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Effició Intelligence Report – Refining financial decision-making processes to improve financial outcomes.

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INTELLIGENCE ISSN 2834-6238, Report #10 Published: Thursday, April 4, 8:00 AM Eastern
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Refining financial decision-making processes to increase financial literacy and improve financial outcomes.

April is Financial Literacy Month! This month, we discovered a wealth of information to answer our question. Financial literacy has a multidimensional impact on company performance and decision-making, influencing critical areas such as financial decision-making, financial access, risk management, performance appraisal, and strategic planning.

Section I – Report Format

Getting to the CORE is about a digging process. Our goal is to uncover pertinent business problems investigated in academic, practitioner, and industry research that provide guidance, sources, and opportunities for small business leaders to employ in their strategic planning and execution.

Our objective is to address important questions through research and real-world applications. Our CORE investigation aims to deliver compelling insights on essential business questions related to operations, systems, strategy, and marketability.

To generate questions, you are our most valued contributor! We want our community to grow via open discussion and engagement.

Each issue will have a question, findings, and a list of sources. Each quarter, we hold a live discussion to analyze the findings and give ways to apply them to your business.

I hope you’re ready to push yourself, move yourself, and achieve great things. We’re ready to assist you in excavating your Red Diamond Business!

Section II – CORE Question

You may improve your company’s overall financial health, competitiveness, and resilience by increasing its financial literacy. To begin studying this aspect of your organization, this month’s business question is: “As CEO, how can I improve my financial decision-making process to improve the firm’s financial outcomes?”

Section III – CORE Findings

It’s critical to start with definitions and then look into measures to improve financial literacy in your firm. Both academic and practitioner research find that strengthening financial literacy among firm leaders can help organizations improve their financial management practices, decision-making capacities, and overall performance, ultimately contributing to their long-term success and viability. This implies that as CEO, your financial decisions lay the groundwork for building a financially sustainable organization.

This month, we combined our findings rather than addressing each resource separately. This provides a set of findings that you can use to improve and/or plan your financial decision-making processes.

Academic Findings

[1-6] Definitions:

The studies define financial literacy in a variety of ways, highlighting the concept’s multidimensionality and consequences for SMEs (Small and Medium Sized Enterprises). Here are some popular definitions and characteristics of financial literacy as described in the studies:

  • Financial Literacy: Financial literacy is commonly defined as the knowledge and understanding of financial concepts, phrases, and principles that apply to business operations. This includes comprehending financial statements, budgeting, managing cash flows, evaluating investments, and assessing risks.
  • Financial Skills: Financial literacy includes the practical skills needed to effectively utilize financial information in decision-making processes. These abilities may include financial analysis, forecasting, financial planning, and the ability to evaluate and apply financial data to support corporate strategy.
  • Financial Behavior: Financial literacy entails engaging in suitable financial behaviors and practices that benefit the SME’s financial health and sustainability. This includes making sensible financial decisions, managing risks, adhering to financial regulations, and using financial resources responsibly.
  • Financial Attitude: According to certain studies, people’s attitudes regarding money influence their financial literacy. A positive financial attitude can lead to proactive financial management, a willingness to pursue financial education, and a mindset that encourages sound financial judgments.
  • Awareness and comprehending: Financial literacy is also defined as knowing and comprehending the financial landscape, which includes financial products, services, markets, and regulations. This insight allows SME owners and managers to properly navigate the financial climate and make educated decisions.
  • Strategic Financial Management: Financial literacy in small and medium-sized enterprises is frequently related to the ability to engage in strategic financial management activities. This includes establishing financial goals, devising financial strategies, tracking financial performance, and responding to changing financial situations to meet corporate objectives.

Financial literacy in the context of SMEs is defined as a set of knowledge, skills, behaviors, attitudes, awareness, and strategic financial management practices that enable SME owners and managers to make informed financial decisions, manage financial risks, obtain financing, and improve their companies’ overall financial health and performance.

Understanding the terminology first will help you save time when deciding where to start improving your financial literacy. Overall, understanding financial literacy concepts is critical for clarity, targeted training, and sound decision-making.

How to use the findings:

You can use the findings and recommendations from the research to help improve financial literacy for yourself and the business. Based on the study’s findings, you can take the following practical steps:

  • Conduct a Financial Skills Assessment: Assess the present levels of financial literacy among your leaders and staff. This can be accomplished through surveys, interviews, or self-assessment systems that suggest areas for growth.
  • Create a Financial Literacy Training Program: Based on the identified gaps in financial literacy, you can build and implement a structured training program that covers key financial concepts, tools, and practices. This program may include workshops, seminars, online courses, and mentorship opportunities.
  • Encourage Peer Learning and Networking: Facilitate peer learning and networking among your leaders and staff. This can include organizing knowledge-sharing events, discussion forums, or mentorship programs to enable the exchange of best practices in financial management.
  • Use Technology for Financial Management: Use financial management tools and technologies to simplify procedures, track financial performance, and make data-driven choices. Implementing accounting software, budgeting tools, and financial analytics platforms can help improve financial literacy and decision-making.
  • Seek External Support and Expertise: Work with financial advisors, consultants, or industry specialists to gain specialized financial expertise and direction. These professionals can offer insights, recommendations, and tactics for increasing financial literacy throughout the firm.
  • Apply Case Study Lessons: Gain insight into how other businesses have effectively improved their financial literacy and management processes by studying case studies and practical examples. By evaluating these experiences, you can tailor suitable methods to your specific situation.
  • Monitor Progress and Evaluate Impact: Measure the progress of your financial literacy activities and assess the impact on business performance. Regular assessments, feedback mechanisms, and performance indicators can be used to measure the effectiveness of activities and make required adjustments.

By incorporating these strategies, you can empower everyone on your team with the necessary skills and knowledge to make informed financial decisions, enhance business performance, and ensure long-term sustainability and growth.

Practitioner/Industry Findings

Our practitioner/industry findings revealed many articles that provided steps to improve financial literacy. One resource provided a [7] full guide on Financial Literacy for Small Businesses emphasizing the significance of understanding and managing financials for small business owners. It highlights that approximately 40% of small business owners struggle to comprehend their company’s financials. The guide covers essential topics such as recordkeeping, cash flow, building credit, banking services, financing options, tax planning, and risk management. You can pick and choose which modules to engage with.

We also found three sources that collectively provided how financial literacy affects decision-making, and strategy-making, in addition to a great list of why more CEOs may not focus on this important aspect of their skill development.

[8-10] Practical Insights

Supporting our academic findings, these articles share that increasing financial literacy enhances decision-making and strategy-making abilities in several ways:

Enhanced Decision-Making:

  • Financial literacy enables CEOs to understand the financial implications of their decisions. This understanding helps in evaluating the impact on the company’s financial status, allowing for more informed and strategic decision-making.
  • With financial literacy, CEOs can advocate for growth budgets effectively by calculating the return on investment and demonstrating the impact on the company’s bottom line.
  • Understanding finance allows CEOs to identify ways to be more financially efficient by assessing expenses and finding cost-effective solutions.

Improved Strategy Making:

  • Financial literacy empowers CEOs to make better strategic decisions by considering the financial aspects of various options.
  • CEOs with financial literacy can negotiate more effectively, whether it’s about salary, benefits, or project scope, by leveraging their understanding of the financial implications.
  • Being financially literate helps CEOs build a strong case for funding requests, such as project management software, by showcasing the anticipated return on investment and the software’s efficiency benefits.

Additionally, we want to address the many elephants in the room!

According to the articles shared, there are several reasons why more CEOs of small firms may not be focused on financial literacy:

Assumption of Irrelevance: Many CEOs of small firms may assume that finance is not a significant concern for them if they do not work in a finance role. This misconception can lead to a lack of emphasis on financial literacy.

Decreasing Financial Literacy: Since 2009, the number of people who score more than 60% on basic financial literacy examinations has progressively decreased. This trend suggests a broad decline in financial literacy, which may influence CEOs of small businesses.

Increasing Demand versus Decreased Supply: The Bureau of Labor Statistics predicts a 16% increase in demand for finance skills by 2028, while the supply of financial literacy is declining. This mismatch between demand and supply emphasizes the significance of CEOs increasing their financial literacy to meet the changing needs of the corporate landscape.

Lack of awareness: Some small-company CEOs may be unaware of the importance of financial literacy in decision-making, strategy formulation, and overall business performance. This lack of understanding may result in a lower priority for financial education.

Resource constraints: Small businesses frequently suffer resource constraints, including time and budget limits, which may discourage CEOs from investing in their financial literacy. Prioritizing day-to-day operations and current issues may overshadow long-term skill development.

>>Are you ready to increase your financial literacy after exploring these findings?

Section IV – CORE Discussion

What do we think? You are responsible for your company’s financial well-being! Addressing these barriers and misconceptions can help you grasp the importance of financial literacy and how it directly affects your decision-making ability, strategic planning, and overall business performance. Increased financial literacy enables you to not only make more informed decisions but also to develop strategies that align with your company’s financial objectives. Whether you work alone, with a team of contractors, or with a workforce of 20, you are responsible for your company’s financial vision.

How will you improve your financial decision-making process to improve your firm’s financial outcomes?

Let’s converse!

We have many more sources and insights on this month’s question. Additional findings will be shared during CORE Webcasts, our LIVE dialogue, and conversations about “the findings” for subscribers. Webcasts are held on the third Thursday of each quarter in January, April, July, and October. If you’re a subscriber, no need to register, set the reminder on your calendar. We’ll send the link to join one week before the event.

If you want to subscribe to our monthly reports and access our webcasts, use the form below, it is free.

Section V – CORE Sources

Remember: We investigate research from all sources. Your goal is to dig into the findings so that you can create solutions.

Academic Articles

[1] Graña-Alvarez, R., Lopez-Valeiras, E., Gonzalez-Loureiro, M., & Coronado, F. (2024). Financial literacy in SMEs: A systematic literature review and a framework for further inquiry. Journal of Small Business Management, 62(1), 331-380.

[2] Duréndez, A., et al. (2023). The influence of CEO’s financial literacy on SMEs technological innovation: The mediating effects of management control systems and risk-taking attitudes. Financial Innovation, 9(15).

[3]  Molina-García, A., Campos-Valenzuela, M., Galache-Laza, M. T., & Diéguez-Soto, J. (2021). Financial literacy in SMEs: a bibliometric analysis of an emerging topic.

[4] Kulathunga, K. M. M. C. B., Ye, J., Sharma, S., & Weerathunga, P. R. (2020). How does technological and financial literacy influence SME performance: Mediating role of ERM practices. Information, 11(6), 297.

[5] Wong, P. K., Holmes, S., & Schaper, M. (2018). How do small business owners actually make their financial decisions? Small Enterprise Research.

[6] Eniola, A. A., & Entebang, H. (2017). SME managers and financial literacy. Global Business Review, 18(3), 559–576.

Practitioner/Industry Articles

[7] Startup Washington. (n.d.). Financial Literacy for Small Businesses. Retrieved from

[8] Houston, M. (2023, February 28). The Benefits Of Financial Literacy For Business Owners. Forbes.

[9] Houston, M. (2023, February 28). The Benefits Of Financial Literacy For Business Owners. Forbes.

[10] Cote, C. (2020, May 26). The Importance of Financial Literacy in Business. Harvard Business School Online.…CjwKCAjw_LOwBhBFEiwAmSEQAWGw0uBeIRpdwFnOyK_d61jCH2P3q-65jwIXGMfocF7MWnEtddvXrxoCU_wQAvD_BwE

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