Assessing the Impact of Financial Literacy and Digital Capability on the Performance of Small and Medium Enterprises in Ghana

Over the past decade, there has been an increasing scholarly work on financial literacy (FL) and digital capability (DC) for Small and Medium Enterprise (SME) managers specifically for developing countries. It is believed that developing these capabilities could be a significant step in enhancing SMEs survival rate. Drawing on the Knowledge-Based View (KBV) and the Institutional Theory, this study aims to investigate how the FL and DC of SME managers influence business performance in the Ghanaian context. The study adopts a pragmatic philosophical stand with a sequential explanatory triangulated strategy. Using a structured questionnaire in a survey, primary data was collected from 499 SME managers in Ghana using a stratified random sampling technique. Secondly, using an interview technique, qualitative data was collected from ten (10) SME managers in line with the pragmatic research paradigm. The Partial Least Square Structural Equation Modelling (PLS-SEM) was deployed to analyse the quantitative data through Smart PLS version 4. The Statistical Package for Social Scientists (SPSS) was also used to conduct the Exploratory Factor Analysis (EFA) in validating the variable items given its optimal statistical package that provides comprehensive output from a principal components analysis. Regarding the qualitative data, thematic analysis was used. The study measured the impact financial knowledge construct using six (6) main variables such as inflation, insurance, interest rates, risk diversification, investment and debt management on the performance of SMEs in the areas of sales, employment and profitability. Secondly, the effect financial behaviour construct using variables such as savings (SB), risk management (RMB), budgeting (BB), and record keeping (RKB) were also examined on the performance of the sampled SMEs. Lastly, Digital Capability (DC) was tested as a mediation variable in the relationship between FL, and SME performance. The results show that managers’ knowledge of interest rates exerts a significant positive effect on profitability. Also, managers’ Knowledge of inflation exerts a statistically significant positive effect on SME profitability and sales growth. In addition, managers’ debt literacy also exerts a statistically significant positive effect on employment growth. Furthermore, Knowledge of risk diversification exerts a statistically significant effect on sales growth. On financial behaviour, managers’ risk management behaviour emerged to have a statistically significant positive effect on SMEs profitability and sales growth. Finally, savings behaviour showed statistically significantly positive effect on both SME profitability and sales growth. On the mediating effect, the path analysis shows that the application of Knowledge on interest rates, risk diversification, risk management behaviour, budgeting behaviour and savings behaviour exert a significant indirect effect on SME employment growth through the application of digital capability. Also, the application of Knowledge on interest rates, risk diversification, risk management and savings behaviour exert a significant indirect effect on the profitability of SMEs through the application of digital capability. This study has made three important contributions. The study adds to the body of knowledge on financial management by investigating how SME financial literacy contributes to managers' sound financial management behaviour to improve SME performance. The study also contributes to the digital transformation literature by exploring how the use of digital literacy can enhance SME performance and streamline their operations. From the theoretical perspective, the study presents how the Knowledge-Based View strengthens the acquisition of explicit and tacit knowledge leading to a high SME financial performance. Also, through Institutional Theory, this study presents a strong argument on how the regulatory, normative, and cognitive institutions impact on managers’ financial behaviour and the general business outlook. Lastly, the study significantly improved methodology by using an explanatory sequential triangulation strategy that ensures that both quantitative and qualitative strategies are deployed to validate and complement the weaknesses of each other to add depth, breadth, and richness to the study outcomes.