders of substantial and Bulgaria, Romania and Moldova established businesses in most countries (Figure 3.3). While Baltics understandable, this trend severely limits the potential for enterprise to 0 10 20 30 40 function as a platform for social mobility, and introduces a host of economic inefficiencies, limiting the Figure 3.3: Repeat entrepreneurs as % of founders of high-potential SMEs flexibility of economies faced with rapid change. India Netherlands France Belgium Russia Italy Brazil USA South Africa Germany Spain UK China 0 10 20 30 40 50 60 70 8 4. Why the emphasis on financial management? ACCA-sponsored research among Even when businesses turn to SMEs (Forbes Insights 2010) traditional finance providers, financial demonstrates that the most common management remains paramount. types of small business financing are Forbes Insights (2010) demonstrates not obtained on strictly commercial that the strength of business’ cash flow terms (see Table 4.1). Retained earnings is a significant determinant of the and credit from suppliers, for example, outcomes of finance applications, are two extremely significant sources of regardless of whether they pertain to finance, yet both are generated during debt or equity. Credit providers are the course of business operations, and generally unwilling to fund SMEs that depend on credit and financial need money to finance their customers, management. The volumes of financing while equity investors are unwilling to obtained in this way are far from help refinance SMEs’ debt; moreover negligible. Trade credit, in particular, the ability to draw on retained earnings typically provides SMEs with twice as is correlated with better access to all much liquidity as do banks (Paul and other types of finance. It therefore falls Boden 2012), while internal budgets are to the businesses themselves to often much more of a constraint on manage their finances in such a way that business innovation than the supply of they remain ‘creditworthy’ and external funding (Forbes Insights 2011). ‘investable’. Table 4.1: Top sources of finance for SMEs in six countries (2010) Types of financing Actual in 2010 Predicted for 2011–2 Retained earnings 59.9% 49.9% Secured bank loan 36.6% 35.6% Equity investment from personal income/savings 32.0% 29.5% Business credit cards 31.3% 30.5% Personal credit cards 28.3% 19.7% Trade credit from suppliers 27.2% 25.4% Secured bank overdraft 24.2% 24.2% Unsecured bank loan 20.5% 17.0% Equity investment from friends/family 20.2% 18.8% Unsecured bank overdraft 18.9% 18.5% Revolving line of credit 18.9% 21.6% Loans from friends/family 17.7% 16.6% Factoring/invoice discounting 15.6% 16.0% Government grants 14.9% 18.3% Note: Sample of SMEs in Canada, China, Italy, Singapore, South Africa and the United Kingdom (n=1,777) Source: Forbes Insights (2010) FINANCIAL EDUCATION FOR ENTREPRENEURS: WHAT NEXT? 9 The ability to produce high-quality Figure 4.1: Key factors in SME lenders’ decisions pre- and post-crisis financial information is at the heart of both creditworthiness and Industry trends Before ‘investability’. As Figures 4.1 and 4.2 demonstrate, lenders to SMEs around Collateral Added importance the world value financial information, Forecast information during crisis and did so even more during the recent Personal guarentees financial crisis. At the macro-level, finance providers in countries with a Key risk indicators stronger supply of financial information Transaction history and better creditor protection are Fin statements and complete report better at directing finance towards SMEs. They are also better at Director’s/management profiles distinguishing between better and Tax return worse risks – an advantage that helps to Cash flow information reduce lenders’ over-reliance on collateral (ACCA 2013a). In the UK, the Business plans independent SME Finance Monitor has Credit ratings and references demonstrated conclusively that, even Fin statements and non-audit report after accounting for multiple measures of business capability and risk, credit Fin statements alone providers are more likely to lend to Fin statements and audit report SMEs that produce regular management reports. Crucially, the 1 2 3 4 5 benefit from regular management reporting appears to be even greater for SMEs that have never borrowed Source: IFAC/The Banker SME Lenders Survey, 2009 money before (BDRC 2013), and that would otherwise have been at a severe disadvantage. Figure 4.2: Access to finance of SMEs by country and strength of cash position 70% UK South Africa Strong 60% Medium 50% Weak Canada 40% 305 China Italy 20% 10% 0 0 20 40 60 80 100 World Bank/IFC credit rank in 2010 (out of 183) 10