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1
Entrepreneurial Financial Literacy
ABSTRACT
Given the high failure rateamongSMEs, policymakers note that more time should be invested in im-
proving nancial literacy among entrepreneurs.However, there is a lack of clarity about how to dene
and measure nancial literacy among entrepreneurs.This study takes a rst step towardsunravelling
and measuring the concept of nancial literacy among entrepreneurs by introducing Entrepreneurial
Financial Literacy (EFL) as a distinct construct for the entrepreneurship domain and explore its under-
lying dimensions. We also address the issue of how to measure this construct and develop an EFL scale,
which consists of 72 items.
Gezien het hoge falingspercentage van KMO’s, merken beleidsmakers op dat meer tijd moet worden
geïnvesteerd in de verbetering van de nanciële basiskennis van ondernemers. Er bestaat echter een
gebrek aan duidelijkheid over hoe nanciële geletterdheid bij ondernemers kan worden gedenieerd
en gemeten. Deze studie zet een eerste stap in het ontrafelen en meten van het concept nanciële ge-
letterdheid bij ondernemers door Entrepreneurial Financial Literacy (EFL) te introduceren als een apart
construct voor het ondernemerschapsdomein en de onderliggende dimensies ervan te onderzoeken.
We gaan ook in op de vraag hoe we dit construct kunnen meten en ontwikkelen hiervoor een EFL-
schaal, die bestaat uit 72 items.
Keywords:Financial literacy – SMEs – Entrepreneurs – Scale development
1. INTRODUCTION
Small and medium-sized enterprises (here-
after: SMEs) are of major importance for
our society (Dahmen and Rodríguez, 2014,
Nunoo and Andoh, 2011). They create jobs,
drive innovation, increase competition and
respond to changing economic trends (Green,
2013). However, a high failure rate remains
among SMEs (Esubalew and Raghurama,
2020).The survival rate of new ventures after
ve years is less than 50 percent (Eurostat,
2020). Ten years after the start-up of the
company, only ten percent of the companies
remain in the market (Timmons and Spinelli,
2004).
According toRopega (2011), one of the main
reasons for this high failure rate is a lack of
nancial knowledge and poor management
decisions. Managers of SMEs must make de-
cisions regarding the acquisition, allocation,
and use of resources.The quality of these de-
cisionswill be stronglyinuenced by the nan-
cial literacy of the entrepreneur.In general,
nancial literacy has been investigated in dif-
ferent contexts (e.g. consumer nancial litera-
cy, or investors nancial literacy) and refers to
someone’s ability to handle nancial matters
(Dahmen and Rodríguez, 2014, Rugimbana
and Oseifuah, 2010, Wise, 2013). However,
in the context of entrepreneurship, research
is scattered and there is no consensus on a
domain-specic denition and measure for -
nancial literacy among entrepreneurs.
Despite the lack of a clear denition and
measure for nancial literacy in the context
of entrepreneurship, research shows that
entrepreneurs with limited nancial knowl-
edge are more likely to face nancial di-
culties (Adomako and Danso, 2014, Dahmen
and Rodríguez, 2014), make ineective deci-
sions (Rugimbana and Oseifuah, 2010), and
have more diculties in growing their com-
pany (Ngek, 2016). Furthermore, policymak-
ers have already concluded that in both de-
veloped and developing countries, more time
should be invested in improving the nancial
literacy of SME entrepreneurs.A good nan-
cial basis for the entrepreneur is an important
driver for the success of the company (Sucua-
hi, 2013).In other words, improving nancial
literacy in SMEs can improve their perfor-
Lien Vekemans
Universiteit Hasselt
lien.vekemans@uhasselt.be
Anneleen Michiels
Universiteit Hasselt
Jelle Schepers
Universiteit Hasselt
AUTHORS
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Accountancy & Bedrijfskunde, 2022
mance and eventually also the general economic growth and
stability in a region (Dahmen and Rodríguez, 2014).
Taken together, given the importance of nancial literacy for
entrepreneurs in SMEsand for society in general, thereis a
need for a clear denition and measure. Existing literature
does not yet oer a clear and consistent denition and scale
for measuring the nancial literacy of entrepreneurs. This
denitional unclarity limits constructive progress in the entre-
preneurship eld as it leads to confusion and ambiguity. The
aim of this study is to ll this gap by delineating the concept
of Entrepreneurial Financial Literacy (EFL) and to develop an
EFL scale.
The results of our study show that EFL consists of eightdimen-
sions which can be further classied into three categories:
accounting, nance, and mathematics. The accounting cate-
gory consists of “Interpreting Financial Statements”, “Opera-
tional Budgeting” and “Understanding and Managing Financial
Risks”.The Finance category consists of “Financial Analysis and
Ratios”, “Cash Management”, “Capital Budgeting”, and “Debt
Management”. Finally, the mathematics category consists of
one dimension, namely “Mathematical Literacy”. Based on
a Delphi procedure, this article achieves content validity for
our self-constructed EFL scale which consists of a question-
naireof72items.
This study contributes to the scientic literature by taking a
rst step towards developing the EFL concept and suggesting a
scale that can measure entrepreneurs’ nancial literacy.Future
research can build on our ndings to further test the reliability
and validity of our EFL measure in dierent large-scale sam-
ples.Once the EFL scale has been tested and validated in dier-
ent contexts, this oers potential avenues for future research.
The remainder of this paper is as follows. The next section con-
tains a literature review from which relevant EFL dimensions
are distilled. This is followed by a section on scale development
and content validation. In the nal section, the ndings and
conclusions of the paper are discussed.
2. LITERATURE REVIEW
2.1. Methodology
The aim of this literature review is to delineate a conceptual
denition of EFL based on current academic literature.Today,
research in nancial literacy of entrepreneurs is scattered, and
a clear conceptual denition of EFL is lacking. A clear consistent
denition improves the ability to eectively measure nancial
literacy (Remund, 2010).Therefore, the nal step of this liter-
ature review consists of identifying relevant dimensions that
constitute the EFL concept.
The scientic databases ProQuest and ScienceDirect were
used to search for relevant scienticarticles on nancial liter-
acy in the context of entrepreneurship. Articles were retained
when they empirically or conceptually examined the determi-
nants of EFL, in other words: when they attempted to measure
EFL. These articles were coded in three phases, as illustrat-
ed in Figure 1, similar to the method of Tabor and colleagues
(2018). In rst phase, an open-coding process was engaged by
labelling each study with descriptive keywords that indicated
its focus. The second phase consisted of axial coding (Strauss
and Corbin, 1990) in which similar keywords were consolidated
into eight categories: “Interpreting Financial Statements”, “Op-
erational Budgeting” and “Understanding and Managing Finan-
cial Risks”, “Financial Analysis and Ratios”, “Cash Management”,
“Capital Budgeting”, and “Debt Management” and “Mathemati-
cal Literacy”. The nal phase of the coding process consisted of
consolidating these eight categories into three broad themes:
Accounting, Finance and Mathematics. These categories, and
their underlying dimensions, will be the starting point for de-
veloping a denition of EFL and constructing the EFL measure-
ment scale in the next sections.
2.2. Entrepreneurial Financial Literacy:Denition
To date, there is little consensus among academics and nan-
cial experts on how to dene the concept of nancial literacy as
it is used in dierent contexts and for dierent purposes.For
example, in 2011 the Organization for Economic Co-operation
and Development dened nancial literacy as “a combination
of the awareness, knowledge, skills, attitudes, and behav-
iour required to make sound nancial decisions”. The Unit-
edStatesFinancialLiteracyandEducationCommission(2007),
on the other hand, describes nancial literacy as “the ability
to use knowledge and skills to manage nancial resources ef-
fectively for a lifetime of nancial well-being”.Finally, theAus-
tralia and NewZealand banking group(ANZ) (2008) denes
the concept as “the ability to make informed judgments and
make eective decisions regarding the use and management
of money”.
Based on various conceptual denitions written between 2000
and 2010,Remund (2010)triedto describe a generally consis-
tent denition by identifyingve important components.First,
nancial literacy consists of knowledge about nancial con-
cepts. To manage money eectively, a basic knowledge of
money must rst be learned. In addition, nancial literacy
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Entrepreneurial Financial Literacy
consists of the ability to communicate about nancial litera-
cy, the ability to manage personal nances, the condence to
plan eectively for future needs, and the skill to make eec-
tive nancial decisions. Based on those components,Remund
(2010) described a general and broad conceptual denition of
nancial literacy:“Financial literacy is a measure of the degree
to which one understands key nancial concepts and possess-
es the ability and condence to manage personal nances
through appropriate, short-term decision-making and sound,
long-range nancial planning, while mindful of life events and
changing economic conditions” (Remund, 2010).
Existing literature does not yet provide a clear denition of -
nancial literacy that is specically aimed at entrepreneurs.Since
the nancial crisis in 2008, nancial literacy has become in-
creasingly important in the entrepreneurship. Policymakers
saw warning signs, such as a low savings rate, and took action
to help consumers and entrepreneurs alike understand and
adapt to the increasingly complex economy. For example, in
2006 the United States launched the very rst national strategy
to improve nancial literacy among consumers and entrepre-
neurs.However, that strategy started without any clear deni-
tion of nancial literacy and without a consistent way ofmea-
suring nancial literacy. Academics and other organizations
conducting research used their own denitions and measures
of understanding. Without consistency, academic progress
and the ability to measure nancial literacy eectively slows
down.As a result, the design of nancial education programs
for consumers and entrepreneurs is less eective and ecient
(Remund, 2010).Having a clear and consistent denition of EFL
is thus considered important both for academics and practi-
tioners. For that reason, based on current academic literature,
this article attempts to propose a clear conceptual EFL deni-
tion:
Entrepreneurial Financial Literacy (EFL) is a combination of behav-
iour, attitude and knowledge that involves an entrepreneur’s abili-
ty to manage the company’s nances eectively and eciently and
requires insight in accounting, nance, and mathematics.
2.3. Entrepreneurial Financial Literacy:Dimensions
The conceptual denition of nancial literacy, outlined above,
refers to 3 categories: Accounting, Finance, and Mathematics
(Remund, 2010). In what follows, this article will further explain
these categories and elaborate on the 8 EFL dimensions.
Figure 1.Conceptual model of EFL based on current literature
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Accountancy & Bedrijfskunde, 2022
2.3.1 Accounting
Interpreting Financial Statements. Financial statements, includ-
ing annual reports and other accounting information, are
among the most important sources of information for a com-
pany. Indeed, the information from nancial statements can
help companies manage short-term problems in certain areas
such as costs, expenses, and cash ows by providing informa-
tion to support monitoring and control (Mitchell et al., 2000).In
addition, the use of information from nancial statements is
also important in making strategic long-term plans. The in-
formation must therefore be interpreted correctly in order to
make good decisions (Ismail and King, 2007).
In general, it has been found that nancial statements help
entrepreneurs to evaluate nancial information and thus gain
a better insight into many nancial aspects and risk charac-
teristics of their company (Carraher and Van Auken, 2013, Va-
nauken et al., 2017).It isimportant that an entrepreneur is able
to interpret these overviews and use them eectively to arrive
at better decision-making (Van Auken, 2005).
However, small business owners often lack strong nancial
skills and may not fully understand the impact of their deci-
sions.This is because decisions are taken without taking into
account their nancial impact, and this could lead to nancial
problems (Horngren et al., 2015).In addition, entrepreneurs
are generally optimistic about the nancial potential of their
company.This can lead to inaccurate assessments of potential
protability (Vanauken et al., 2017). The consequence of both
observations is a potential threat to the viability of the compa-
ny (Timmons and Spinelli, 2004).
By contrast, entrepreneurs who are able to use and interpret
nancial statements and other nancial statements eciently
can better evaluate and assess the impact of their decisions
and available nancial information. As a result, those entre-
preneurs make better decisions (Breen et al., 2004, Shields,
2010). If they come to better interpretations and use the in-
formation in the nancial statements correctly, entrepreneurs
can develop a more accurate perception of the situation and
therefore make more informed decisions (Breen et al., 2004).
It should be noted that the quality of the nancial statements
is extremely important.Several studies show that companies
with inadequate accounting are more likely to fail (Lybaert,
1998, Mitchelmore and Rowley, 2013).Thus, there is a need
for reliable accounting information generated by a suitable ac-
counting system (Amoako, 2013).Timmons and Spinelli (2004)
agree that accurate nancial information is the basis for mak-
ing good decisions.
Operational budgeting. Operational budgeting refers to plan-
ning expenses and analysing future cash ows. Budgets have
two types of functions (Jacob, 2002).On the one hand, budgets
are used as a tool to ensure that assets and debt are managed
eectively. It can then be seen as a means of control (Bragg
and Burton, 2006).On the other hand, budgets help in achiev-
ing higher prots or minimizing losses. A budget is then seen
as a tool for planning future expenditures (Fatoki, 2014).
The importance of budgeting is conrmed by several research-
ers.According toAbdurahman et al. (2012), budgeting is an im-
portant factor for the growth of any business.After all, drawing
up a budget oers the opportunity to translate business strate-
gies into action plans for both the short and long term.They do
this by highlighting areas where actual performance deviates
from the budgeted performance so that appropriate correc-
tive action can be taken (Akande and Oluwaseun, 2014).In ad-
dition, budgets help entrepreneurs to think long-term, rather
than just drawing conclusions based on short-term daily activi-
ties that may not aect the company’s competitiveness (Dima,
2013).Finally, budgets help identify factors that contribute the
most to the protability of the business.Through budgets, the
entrepreneur can decide on how to improve protability (Hill,
2015).
Derived from previous studies, it is of importance that entre-
preneurs should be able to understand and use operational
budgets to facilitate the decision-making process. In other
words, being able todraw up and understand eective and re-
alistic budgets has a signicant positive impact on the success
of the company (Sucuahi, 2013). Nevertheless, determined in
previous literature, most SME entrepreneurs do not know how
to properly use formal budgets in the decision-making process
(Fatoki, 2014, Sucuahi, 2013).That could be one of the possible
causes of small business failure (Warue and Wanjira, 2013).
Financial risk management: Understanding and managing risks.
Risk management is important to all businesses, especial-
ly small and medium-sized enterprises that are particularly
sensitive to business risk and competition (Blanc Alquier and
Lagasse Tignol, 2006). This is because risk is seen as a prob-
lem that can impact the objectives of a business entity.This is
because there is the possibility that both expected and unex-
pected events have a negative impact on the capital and on the
prot of the company (Watkins, 2012).
This article focuses on nancial risks.These are mainly caused
by movements in nancial markets and the changing atti-
tude of the company towards individual nancial instruments
(Fetisovová, 2012).In other words, a nancial risk refers to the
possibility that cash ows from a business are not enough to
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Entrepreneurial Financial Literacy
pay creditors and full other nancial responsibilities.Financial
risks come in various forms.On the one hand, there are exter-
nal forms of nancial risk related to changes in the nancial
markets.This concerns risks related to exchange rates, interest
rates, and raw material prices. On the other hand, there are
sources of nancial risk that arise from the internal environ-
ment of the company.This concerns nancing risk, insolvency
risk, and liquidity risk (Napp, 2011).
Misjudgements or failure to recognize nancial risks thatad-
versely aect company performance can lead to disastrous
consequences ranging from customer loss to liability for dam-
ages.If a risk is not properly managed, it can lead to bankrupt-
cy of the company (Hollman and Mohammad-Zadeh, 1984).For
that reason, risk must not only be measured eciently, but
also managed eectively throughout the company (Gwangwa-
va et al., 2014). Also Iopev and Kwanum (2012) indicate that
risk management is particularly important for the survival of
small businesses.Risk management should focus on recogniz-
ing future uncertainties, weighing risks, and formulating plans
to address these risks (Ntlhane, 1995). In this way, a company
can benet from calculated risks (Watson, 2004).
Risk management must be integrated into the existing man-
agement of the company.Risk management within a compa-
ny must be comprehensible, even without the understanding
of special knowledge of risk management.The entrepreneur
plays an important role in this.They must be able to see and
understand how the risk situation of the company works (Napp,
2011).In other words, it is important that the entrepreneur is
aware of which risks are or are not acceptable and which risks
must therefore be managed.An important means by which
small and medium-sizedenterprises can achieve this is the use
of nancial analysis.More specically, it is stated that nancial
ratios are used as a simple approach to assess the company’s
overall risk (Napp, 2011).Financial analyses and ratios are dis-
cussed further in this article.
2.3.2 Finance
Financial analyses and ratios. The absolute gures in the book-
keeping do not say much.However, it is dicult or even impos-
sible to compare those absolute gures within and between
companies. A nancial analysis oers a solution for this and
is seen as one of the most important functions of an organ-
ization.Based on the accounting information, each company
must periodically perform nancial analyses (Avakumovic and
Avakumovic, 2016).
Financial analyses provide insight into the liquidity, solvency,
and protability of an organization.That insight makes an im-
portant contribution to making business decisions. Ratios are
important in those nancial analyses.These quantify the bal-
ance sheet position of economic entities in order to be able to
assess the credibility of the nancial position and the activities
of the company. That type of analysis can help the entrepre-
neur analyse the nancial health of a company.A ratio analysis
consists of calculating dierent ratios, after which they are in-
terpreted by the entrepreneur (Avakumovic and Avakumovic,
2016).
However, it is crucial for an entrepreneur to understand
what nancial ratios are considered important to his busi-
ness. There is a large number of ratios, but not all of them
are relevant. A meaningful ratio analysis therefore starts with
a qualitative study of the strategy and policy of the company
concerned. This research immediately indicates which of the
ratios are relevant for the company to calculate (Avakumovic
and Avakumovic, 2016).
One of the most important ratios according toIsberg (1998) is
return on equity (ROE) because of the fact that a for-prot com-
pany exists to create wealth for its owner.The ROE indicates at
what speed the equity capital increases. The ROE can be bro-
ken down into three components, namely net prot margin,as-
set turnoverandleverage multiplier.This decomposition is also
referred to as theDuPontratio.The net prot margin is a prof-
itability ratio that reects the rate at which sales are converted
into prot.It is calculated by dividing the net income of a given
year by the sales of the same year. Second, asset turnover im-
portant because they indicate how well a company’s assets are
being used to generate sales.Protability is an important met-
ric, but it does not always provide the complete picture of how
well a company delivers a product or service.In other words,
a business can be very protable, but not ecient.Therefore,
the second component of theDuPontratio consists of theasset
turnover ratio. It measures the extent to which the company
generates revenue with its total asset base and is calculated by
dividing the sales of a given year by the average total assets.Fi-
nally, the leverage multiplier is calculated. It is a leverage ratio
and measures the degree to which a company depends in its
capital structure on debt nancing. The leverage multiplier is
calculated by dividing the average assets by the average equity
(Isberg, 1998).
It is also important that the entrepreneur understands how to
interpret the nancial ratios.The calculated ratio must be com-
pared.For this, the entrepreneur can use a time series analysis
in which the company’s own performance is used as a bench-
mark.In addition, one can opt for a cross-sectionalanalysis in
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Accountancy & Bedrijfskunde, 2022
which external performance benchmarks are used for compar-
ison purposes.In both ways, the entrepreneur tries to under-
stand how to improve the business process (Isberg, 1998).
Also, according to the research by Thomas III and Evanson
(1987), it is important that entrepreneurs can use the informa-
tion they get from nancial analyses to improve the eciency
and protability of their operations.In this way, the entrepre-
neur may be able to prevent bankruptcy.Furthermore, (Dah-
men and Rodríguez, 2014)armthe importance of performing
and understanding nancial analysis.Their research aims that
the success of a company depends on calculating and inter-
preting nancial analyses. Respondents in nancial diculties
did not use nancial analyses. However, they admitted that
they did not have the necessary knowledge for this (Dahmen
and Rodríguez, 2014).
Capital budgeting. Capital budgeting is the process of analysing
investment opportunities in assets that are expected to yield
benets for more than a year (Peterson and Fabozzi, 2002).In
other words, it is a decision-making process by which a com-
pany evaluates the purchase of important xed assets such as
buildings, machinery, and equipment.It contains an economic
analysis to determine the prot potential of each investment
proposal.Most spending on long-lived assets aects the oper-
ations of a company.They are large and permanent liabilities
that aect long-term exibility and ability to earn returns (Gup-
ta and Jain, 2016).
One of the most well-known rules regarding capital budgeting
is the use ofnet present value(NPV).In that method, they use
the future cash ows where they are discounted.When that
value is greater than the initial cash outows from the invest-
ment project, the NPV is considered positive.The investment
project can then be carried out because it contributes to the
maximization of the value of the company. In addition, many
companies use theinternalrateof return(IRR).The IRR is a per-
centage that equates the present value of future cash inows
with the present value of the capital expenditure.That percent-
age is compared to the company’s cost of capital.If the IRR is
greater than the cost of capital, the investment project is con-
sidered to contribute toshareholdervalue creation(Bennouna
et al., 2010).
However, small businesses are more likely to use the pay-
backperiod(PB) method, which is convenient but less sophisti-
cated (Danielson and Scott, 2006).The method uses a predeter-
mined period during which the initial investment must be paid
back. The entrepreneur then calculates the number of years
required to recoup the investment amount on the basis of fu-
ture cash ows.Based on this calculation, it is checked whether
the investment can be earned back in the predetermined time
span. Despite itsease of use, the PB method has a number
ofshortcomings.However, it ignores the time value of money
and cash ows beyond the specied period.Furthermore, the
set period is often determined arbitrarily without further rea-
soning (Graham and Harvey, 2002).
Egbide et al. (2013) conrm the importance of capital budget-
ing. According to the researchers, decisions about capital in-
vestments have a signicant impact on the speed and direction
of growth of the company. A wrong investment decision or
over-investment could adversely aect the value of the compa-
ny, making the company less competitive.In other words, it is
important for an entrepreneur to be aware of how to do capital
budgeting, which method is the most optimal, and why capital
budgeting is important to make eective decisions.
Cash management. Cash management involves planning and
controlling cash ows in and out of the enterprise, cash ows
within the organization, and cash balances held by an enter-
prise at a particular point in time (Pandey, 2004). While com-
mon wisdom suggests that holding cash is an inecient man-
agement choice, many companies appear to be building cash
reserves to support the growth process and business devel-
opment.Holding cash therefore has some advantages.Indeed,
companies with a large amount of cash can nance potential
investment opportunities when they arise. In addition, the
possession of cash acts as a buer against possible negative
shocks in the future. However, it helps to maintain nancial
exibility and take advantage of growth opportunities. This is
especially important when companies have great uncertainty
about growth opportunities and future transactions. Short-
age of cash can lead to bankruptcy. Finally, small and medi-
um-sized companies have to deal with asymmetric information
and informationcoveragewhen seeking nancing (Berger and
Udell, 1998).The use of cash reduces the sensitivity to limited
access to external capital markets (La Rocca et al., 2019).
Moreover, holding cash resources can also have negative con-
sequences.This is because it entails an opportunity cost equal
to the return that could have been earned if the cash were in-
vested or used for production (Hamza et al., 2015).
Cash management consists of a number of facets.First, an en-
trepreneur should be aware of the pros and cons of cash. Ef-
cient cash management refers to determining the optimal
cash level to be held.This is done by weighing the opportunity
cost of having too much cash and the trading costs of holding
too little cash (Ross et al., 2007).In addition, there is a great
need for careful planning and monitoring of a company’s cash
ows over time to maintain the optimal level of cash(Hamza
et al., 2015). Finally, an entrepreneur must take into account
the “runway” of the company.That term refers to the number
7
Entrepreneurial Financial Literacy
of months a company has left until the company runs out of
cash. By carefully monitoring the runway, the company can
look for additional external nancing in time and thus try to
avoid the risk of bankruptcy (Alemany and Andreoli, 2018).
Several studies recognize the importance of determining the
optimal cash level. For example, the study byGrablowsky and
Rowell (1980) nds that ineective cash management contri-
butes to the failure of small and medium-sized enterpris-
es.Furthermore, the study by Hamza et al. (2015) aims that
poor management of cash ows can lead to diculties in ob-
taining funds.
Debt management. Knowledge related to debt is another aspect
of nancial literacy.The lack of proprietary resources in small
and medium businesses makes debt nancing an inevitable
part of a total amount of capital that will be used in business
(Kozubíková et al., 2017).Debt literacy refers to the ability to
make simple decisions related to debt contracts (Lusardi and
Tufano, 2009).
First, it is known in the literature that loanscan reducea compa-
ny’s total capital cost as a result of theinteresttaxshield.How-
ever, that positive eect is diminished because debt nancing
is riskier than equity.As a result, it entails certain negative con-
sequences. Thus, the cost of capital of the company’s equity
will rise. Inother words, the choice with regard to the capital
structure of the company will have an eect on the value of the
company (Abor, 2007).
It is therefore important that entrepreneurs are aware of the
advantages and disadvantages of using loans (Kozubíková et
al., 2017).The research byOsei-Assibey (2010)) found that most
micro-enterprises are illiterate with regard to corporatenanc-
ing. Unbeknownst to entrepreneurs, their debts are getting
bigger because of interest and high indebtedness.That can
lead to the downfall of their company.In other words, it is ar-
gued that nancialknowledge is one of the main determinants
of a capital structure that enables growth and development of
a company(Kozubíková et al., 2017).
In addition,knowledge about dierent nancing sources is an
important factor. Companies that do not have a large num-
ber of nancing sources should look for alternatives.The im-
portance of non-traditional nancing is gaining recognition in
both developed and emerging economies.However, nancing
of SMEs in Europe remains mainly bank-based, despite the
many policy measures proposed to develop alternative nanc-
ing instruments (Rupeika-Apoga and Danovi, 2015).However,
researcherFatoki (2014) claimsthat small business operators
are unaware of the existence of alternative nancing sources,
such as venture capitalists andbusiness angels. According to
the research by Rupeika-Apoga and Danovi (2015), the share
of alternative nancing resources that was attracted was also
considerably small. However, alternative nancing oers the
possibility of obtaining nancial resources that companies
would not have obtained in the case of traditional bank nanc-
ing.In other words, it oers companies additional opportuni-
ties to develop certain activities (Baeck et al., 2014).
2.3.3 Mathematics
Mathematical Literacy. Several studies conrm that mathemat-
ical literacy is an important aspect of nancial literacy (Rugim-
bana and Oseifuah, 2010, Wise, 2013). More than half of the
decisions made in a small or medium-sized company consist
of mathematical reasoning (Taylor, 2008).Acommon synonym
of mathematical literacy is quantitative literacy. The concept
refers to the ability to reason and solve quantitative problems
from a wide variety of authentic contexts and everyday situa-
tions (Dahmen and Rodríguez, 2014).
Entrepreneurs must have a sucient level of quantitative lit-
eracy to make calculated decisions in an increasingly complex,
information-oriented, knowledge-based world (McClure and
Sircar, 2008).The math skills applied in an enterprise are dif-
ferent from the mathematics taught in educational institutions
(Rosen et al., 2003). Chrisman et al. (2013) refer to the term
“business mathematics”.That is math used by commercial en-
terprises to record and manage business activities.Most of the
math problems faced by an entrepreneur in a small or medi-
um-sized business involve applications of what is commonly
referred to as a basic calculation.These consist of the addition,
subtraction, multiplication and division of certain numbers
(Rosen et al., 2003). Entrepreneurs use mathematics in ac-
counting, inventory management, marketing, sales forecasting,
and nancial analysis (Chrisman et al., 2013).
In addition to business mathematics, quantitative literacy for
entrepreneurs consists of actuarial arithmetic (Lusardi and
Wallace, 2013) and statistics (Taylor, 2008). Calculating inter-
est rates is considered important in determining future cash
outows and debt level.Furthermore, entrepreneurs need sta-
tistics skills to understand the mass of data collected in today’s
automated business environment. However, it is not enough
to copy numbers obtained by computerized programs without
some critical examination of the credibility of those numbers
(Bajpai, 2009, Taylor, 2008).
According to the authors, dimensions discussed in previous
sections inevitably require mathematical applications. How-
ever, while no research shows the direct link between quan-
titative literacy and enterprise performance, there are some
studies that nd that mathematics in education programs has
8
Accountancy & Bedrijfskunde, 2022
a positive eect on the nancial knowledge of potential future
entrepreneurs (Chrisman et al., 2013, Dowse and Gearing,
1958, Raehsler et al., 2012).
3. SCALE DEVELOPMENT
The next step in our study is to develop a scale to measure
EFL that can serve as a basis for future research. This section
provides an overview of the various steps that have been taken
to provide content validity for our self-constructed EFL scale.
3.1. Item generation
Based on the literature study on nancial literacy among en-
trepreneurs, EFL was coded into three broad categories (ac-
counting, nance and mathematics). Each time, these catego-
ries were further subdivided into relevant dimensions based
on the abovementioned literature review.Figure 2 provides a
visual overview of the 8 EFL dimensions identied in the liter-
ature review.
Following the method employed by Potrich et al. (2016), a be-
havioural-, attitudinal, and knowledge component is included
in each of the EFL dimensions.Based on the literature study, a
rst provisional EFL scale is drawn up by means of a question-
naire with 73 questions.
3.2. Content Validation:In-depth Interviews
The preliminary questionnaire, which was based on the above-
mentioned literature review, must be validated.In a rst step,
this article organises in-depth interviews with several ex-
perts.The choice of the right experts is essential.Therefore, a
rst important step in the entire process consists of selecting
suitable experts.In academic literature no consensus exists on
the exact criteria to included respondents as experts. Partici-
pants are considered appropriate if they have a related back-
ground and experience on the target topic.Furthermore, it is
required that the participants are highly educated and have
sucient knowledge of the subject (Hsu and Sandford, 2007).
To this end, potential experts on EFL were screened based on
their professional background, specic trainings they followed,
and their current job. Multiple in-depth interviews were per-
formed with four experts, who were mainly active in the ser-
vices industry (accounting, advising) with a specic focus on
entrepreneurs. They were therefore considered to be excellent
candidates for the expert panel. Based on the results of the in-
terviews with the expert panel, some adjustments were made
to the questionnaire.For example, items were dropped when
unanimously considered irrelevant, and certain items were re-
written, and new items added.
3.3. Content Validation: Delphi Procedure
In a second step, a Delphi procedure isused to validate the
content of our EFL scale. In this method, a dierent panel of
four other experts than the previous round– all experienced
professionals in the area of business and nance - was asked
to assess the content of the questionnaire.The procedure is
regarded as a group communication process that focuses on
conducting research and consultation on a specic topic. Its
purpose isto collect information from various experts who,
after their consent, participate in the study. In this way, it is
checked whether the questionnaire covers the entire knowl-
edge area of nancial literacy (Powell, 2003).
The scale was sent to each expert, with the request to judge
the relevance and clarity of each item on the basis of a 4-point
Likert scale (1 = not relevant at all, 2 = only relevant if question
is reformulated, 3 = relevant but minor adjustment needed,
4 = very relevant).
The nal assessment of each item is based on the Content
Validity Index (CVI). To calculate the CVI, a ratio is made be-
tween the number of experts who agree (score 3-4) with the
total number of experts. The standard set by researcher Lynn
Figure 2.Structure of literature study
9
Entrepreneurial Financial Literacy
(1986) is a CVI of at least 0.83. This means that all participating
experts must agree with the relevance of the item. When an
item reaches a CVI of at least 0.70, but is less than 0.83, the
item is kept and adjusted (Rodrigues et al., 2017, Yaghmaei,
2003, Youse, 2017, Zamanzadeh et al., 2015).
S-CVI relates to the substantive validation of the scale as a
whole. There are two methods of calculating the S-CVI. A rst
method calculates what percentage of items are unanimously
considered relevant (S-CVI / UA). In addition, the scale is tested
in its entirety by calculating the average of the sum of the CVIs
per item (S-CVI / AVE). For excellent content validity, a minimum
S-CVI / AVE of 0.90 and S-CVI / UA of 0.80 is required (Rodrigues
et al., 2017).
3.3.1. First round
The results after the rst round are processed by means of
the Content Validity Index (CVI). This shows that 9 questions
should be deleted, and 24 questions should be rewritten.The
scale achieves an S-CVI / AVE of 0.84 and an S-CVI / UA of 0.50
after the rst round.However, these gures do not yet meet
the minimum standards required, being 0.90 for S-CVI / AVE
and 0.80 for S-CVI / UA (Rodrigues et al., 2017).
Table I.Coverage ratio per dimensions
PANEL A – First round
Dimension Average
Interpreting Financial Statements 6.75
Operational budgeting 8.00
Understand and manage nancial risks 7.75
Financial analyses and ratios 8.00
Cash management 8.25
Capital budgeting 8.00
Debt management 7.00
Mathematical Literacy 7.50
PANEL B – Second round
Dimension Average
Interpreting Financial Statements 8.50
Operational budgeting 9.00
Understand and manage nancial risks 9.00
Financial analyses and ratios 9.00
Cash management 8.00
Capital budgeting 8.50
Debt management 8.50
Mathematical Literacy 6.50
PANEL C – Third round
Dimension Average
Interpreting Financial Statements 8.50
Operational budgeting 8.50
Understand and manage nancial risks 8.50
Financial analyses and ratios 9.00
Cash management 9.00
Capital budgeting 8.50
Debt management 8.50
Mathematical Literacy 8.00
Based on the current items in the scale, experts were addition-
ally asked to indicate a coverage ratio on a scale from one to
ten. Table I, Panel A, shows an average score, indicating that
not every dimension is suciently covered by the included
items according to the experts.Consequently, new items must
be added.Overall, 17 new questions were added.This resulted
in a revised EFL scale consisting of 74 questions.
3.3.2. Second round
Based on the results from the second round, ve questions
were deleted from the scale. Twenty questions have been
rewritten through additional comments and suggestions re-
garding the clarity of the question.The S-CVI / AVE and S-CVI /
UA are 0.97 and 0.95, respectively in the second round.At this
stage, the minimum standard for both indices was achieved
(Rodrigues et al., 2017).Again, experts were asked to indicate
on a scale from 1 to 10 to what extent the questions for each
dimension cover EFL.The results can be found in Table 1, Pan-
el B. Due to the deletion of some items, and the addition of
new items, the adjusted scale consists of a questionnaire of
73questions after the second round.
3.3.3. Third round
The results regarding the relevance and clarity of the questions
show that one question should be deleted, and ve questions
rewritten.The content validity of the entire scale is set at an
S-CVI / AVE of 0.99 and an S-CVI / UA of 0.96. Both measures
meet the established minimum standards (Rodrigues et al.,
2017). The ultimate coverage ratio per dimension of the scale
is shown in Table 1, Panel C. This article concludes that after
following the Delphi procedure, a reasonable degree of con-
sensus has been reached after the third round. The nal EFL
scale consists of a questionnaire of 72 questions, divided into
eight dimensions.Each dimension consists of a behavioural-,
10
Accountancy & Bedrijfskunde, 2022
attitudinal and knowledge component. To model nancialat-
titude, a 5-point Likertscale (1 = totally disagree, 5 = totally
agree) is used. The purpose of this scale is to determine how
entrepreneurs evaluate nancial aspects in the company. Ac-
cordingly, the higher the score, the better the entrepreneur’s
nancial attitude (Potrich et al., 2016). Financial behaviour is
also measured on the basis of a 5-pointLikertscale (1 = nev-
er, 5 = always).The purpose of that scale is to determine how
entrepreneurs deal with the nancial aspects of the compa-
ny.High scores indicate good nancial behaviour (Potrich et al.,
2016).The nancialknowledgeof anentrepreneur is estimated
on the basis of multiple-choice questions.Each correct answer
represents a score of 1 point.In contrast, every wrong answer
is awarded zero points (Potrich et al., 2016). The full EFL ques-
tionnaire is included in Appendix.
4. DISCUSSION AND CONCLUSIONS
4.1. Discussion
Increasing attention is being put on improving nancial liter-
acy among small and medium-sized entrepreneurs (Dahmen
and Rodríguez, 2014).Several studies have established a pos-
itive relationship between the entrepreneur’s nancial litera-
cy and the success of his business (Sucuahi, 2013). However,
the survival rate remains low, especially in SMEs (Fritsch and
Weyh, 2006), where the owner-manager himself often has
sole responsibility for managing the rm’s nances. According
toRopega (2011), one of the main reasons for the low survival
rate of SMEs is a lack of nancial knowledge and poor manage-
ment decisions.However, existing literature does not yet oer
a consistent denition and scale that measures nancial litera-
cy in entrepreneurs.In addition, studies make use of dierent
interpretations, dimensions, and terminology, which hampers
progressive insight into the important domain of nancial lit-
eracy in entrepreneurship.This article aims to ll this gap by
taking the rst step in developing the Entrepreneurial Financial
Literacy (EFL) concept and suggests a 72-item scale to measure
the EFL concept.
Building on existing literature and a Delphi procedure with an
expert panel, results indicate that the EFL construct consist of
eight dimensions that can be divided into three dierent cate-
gories: accounting, nance and mathematics. Each dimension
contains a behavioural-, attitudinal-, and knowledge com-
ponent, for which items were generated based on academic
literature followed by a Delphi procedure. According to the
experts, no additional dimensions were suggested on top of
those already identied in the literature (i.e., accounting, -
nance, mathematics). In the scale development process, how-
ever, it turned out that certain items were not conrmed by the
experts.Those items were eliminated from the scale.Experts
agreed that certain issues described in the literature are too
far-reaching, irrelevant and not directly linked to the specic
context of EFL, such as for example the use and calculation of
Figure 3.EFL Construct and Scale Composition
11
Entrepreneurial Financial Literacy
ROE based on the DuPont ratio. The items concerning the atti-
tudinal component of Mathematics have also been dropped in
the process.In addition, some items were not yet discussed in
the literature and have been added by the expert panel which
might be an indication that exiting literature on nancial litera-
cy in entrepreneurship was not only scattered but also lacking
a good proxy for EFL. Figure 3 represents a visual overview of
the EFL construct and shows how the proposed EFL scale is
composed. A full overview of the 72 items can be found in Ap-
pendix.
4.2. Limitations and Recommendations for Further
Research
The most important recommendation for future research aris-
ing from this study is thattheEFL scale should be further test-
ed.Various tests can be carried out on the basis of large-scale
samples consisting of entrepreneurs. Although the 72 items
proposed in Appendix are based on prior research and have
passed our Delphi procedure, they still need to be tested on
a large scale and to pass standard psychometric procedures
(e.g., exploratory and conrmatory factor analyses) to verify
the proposed content structure of EFL and ensure the items’
internal consistency and interrater reliability. This is an impor-
tant issue for future research since psychometrically sound
constructs, and measures are essential to the credibility and
academic progress of nancial literacy in the entrepreneurship
domain (Crook et al., 2010). Surveys are an appropriate tool for
future researchers to collect data and test the reliability and
validity of the proposed EFL scale.
After the psychometric properties of the EFL scale have been
tested, there is abundant room for several future research
questions which can be empirically tested. First, existing lit-
erature emphasizes the importance of eective nancial ed-
ucation programs. Drexler et al. (2014), for example, conclud-
ed that training to improve nancial knowledge could have a
positive eect on management decisions and nancial reports
of small businesses. Governments and private organizations
also recognized the importance of these nancial education
programs and are investing signicant amounts of money in
them.However, there is little empirical evidence about which
education programs are eective and for whom they can be
useful (Bruhn and Zia, 2011).On the basis of the developed
EFL scale, the eectiveness of specic nancial education pro-
grams can be assessed.This can be achieved, for example, by a
study based on a control group and a test group.
The socio-economic function ofSMEs is well known in both
developed and developing countries. However, in recent
times several countries have become increasingly concerned
about the level of nancial literacy of entrepreneurs (Eniola
and Entebang, 2016). The results of Dahmen and Rodríguez
(2014) showed that the surveyed small businesses, with an
entrepreneur with limited nancial knowledge, are more like-
ly to face nancial diculties.On the basis of the developed
EFL scale, the relationship between an entrepreneur’s nancial
literacy and the performance of the enterprise can be inves-
tigated in dierent contexts. Finally, Atkinson (2014) conrms
that nancial literacy is seen as a common problem that small
business entrepreneurs struggle with when starting their busi-
ness.By means of the developed EFL scale, future research can
investigate the relationship between nancial literacy of the
entrepreneur and the success rate of the start-up.
4.3. Theoretical andPracticalImplications
In extant literature, a considerable number of articles have
been written about the importance and the dierent dimen-
sions of nancial literacy in entrepreneurs (Rugimbana and
Oseifuah, 2010, Sucuahi, 2013, Wise, 2013). However, existing
literature on nancial literacy among entrepreneurs is quite
dispersed as no consistent denition exists, and a domain-spe-
cic scale that measures nancial literacy in entrepreneurs is
lacking. This article takes a rst step towards providing de-
nitional clarity and consequently develops a nancial literacy
scale which is specically developed for the entrepreneurship
domain.In addition to academic contributions, the article also
has some important practical implications. First, the EFL scale
developed in this paper can be an ecient resource for small
business consultants.It allows them to optimize their services
for small business entrepreneurs by responding to specic as-
pects of EFL (e.g., accounting, nance, or mathematics) where
the target person scores less well.Also, for policymakers, the
EFL scale can help establish eective and targeted nancial
education programs for entrepreneurs and potential/nascent
entrepreneurs.In addition, the EFL scale can also be an impor-
tant self-assessment tool for small business entrepreneurs.By
means of the scale, they are able to determine in which areas
they need additional training or should be assisted by an ex-
pert.
4.4. Conclusion
This article contributes to the research domain of nancial
literacy in the domain of entrepreneurship. This has received
increasing attention since the nancial crisis because of the im-
pact of SMEs on society (Dahmen and Rodríguez, 2014).These
companies contribute to economic growth through a combina-
tion of various factors.They create jobs, drive innovation and
increase competition (Green, 2013, Wong et al., 2005).Howev-
12
Accountancy & Bedrijfskunde, 2022
er, a high failure rate still remains among these companies.This
could possibly be due to insucient nancial literacy of the
owning-entrepreneurs (Dahmen and Rodríguez, 2014, Rugim-
bana and Oseifuah, 2010). For this reason, researchers start-
ed focussing on nancial literacy among entrepreneurs. Since
there is no consistent denition of nancial literacy in the do-
main of entrepreneurship, the aim of this study was to unravel
EFL and explore its underlying dimensions. Consequently, a
preliminary EFL scale was developed by means of a thorough
literature review followed by a 3-step Delphi procedure.
The nal scale consists of a questionnaire with 72 items, divid-
ed into eight dimensions. Those dimensions are further clas-
sied into three categories: accounting, nance, and mathe-
matics.The rst category, accounting, consists of “Interpreting
Financial Statements”, “Operational Budgeting” and “Under-
standing and Managing Financial Risk”. The second category,
nance consists of “Financial Analysis and Ratios”, “Cash Man-
agement”, “Capital Budgeting”, and “Debt Management”.The
third category, mathematics, consists of one dimension, name-
ly “Mathematical Literacy”.Recommended by the Organization
for Economic Co-operation and Development and Potrich et
al. (2016), the items in our scale are a mix of attitudes, behav-
iours, and knowledge as it is inadequate to measure only one
of these aspects.
BIOGRAPHY
LienVekemansis currently working on a PhD project at the
Research Center for Entrepreneurship and Family Firms at
Hasselt University. Her research focuses on bank nancing in
a family rm context. More specically, she investigates how
certain family rm-specic characteristics aect the evaluation
process of credit loan ocers.She can be reached at lien.veke-
mans@uhasselt.be.
Anneleen Michiels, PhD is Associate Professor of Finance and
Family Business at the Research Center for Entrepreneurship
and Family rms at Hasselt University, Belgium. Her research
focuses on the inuence of money on the family business and
the business family and is published in academic as well as
practitioner-oriented journals. She can be reached at anne-
leen.michiels@uhasselt.be.
Jelle Schepers, PhD is an Assistant Professor at the Research
Center for Entrepreneurship and Family Firms at Hasselt Uni-
versity (Belgium). His research focuses on strategic entrepre-
neurship in family rms, startups and growth-oriented rms.
Contact: jelle.schepers@uhasselt.be.
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APPENDIX
Items of the EFL Scale
FINANCIAL BEHAVIOR
Interpreting Financial Statements I periodically review the nancial status of my company before making decisions.
I Use relevant nancial KPI (Key Performance Indicators) when measuring set goals.
I know the main dierences between a balance sheet and income statement.
Operational budgeting My business uses budgets to covert the overall business strategy into action plans for
both short- and long-term.
In case of a new project, my rm makes up an operational budget.
As an entrepreneur, I periodically review operational budgets to draw conclusions about
business operations.
Financial risk management My business has established procedures to identify, analyse, and manage nancial risks
(for example, insucient funds to pay suppliers).
I am aware of the main external nancial risks (such as the uctuation of raw material
prices) for my business.
My rm uses procedures that protect the business form certain nancial risks, such as
relevant insurance policies.
Financial analysis and ratios I am able to interpret the nancial analyses and ratios of my company in order to make
ecient decisions.
I am aware of the liquidity, solvency, and protability of my company in order to make
good strategic decisions.
I compare my rm’s nancial ratios with industry averages or with several competitors if
I have data on them.
As an entrepreneur, I know the contribution margin of the various products/services that
I provide.
I am aware of which nancial ratios banks look at when deciding on granting credit.
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Accountancy & Bedrijfskunde, 2022
Cash management I try to implement ecient cash management policies to deal with possible setbacks or
crisis in the future.
I am aware of how much cash my rm spends each month. That way I can calculate how
many months it will take before the cash insucient.
I manage my rm’s working capital needs through ecient policies regarding accounts
receivable, supplier, and inventory.
Capital budgeting My company uses existing investment evaluation techniques such as net present value,
internal rate of return, or payback period when deciding on investment opportunities
(buildings or machinery).
I am aware of the WACC (weighted average cost of capital of debt and equity) of my com-
pany and compare it with the return on a potential investment.
After making an investment decision, I track the return on investment. That way I can
draw my conclusions.
Debt management I am aware of the costs associated with a loan. This means that I can determine to a
reasonable degree what the interest costs will be for the next period and to what extent
these will aect the result of my company.
I am aware of the existence of alternative funding sources such as venture capitalists,
business angels, and accelerators.
As an entrepreneur, I use short-term debt for current assets, and long-term debt for xed
assets.
I know the pros and cons of straight loans (synonym: xed-term advance payment).
Mathematical Literacy I am able to do certain calculations within a business context.
FINANCIAL ATTITUDE
Interpreting Financial Statements I nd it important to periodically review the nancial status of my business.
As an entrepreneur, it is important to know the dierence between a balance sheet and
a prot and loss account.
Operational budgeting I think it I s important that the entire management is involved in the process of opera-
tional budgeting. In other words, it is not just my job or the job of the nance manager.
In function of a new project, it is important that operational budgets are drawn up.
I nd it important to be involved as an entrepreneur in the process of drawing up budg-
ets.
Financial risk management It is important to draw up a risk plan for nancial risks in order to identify, analyse and
manage those risks.
I nd it important to be aware of the most important external nancial risks of my com-
pany.
I believe that risk management is extremely important for small to medium sized compa-
nies because they are particularly sensitive to business risks.
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Entrepreneurial Financial Literacy
Financial analysis and ratios I believe the interpretation of the ratios and analyses is more important than being able
to calculate those ratios oneself.
I think it is important to be aware of the liquidity, solvency and protability of my compa-
ny when making strategic decisions.
I think it is important to compare these ratios with a sector average or with a few com-
petitors.
I nd it important to be aware of the contribution margin of the dierent products/servic-
es provided by my company.
I think it is important that an entrepreneur always keeps in mind what ratios banks look
at when they decide to grant credit.
Cash management Careful planning and monitoring of a company’s cash ows is important in order to ab-
sorb possible setbacks or crisis in the future.
It is important to consider the number of months a company has left until it runs out of
cash.
It is important that an entrepreneur is always aware of possible working capital needs in
order not to limit growth.
Capital budgeting It is important to use investment evaluation techniques when deciding on major invest-
ments.
It is important to consider the WACC (weighted average cost of debt and equity) of my
company when making an investment decision.
I think it is important to follow up on the return of the investment made in order to learn
from it.
Debt management It is important for an entrepreneur to be able to determine to a reasonable extent what
the interest costs will be in order to prevent the business from getting into nancial prob-
lems.
When a business can be dened as a start-up or a scale-up, it is important to be aware of
the existence of alternative sources of nancing (e.g., venture capitalists, business angels,
accelerators, etc.).
As an entrepreneur, it is important to use short-term debt for current assets, and long-
term debt for xed assets.
As an entrepreneur, it is important to carefully consider the pros and cons of a straight
loan (xed advance) before deciding to apply for such a source of nancing.
FINANCIAL KNOWLEDGE
Interpreting Financial Statements Assets represent the company’s assets. Liabilities give an overview of all resources used
to nance these assets.
a) True
b) False
A depreciation charge means that cash is owing out of my company.
a) True
b) False
This document gives an overview of costs and revenues during a nancial year.
a) Income statement
b) Balance sheet
An available reserve on the equity of my balance sheet is a cash reserve that I have on
my bank account.
a) True
b) False
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Operational budgeting The purpose of operational budgeting is to translate the strategy and business plan into
revenues, costs, investments, cash ows and any capital requirements.
a) True
b) False
The operating budget, part of the master budget, shows how much a company will sell
in a subsequent period.
a) True
b) False
Which of the following items is a xed cost?
a) Packing cost
b) Rental cost
c) Raw material cost
Financial risk management If an entrepreneur spreads his activities of sales across dierent products/services, then
the risk is highly likely:
a) Increase
b) Take away
c) Staying the same
Financial analysis and ratios Return on equity is calculated as follows:
a) (Operating result / average total capital employed) x 100%
b) (Prot after deduction of interest and taxes / average invested equity) x 100%
c) (Interest paid / average invested loan capital) x 100%
The net working capital of a company is as follows: Current assets + cash at bank and in
hand - short-term borrowings.
a) True
b) False
The gross prot margin:
a) Calculates the ratio of prot to turnover
b) Indicates the extent to which revenue exceeds direct costs associated with
sales
The contribution margin for a certain product per unit:
a) Shows how much money is generated by selling one product after deducting
variable costs (Selling price - variable cost per unit)
b) Shows the average cost of producing one product (variable cost per
unit + )
c) Indicates how much xed costs should be allocated to the production of one
product
The quick of acid ratio (liquidity in the narrow sense) measures a company’s ability to
pay its current liabilities using only its current assets.
a) True
b) False
Cash management An expense only relates to the result of the business when an expense is an outgoing
cash ow.
a) True
b) False
A negative free cash ow means that a company has to attract additional resources.
a) True
b) False
The following calculation shows the working capital requirement: equity - long-term
debt - assets.
a) True
b) False
(prot after tax )
sales
(revenue-cost goods sold)
revenues
(
xed costs )
number of units produced
(
xed costs )
number of units produced
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Entrepreneurial Financial Literacy
Capital budgeting A company would like to invest in a new machine. Currently one has the choice between
two machines. The cost of the machine A is 50 000 euro. It is expected that this machine
will generate an annual net cash ow of 10 000 euro. Machine B has a cost of which the
purchase cost is 30 000 euro. It is expected that the annual cash ow resulting from this
machine will be 5 000 euro. If the pre-determined payback period is xed at 5 years, and
one can only invest in one of the two machines. Which one will it be?
a) Machine A
b) Machine B
The current purchase price for a new machine is 20 000 euros. When you know that the
current value of the future prots from this machine is 25 000 euros. Will the company
make the investment or not?
a) Yes
b) No
When an investment yields a return of 5%, and one has a WACC of 9%, one will take the
investment (WACC = weighted average cost of debt and equity).
a) True
b) False
Debt management An incubator is like a bank. It puts money at the disposal of an enterprise. It is repaid
periodically like a bank. However, the dierence is that the interest rate will be much
lower.
a) True
b) False
If a company has an outstanding account of 100,000 euros. The company earns 2% in-
terest per month on this and leaves the full amount on the account for one year. How
much interest will the company earn (opportunity cost = 0 euro)?
a) 2000 euro
b) More than 2000 euro
c) Less than 2000 euro
A roll-over credit can be used as an alternative to an investment credit. Both are aimed
at the long term. However, an investment loan is more exible because you decide for
yourself how much and when money will be withdrawn. There is no obligation to use
the entire credit limit.
a) True
b) False
A straight loan (also called a xed advance) is a xed-term advance. It concerns credit
with a maximum term of 1 year. It is intended to cover larger cash needs, for example
while waiting for your customers to pay or to nance your stocks.
a) True
b) False
Mathematical Literacy An entrepreneur buys goods for 4 euros each. Those goods are sold for 250% of the
purchase price. In year X the company sells 100 products. How much is the gross prot
in year X?
a) 500
b) 400
c) 600
