TECHNICAL NOTE Investigating the Financial Capabilities of SMEs Lessons from a 24-Country Survey JUNE 2018 ACS22748 FINANCE, COMPETITIVENESS & INNOVATION GLOBAL PRACTICE TECHNICAL NOTE Investigating the Financial Capabilities of SMEs Lessons from a 24-Country Survey JUNE 2018 © 2018 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover photo: © Dominic Chavez/World Bank CONTENTS Acknowledgments  vi Abbreviations and Acronyms  vii EXECUTIVE SUMMARY viii 1 WHY MEASURE THE FINANCIAL CAPABILITY OF SMES? 1 1.1 Lessons Learned from Existing Measurement Approaches 2 1.2 How to Read This Report 2 2 FINANCIAL-CAPABILITY SURVEY OF SMES 4 2.1 Conceptual Approach to Measuring Financial Capability 4 2.2 Implementing the Selected Approach 5 2.3 Key Features of the Finalized Questionnaire 9 2.4 Selection of Test Participants and Pilot Implementation 9 2.5 Financial-Capability Analysis 11 2.6 SME Financial Capability 19 2.7 Finalization of the Questionnaire 35 3 LESSONS LEARNED AND SUGGESTIONS FOR NEXT STEPS 41 ANNEXES 43 A Focus-Group Discussion Guide 44 B Expert Interview Guide 47 C Profile of Surveyed SMEs 49 D Methodology for Financial-Capability Analysis 51 E Financial-Capability Questionnaire of SMEs 60 REFERENCES 74   iii iv   Investigating the Financial Capabilities of SMEs BOXES, TABLES AND FIGURES Box 1 Topics Associated with Components Where Participants Showed “Strengths” 15 Box 2 Topics Associated with Components Where Participants Showed “Weaknesses” 15 Table 1 Report Structure 3 Table 2 Findings from Focus-Group Discussions 7 Table 3 Findings from Expert Interviews 8 Table 4 Content of the Questionnaire 10 Table 5 Summary of Steps to Analyze SME Financial Capability 11 Table 6 Main Identified Financial Components from PCA 13 Table 7 Underlying Financial Domains from Factor Analysis 19 Table 8 Set of Components According to Their Overall Fit 20 Table 9  Differences of Component Scores by Ownership of Transactional Accounts, Financial Access, and Years of Operation 29 Table 10 Regression Results of Component Scores across Pilot Countries (I) 30 Table 11 Regression Results of Component Scores across Pilot Countries (II) 31 Table 12 Regression Results of Component Scores across Pilot Countries (III) 32 Table 13 Average Characteristic of the Clusters 33 Table 14 Description of Accounting Understanding versus Definitions 36 Table 15 Number of Correct Definitions (Accounting) versus Description of Accounting Understanding by Country Income Classification (I) 37 Table 16 Number of Correct Definitions (Accounting) versus Description of Accounting Understanding by Country Income Classification (II) 38 Table 17 Risk Assessment versus Risk Meaning 38 Table 18 Steps to Analyze SME Financial Capability (Part I) 51 Table 19 “Behavioral” (or Derived) Variables 52 Table 20 Steps to Analyze SME Financial Capability (Part II) 57 Table 21 Steps to Analyze SME Financial Capability (Part III) 58 Table 22 Steps to Analyze SME Financial Capability (Part IV) 59 Figure 1 Outline of Methodological Approach 5 Figure 2 Density of the “Aggregation of the Financial-Capability Core Elements” Indicator 12 Figure 3 Average Financial-Capability Scores 14 Figure 4  Comparison of Cumulative Distribution of Selected Component Scores (Low-Income versus High-Income Countries) 16 Figure 5  Cumulative Distribution of Component Scores across Pilot Countries Grouped by Country Income Classification (I) 17 Figure 6  Cumulative Distribution of Component Scores across Pilot Countries Grouped by Country Income Classification (II) 18 Figure 7 Average Financial-Capability Scores by SME Relevant Characteristic (I) 21 Figure 8 Average Financial-Capability Scores by SME Relevant Characteristic (II) 21 Figure 9 Average Financial-Capability Scores by SME Relevant Characteristic (III) 23 Figure 10 Distribution of Financial-Product Awareness Scores 26 Figure 11 Overview of Financial-Product Awareness by Type of Products 26 Figure 12 Average Financial-Product Knowledge by Type of Enterprise, Country Income Classification, Gender, and Main Economic Activity 27 Figure 13 Financial-Literacy Distribution 27 Figure 14 Financial-Literacy Quiz Overview (Percentage of Correct Answers) 28 Figure 15 Average Financial-Literacy Score by Sales Level (First Quartile versus Fourth Quartile), Country Income Classification, Type of Enterprise, and Gender 28 Figure 16 Understanding of Financial Products versus Financial Concepts 39 Figure 17 Surveyed SME by Gender of Respondent 49 Figure 18 Surveyed SME by Education of Respondent 49 Figure 19 Surveyed SME by Type of Enterprise 49 Figure 20 Surveyed SME by Beginning of Operations 49 Figure 21 Surveyed SME by Legal Status 50 Contents  v Figure 22 Surveyed SME by Country Income Classification 50 Figure 23 Surveyed SME by Level of Sales 50 Figure 24 Surveyed SME by Current Usage of Formal Financial Products 50 Figure 25 Surveyed SME by Main Source of Financing 50 Figure 26 Surveyed SME by Main Economic Activity 50 Figure 27 Aggregated Exploratory Indicator of Financial Capability 52 Figure 28 Logical Path of Factor Analysis to Define SME Financial Capability 58 ACKNOWLEDGMENTS This publication is a product of the Financial Inclusion, ada) provided useful inputs throughout the research and Infrastructure & Access Unit in the World Bank Group’s drafting process. We also gratefully acknowledge design Finance, Competitiveness & Innovation Global Practice. and layout assistance provided by Naylor Design, Inc., Investigating the Financial Capabilities of SMEs was pre- and editorial inputs provided by Charles Hagner. pared by a team that was led by Siegfried Zottel1 (Senior The team also expresses gratitude to the firm EEC Financial Sector Specialist, World Bank) and included Canada, which conducted the qualitative and quantita- Fares Khoury (Economist and President of Étude tive research, and provided drafting inputs. Specifically, Économique Conseil, EEC Canada) and Minita Mary the team is grateful to Isabelle Leyder, Nicolas Megelas, Varghese (Consultant, GFCFI). Pierre Ross, and Zied Naffouti (Country Managers, EEC The team is grateful to the peer reviewers Simon Bell Canada). The team expresses its gratitude to all the enu- (Global Lead for SME Finance, GFCFI), Maria Lourdes merators whose efforts and commitments made this Camba Opem (Program Lead for Responsible Finance, project possible. The team owes particular appreciation IFC), and Claudia Ruiz Ortega (Economist, DECFP) for to the experts and enterprises in the 24 countries who their valuable comments. Douglas Pearce (Practice Man- participated in focus groups or patiently responded to ager, GFCAS) provided overall guidance. Minah Je (Con- the survey. sultant, GFCFI), Oya Pinar Ardic Alper (Senior Financial The team gratefully acknowledges the generous Sector Specialist, GFCFI), Jeffrey Stephen Allen (Consul- financial support of the Swiss State Secretariat for Eco- tant, GFCFI), and Lina Wedefort (Economist, EEC Can- nomics Affairs (SECO). 1. The corresponding lead author can be contacted at szottel@worldbank.org. vi ABBREVIATIONS AND ACRONYMS EEC Étude Économique Conseil FGD Focus-group discussions PCA Principal component analysis SME Small and medium enterprise VRC Variance ratio criterion WBG The World Bank Group   vii EXECUTIVE SUMMARY WHY MEASURE SME FINANCIAL CAPABILITY? Qualitative research techniques, in the form of focus- group discussions (FGDs) and expert interviews, revealed Financial capability is increasingly becoming a principal the range of attributes that can be associated with finan- concern for policy makers worldwide, as it promotes cially capable SME owners. financial inclusion, financial stability, and effective financial markets. The recent financial crisis has reinforced the view that individuals need to be better equipped with knowl- OBJECTIVES AND ADDED VALUE edge and skills to be able to make informed financial deci- sions. Owners of small and medium enterprises (SMEs) The Financial Capability Survey of SMEs targeted two require a breadth of financial capabilities that are distinct main objectives. First, the initial stage of the project aimed from those needed by individuals and microenterprises in to develop a survey instrument that measured the finan- order to manage their business finances and grow their cial capability of SME owners or managers. The original businesses sustainably. Improving the financial capability instrument design was based on the results of FGDs with of SME owners or decision makers can stimulate SME SME owners and interviews with SME experts in Georgia. growth. SME growth, in turn, plays an important role in Second, the instrument was tested on SME owners or triggering sustainable economic development in areas managers in 24 countries to see if it served to measure with large informal job sectors common in low- and mid- their financial capability properly. dle-income countries. A financial-capability instrument that combines self-as- Financial capability goes beyond the knowledge of finan- sessment and direct testing to measure effective financial cial concepts to include a combination of behaviors, skills, capabilities can be understood as an asset for public pol- and attitudes that enable effective and responsible finan- icy. The core elements of financial capability covered in cial decision making. The overall objective of this project the questionnaire aren’t solely recorded by qualitative was to develop a survey instrument that would measure questions, where SMEs self-report their financial-capabil- financial capability and be both comparable across coun- ity level. Rather, the instrument also contains multiple tries and independent of socioeconomic and other char- questions that effectively measure the understanding or acteristics. Using the positive/agnostic approach, which knowledge of financial concepts in theory and practice. prescribes identifying financial-capability characteristics This combination of self-assessment and direct testing, through peer judgment, a survey module was developed together with behavioral questions, yields a comprehen- to evaluate overall financial-capability levels among SMEs. sive assessment of SMEs’ financial capability, unlike any This assessment methodology has enabled rich and other instrument available in the world. It is most certainly detailed discussions to determine which set of skills, an asset from a public-policy perspective, as it provides knowledge, attitudes, motivations, and behaviors SME with clarity areas of intervention and support to develop owners associate with a financially capable entrepreneur. and deliver extension services targeting SME owners and viii Executive Summary   ix managers. In particular, while SME bankers have an over- The following sections outline the key findings from the view of financial capability based on SMEs’ past perfor- survey pilot, takeaways utilized to refine the survey ques- mance, the financial-capability instrument is a tool that tionnaire, and proposed next steps. allows the identification of strengths, underperformance, or gaps at earlier stages of the business-development cycle, allowing for improved performance and productiv- SME FINANCIAL CAPABILITY FINDINGS FROM ity. This means that targeted policies can be conceived THE SURVEY PILOT and implemented in advance to improve SME perfor- mance over time. Not only is the improvement of entre- The aggregation of core elements conducted in the pilot preneurs’ financial capability positive for the enterprises survey analysis revealed differences in SMEs’ financial-ca- themselves, but it also influences the way that they are pability levels. A principal component analysis (PCA) was perceived in the market—for example, attracting inves- applied to the SME pilot data set, identifying 13 primary, tors or affording access to technical/support programs. uncorrelated components of financial capability, princi- pally involving attitudes, motivations, and behaviors. Aggregated indicators were put together to illustrate gen- DEVELOPING THE FINANCIAL CAPABILITY eral differences in financial-capability levels. SURVEY OF SMES Survey participants showed relative strengths in “keeping Survey questionnaire and piloting in 24 countries separate business expenses,” “being responsible and dil- The survey questionnaire was developed and organized in igent,” and “controlling and keeping cash provisions,” seven sections. The seven sections are (SC) screening, (A) while demonstrating relative weaknesses in “attracting accounting, (B) cash and cash management, (C) expan- investors,” “diversifying cash strategies,” “planning from sion, (D) choosing and using financial products and ser- the beginning with continuous owner’s support,” and vices, (E) financial literacy, and (F) financial attitudes. The “controlled budgeting.” Regression results indicate a sig- seven sections cover three primary topics: (1) categoriza- nificant relationship exists between financial-capability tion of respondents, (2) financial capability, and (3) finan- components and level of sales, type of enterprise, loca- cial inclusion. Additionally, the survey instrument considers tion of enterprise by income level of the country, finan- the core elements of financial capability as (i) attitudes, (ii) cial-product awareness, financial knowledge, ownership behaviors, (iii) skills, (iv) financial knowledge, and (v) finan- of transactional accounts, having access to finance, and cial-product awareness. years of operation of firms. Meanwhile, a weaker relation- ship exists between financial capability and the main eco- Between March and June 2017, the pilot Financial Capa- nomic activity of SME owners’ enterprises. bility Survey of SMEs was implemented on 600 SMEs in 24 countries across different regions and income levels. In Survey development and piloting helped establish a gen- each country, 25 enterprises were randomly selected from eralizable conception of SME financial capability, which current and validated enterprise sample frames that were can be defined as a composite of knowledge, skills, atti- in use for other on-going enterprise surveys. The main tudes, and behaviors of SME owners with respect to the selection criterion was the size of enterprises in terms of financial management of their businesses. This term the number of employees. The Financial Capability Sur- encompasses comprehending basic financial knowledge vey of SMEs recorded different financial attitudes, motiva- and implementing sound business practices that promote tions, and behaviors through diverse qualitative questions the financial health of SME owners’ enterprises. In analyz- with various measurement levels (nominal and ordinal). ing survey pilot results, two underlying domains of SME financial capability, comprising different attitudes, behav- Survey development steps in brief DESK RESEARCH: FOCUS-GROUP INTERVIEWS: SME financial capabilility DISCUSSIONS (FGDs): Georgian SME experts measurement approaches Georgian SME owners QUESTIONNAIRE SURVEY PILOTING: SURVEY REFINEMENTS: DEVELOPMENT: Based SME owners in Based on pilot on desk research and FGDs 24 countries lessons learned x   Investigating the Financial Capabilities of SMEs Differentiation on financial-capability level emerged: SME respondents scored low in behaviors related to diversifying cash Medium enterprises had comparatively higher levels strategies and attracting investors but showed strengths in other areas: in “behavioral/skills” variables. Keeping separate business expenses (58) Small Medium Being responsible and diligent (51) Controlling and keeping cash provisions (49) Getting information and advice (45) Reviewing financial strategies (44) Controlled accounting (41) Risk taking (34) 85 percent 66 percent of small enterprises of medium enterprises Setting detailed financial goals (32) got 125 points or less got 125 points or less Analyzing and developing business opportunities (27) Controlled budgeting (21) Average: Average: Planning from the beginning with continuous owner’s support (21) 112 / 198 121 / 198 Diversifying cash strategies (17) Attracting investors (3) Two underlying domains emerged: SME financial capability can be defined as a composite of Domain: “Managerially Domain: “Business Creator Inclined Entrepreneur” Entrepreneur” Skills Knowledge Reviewing Attracting Keeping separate financial investors business expenses Attitudes strategies Behaviors Controlled Setting Controlling and budgeting financial goals keeping cash provisions Analyzing Being responsible Getting information business and diligent and advice of SME owners with respect to opportunities financial management of their businesses Five groups of participants in terms of financial-capability components: Enterprises with the Informed companies that Keep cash provisions, but Non-informed companies The group that diversifies highest average scores keep separate business do not keep separate and non diversified cash strategies are very financially expenses business expenses companies capable It is possible to say that companies in one The segmentation suggests the cluster were on average more financially most vulnerable groups in terms capable in one component than Small companies of financial capability are: enterprises in the other cluster It is not possible to say Low-sale companies whether one cluster is more capable than another VULNERABLE GROUPS Non-wealthiest locations Executive Summary   xi ior, and skill characteristics, emerged. Specifically, an SME was possible to analyze participants’ answers, and, most entrepreneur who “sets and reviews financial goals and importantly, determine the meaning and components strategies,” “controls the budget,” “analyzes and devel- of SME financial capability. In general, the testing and ops business opportunities,” and “tries to attract inves- answer-evaluation process revealed that the SME Finan- tors” can be viewed as a “Managerially Inclined cial Capability Questionnaire can be applied to SMEs Entrepreneur.” On the other hand, an SME entrepreneur worldwide and is useful for discerning manifestations of who “gets information and financial advice,” “controls and financial capability. Indeed, differences in financial capa- keeps cash provisions to ensure operability,” and in a bility clearly emerged across SMEs, and enterprises were responsible manner “keeps business expenses separated successfully segmented into groups based on their finan- from personal or household expenses” can be perceived cial-capability component levels. as a “Business Creator Entrepreneur.” The experiences and findings from the pilot survey have Enterprise segmentation identified five groups of pilot been utilized to refine the final survey questionnaire, which participants, based on common component characteris- is contained in annex E of this report. A primary objec- tics of financial capability. To complete the SME finan- tive of the Financial Capability Survey of SMEs was to cial-capability evaluation, a cluster analysis was employed capture attitudes, behaviors, skills, and knowledge to to segment the pilot population according to the range of determine what financial capability means for SMEs. 13 component scores. This process identified five distinct Parallel to this analysis of financial capability, a second groups or clusters of enterprises. It was not possible to critically important objective of the exercise was to test conclude whether one cluster was more capable than the instrument itself. Based on implementation and user another. The characterization of groups, however, sug- experience, the survey designers have made important gested that smaller enterprises with relatively lower levels adjustments to enhance the clarity and usefulness of the of sales located in comparatively non-wealthy countries questionnaire. The final questionnaire contained in annex are more vulnerable in terms of financial capability than E reflects these adjustments. A significant improvement medium-size companies with a high level of sales located of the questionnaire facilitates data collection by refining in wealthier countries. These results yield powerful insights the measurement of financial knowledge of SMEs using for future risk-based financial capability enhancing efforts. a combination of declared knowledge and actual knowl- edge questions. RESULTS, REFINEMENTS, AND NEXT STEPS Analysis of the SME financial-capability instrument is a starting point for wider evaluation of SME financial capa- The two primary goals of the survey development and bility. The testing phase of the survey has ended, and the piloting process—designing a clear, generalizable sur- exploratory analysis highlights the instrument’s potential vey tool and successfully analyzing SME financial capa- to capture and understand SME financial capability, as bility from the survey results—were achieved. The SME well as to identify vulnerable groups. The cluster analysis Financial Capability Questionnaire, designed from thor- employed on results of the pilot survey underscores the ough desk research and extensive FGDs and interviews types of vulnerable SMEs that should be targeted in the with Georgian SME owners and experts, was successfully World Bank Group’s future strategies and interventions to tested on 600 enterprises across 24 countries. Critically, increase SME financial capability. Finally, to obtain a the participants recognized the relevance of this instru- global view of SME financial capability, this assessment ment and understood the questions. Furthermore, it recommends deploying the survey on a larger scale. 1 WHY MEASURE THE FINANCIAL CAPABILITY OF SMEs? Financial capability is increasingly becoming a principal SME owners require a breadth of financial capabilities concern for policy makers worldwide, as it promotes finan- that are distinct from those needed by individuals, cial inclusion, financial stability, and effective financial mar- households, and microenterprises to manage their busi- kets. The financial crisis of 2007/08 has reinforced the view ness finances and grow their businesses sustainably. It is that individuals need to be better equipped with knowl- a well-accepted hypothesis that missing human capital, edge and skills to be able to make informed financial deci- specifically management skills, may hinder the growth sions. As such, interest is growing in developing potential and health of SMEs. Multiple studies measure interventions and strategies to raise levels of financial the effect of business skills training on sales and profits, capability. In June 2012, G20 leaders recognized the accounting, recordkeeping, and planning (e.g. Karlan importance of financial capability and education by and Valdivia 2011; Giné and Mansuri 2011; Bjorvatn and endorsing the OECD International Network on Financial Tungodden 2010; De Mel et al. 2012; Drexler et al. 2010, Education’s High-Level Principles on National Strategies and Calderon et al. 2011). Another critical impediment for Financial Education. As of 2017, 71 jurisdictions had to SME growth is lack of access to finance. Enterprise already established or are in the process of designing a Survey data for 120 countries shows that among SMEs, national strategy of financial education (World Bank 2017). 44 percent in low-income countries, 28 percent in mid- dle-income countries, and 20 percent in high-income However, much of the available empirical research on countries were involuntarily excluded from applying for a financial capability has focused on individuals, households, loan (World Bank 2014). However, field experiments on and microenterprises, while small and medium enterprises the impact of financial access in the form of grants (De (SMEs) have largely been overlooked (Kempson et al. Mel et al. 2012; Berge et al. 2011) or microcredit (Giné 2013, Perotti et al. 2013). The existing definition of financial and Mansuri 2011) show that SME growth also depends capability by the World Bank—the internal capacity to act on other dimensions, such as entrepreneurs’ educational in one’s best financial interest, given socioeconomic and background, business, and mindset, for which very little environmental conditions—applies solely to, and does not empirical evidence exists. extend beyond, individuals to encompass SMEs. SMEs are important, especially in low- and middle-income countries, There is a dearth of data measuring financial-capability as they play a fundamental role in job creation and innova- concepts among SME owners or decision makers. These tion. Furthermore, a vibrant SME sector can help to diver- concepts include SME owners’ understanding of account- sify economic activity geographically, it can support women ing concepts, making business plans, using and calculat- and young entrepreneurs, and it can help to achieve other ing financial ratios, setting financial goals, and making development goals, such as food security or health and quick decisions. SME owners who do not have adequate education.   1 2   Investigating the Financial Capabilities of SMEs accounts and records to document their firm’s perfor- This research revealed certain knowledge and skills as well mance, or who are unable to submit a sound business as attitudes that were related to business owners’ financial plan to assess future growth prospects, are more likely to capability. Among the 15 articles and surveys examined, face constraints in accessing finance. Unaware of the five articles—including those from Berge et al. (2011), De broad range of providers and products potentially avail- Mel et al. (2012), Karlan and Valdivia (2011), McKenzie and able to them beyond working capital loans from banks, Woodruff (2015), and the World Bank Kaizen study SME owners may also rely more on internal funds. (2011)—identified numeracy or literacy skills as abilities that were closely related to financial capability. In addition, Addressing this gap in measuring financial capability at analytical skills, or the ability to visualize, critically evalu- the SME level is crucial to strengthening SMEs’ creditwor- ate, and solve problems given available information, were thiness and promoting prudent accounting and borrowing deemed to be linked to financial capability. In terms of practices that are critical to maintaining a sound business attitudes, the desk review found farsightedness to be the and stimulating SME growth. SME growth is important attitude most associated with financial capability among because expansion can trigger sustainable economic SME owners, as studied by Karlan and Valdivia (2011), development in areas with a large informal job sector, McKenzie and Woodruff (2012), McKenzie and Woodruff which is typical to low- and middle-income countries. (2015), Bruhn and Zia (2011), and Drexler et al. (2010). Additionally, SME growth leads to increased household spending, especially in areas such as healthcare and edu- The desk review, however, also outlined the existing gaps cation, and social benefits. Intensive data collection and in measuring key financial-capability concepts important analytic rigor are needed to gather empirical evidence on to SME owners. Several scholarly articles and firm-level existing levels of financial capability among SMEs and to surveys to date have measured select concepts applica- identify target areas that need policy attention. An instru- ble to entrepreneurs’ financial capabilities. Yet many of ment that can measure SMEs’ financial capability can pro- the existing studies merely focus on microenterprises, vide policy makers with a range of important inputs on rather than SMEs. As mentioned previously, SMEs require how to enable SME growth. Such an instrument would financial capabilities that are unique to SME business allow countries to identify target areas that could most owners and dissimilar from those needed by individuals benefit from policy interventions and specific programs. or microenterprises. At the time of writing, no single Such a survey could also be used to measure progress source comprehensively measured all the relevant toward specific objectives on building financial capability SME-related financial capabilities across countries. This among SMEs. desk review clearly illustrates the need to conduct empir- ical research and gather data concerning financial capa- bilities specific to SME owners. LESSONS LEARNED FROM EXISTING 1.1:  MEASUREMENT APPROACHES This project aims to address this knowledge gap by broad- ening the scope of existing efforts to measure financial A thorough desk review of academic articles and existing capability to include SME owners. It is designed to provide surveys on financial capability in the context of SMEs was guidance to policy makers, practitioners, financial service conducted. A total of 15 relevant articles and surveys providers, and researchers on how to measure financial were screened for frequently used concepts that are rele- capability among SMEs in low- and middle-income coun- vant to SME entrepreneurs’ financial capabilities, catego- tries using a new survey instrument that was developed rized into behavior, knowledge and skills, and attitudes. and tested, from start to finish, in Georgia and 23 other Numerous studies, including those by Giné and Mansuri countries. This report presents the considerations, choices, (2011), Karlan and Valdivia (2011), Mano et al. (2011), selections, and implementation issues surrounding the McKenzie and Woodruff (2012), and others, distinguish measurement of SME financial capability in low- and mid- accounting and recordkeeping as one behavior that is dle-income countries. It draws out the thought and imple- closely associated with financial capability. These articles, mentation process around the development of the as well as others by McKenzie and Woodruff (2015), Drex- financial-capability instrument to allow for replication. ler et al. (2010), and Calderon et al. (2011), also classify cash-flow management as a behavior that is relevant to SME entrepreneurs who are financially capable. Lastly, 1.2:  HOW TO READ THIS REPORT creating a business plan has been identified by Berge et al. (2011) and the World Bank Kaizen Study (2011), to The report is an effort to provide a methodology and name a few, as another behavior strongly affiliated with a process for developing a proper set of tools to measure financially capable SME entrepreneur. the financial capability of SMEs. As such, it presents the Why Measure the Financial Capability of SMEs?   3 process; methodological as well as qualitative and quan- the survey. Finally, the survey tool is included for those titative results coming from research, development, and interested in implementing the World Bank’s new Finan- implementation of the pilot questionnaire designed to cial Capability Survey of SMEs. Sections 2.5 (Financial capture information from SMEs; and, finally, an analysis Capability Analysis) and 2.6 (SME Financial Capability) of results obtained. A detailed explanation of the pro- can be overlooked by readers without a statistical back- cess and analysis has been included for readers inter- ground. Table 1 outlines various questions pertaining to ested in replicating the work. Key findings and the financial capability of SMEs as well as the sections interpretations are included for policy makers, practi- that seek to answer them. tioners, or researchers, who can learn from the results of TABLE 1: Report Structure Why measure the financial capability of SMEs? Why is SME financial capability important? Chapter 1 What lessons can we learn from existing surveys? Chapter 1 SME Financial Capability Survey How can we develop a survey instrument to measure financial capability for SMEs? Chapter 2, Section 1 Chapter 2, Section 2 Chapter 2, Section 3 What were the results from pilot surveys? Chapter 2, Section 4 Chapter 2, Section 5 How can the results be used to define SME financial capability? Chapter 2, Section 6 Which SMEs need to be targeted? Chapter 2, Section 6.2 How well does the questionnaire work? Chapter 2, Section 7 Lessons learned and suggestions for next steps What did we learn about financial capability? Chapter 3 What are the next steps to expand SME financial-capability knowledge base? Chapter 3 2 FINANCIAL-CAPABILITY SURVEY OF SMEs CONCEPTUAL APPROACH TO 2.1:  concept and makes no assumption about how the out- MEASURING FINANCIAL CAPABILITY come can be achieved; rather, it determines this through research. This methodology was selected for application Financial capability goes beyond the knowledge of finan- because it seemed better able to account for the imper- cial concepts to include a combination of behaviors, skills, fect market conditions in which SMEs in low- and mid- and attitudes that enable effective and responsible finan- dle-income countries operate. Furthermore, the World cial decision making. The overall objective of this project Bank Group had implemented this approach to develop was to develop a survey instrument that could be used to various financial-capability instruments for individuals— measure financial capability and would be both compara- namely, the Financial Capability and Consumer Protection ble across countries and independent of socioeconomic survey instrument for the Finance and Markets Global and other characteristics. Practice. Applying this conceptual and empirical peer- judgment-based methodology required a long and struc- One of the conceptual issues that existed while develop- tured process to develop a questionnaire that could ing the survey instrument was identifying the concepts capture the operational definition of financial capability. that should be included in the questionnaire. Two main conceptual approaches determine which skills, attitudes, Using the positive/agnostic approach, a survey module and behaviors should be considered part of financial was developed to evaluate overall financial-capability lev- capability. The first approach relies on standard economic els among SMEs. This assessment methodology enabled theory. It is “cognitive-based” and assumes that the deci- rich and detailed discussions that disentangled which set sion-making process is guided purely by knowledge. This of skills, knowledge, attitudes, motivations, and behaviors approach is defined as “normative” because the SME owners associate with a financially capable entrepre- researcher designing a financial-capability survey knows in neur. This qualitative research technique, in the form of advance what topics should be covered and can proceed focus-group discussions (FGDs) and expert interviews, directly to identify the best questions to measure the revealed the range of attributes that can be associated selected concepts. with financially capable SME owners. With these attri- butes, an operational definition of financial capability was An alternative option uses peer judgment to identify man- developed, along with appropriate questions for each of ifestations of financial capability. This approach relies on a the defined concepts of financial capability. To ensure that relevant peer group—in this case, Georgian SME owners all of the designed questions were properly understood and managers—to decide which traits denote a financially by the respondents, they were tested through cognitive capable person. This “positive” or “agnostic” approach, interviews. Furthermore, the survey module was piloted in developed by the United Kingdom’s Financial Services both urban and rural environments. Authority, recognizes that financial capability is a broad 4 IMPLEMENTING THE SELECTED 2.2:  and the length of business operations. The following six APPROACH characteristics were common among all FGDs: (1) All par- ticipants were decision makers in forms of company The following section presents a detailed overview of the founders, general directors, or both. In some cases, the process and steps taken to implement the selected mea- chairmen of companies participated in the discussions. (2) surement approach. Following an initial desk review of All participants were responsible for making major finan- scholarly articles and surveys to identify frequently used cial decisions within the companies they represented. (3) concepts of financial capability, the first phase of the All of the companies represented were formally regis- selected methodological approach involved FGDs with tered. (4) None of the participants represented nonprofit SME owners. The discussions served as an important companies. (5) None of the participants had previously empirical methodological tool for refining the concepts participated in a FGD. And (6) an overwhelming majority identified during the desk review. The focus groups were of respondents claimed to innovate. The most common particularly useful, as they provided bottom-up perspec- industries in which the participants operated were con- tives in the design of the survey, allowing SME owners struction and tourism. themselves to identify key concepts and issues relevant to their first-hand experience. Subsequently, SME finance A FGD guide was used by moderators to orient partici- specialists and/or bank executives were interviewed. pants and direct discussions. (See annex A.) FGDs were These expert interviews complemented the outcomes of conducted in three parts in accordance with the guide, the FGDs by helping ensure that the survey module cov- which was divided into an introduction, a financial-capa- ered all financial-capability aspects considered to be bility discussion, and a validation. The introduction sec- important, as well as those that may have been over- tion served as a priming session for the participants to looked during previous phases. Figure 1 outlines this reflect on their own definition and concept of financial methodological approach as well as the related sections. capability based on personal experiences. The partici- pants shared both positive and negatives experiences with bank products, any major financial decisions they had 2.2.1:  Step 1: Focus-Group Discussions made, and the factors they had taken into account during The main objective of the FGDs was to understand the their decision-making process. In doing so, participants perceptions of SME owners and financial decision makers unconsciously shaped a set of positive and negative char- concerning the concept of financial capability. In particu- acteristics of financial capability. lar, the FGDs were intended to gather a detailed and con- ceptual definition of a financially capable individual in the Once the participants were perceived to be ready, the context of Georgian SMEs based on concrete experiences moderator transitioned to the financial-capability section of the FGD participants, rather than on theory. by directly asking participants about the concept. Partici- pants were asked what they thought financial capability A total of 18 FGDs involving 133 male and female adults meant, its importance, and what they believed made a were conducted in Georgia.2 To ensure a nationally repre- financially capable entrepreneur. The default definition of sentative sample, the FGDs were held in four regions: the financial capability, in the event that the participants were capital, Tbilisi; the second largest city and former capital, not able to formulate one, was that of the World Bank. Kutaisi, in the Imereti region; the Autonomous Republic of Adjara or Adjara region; and the Kakheti region. FGD par- Finally, the validation section of the FGD was used to clar- ticipants were selected according to various defining char- ify concepts that were not mentioned in the first two sec- acteristics, including geography, gender, level of education, tions of the discussion. It prompted participants to FIGURE 1: Outline of Methodological Approach STEP 1: STEP 2: PRELIMINARY Focus-group discussions Expert interviews DESK RESEARCH (section 2.2.1) (section 2.2.2)   5 6   Investigating the Financial Capabilities of SMEs elaborate on specific topics, such as recordkeeping, cash- Participants ranked “consulting financial institutions and flow management, creating and analyzing financial state- professionals” as the most important decision contribut- ments, planning for business expansion, financing a ing to the improvement of business capabilities. Partici- business, and getting and using advice and information. pants considered “being part of a social network” to obtain advice given by “friends” who had experience in Several revisions were made to the FGD guide after the finance as the second most important decision. “Receiv- pilot exercise. One of the difficulties encountered during ing help from family members and friends,” especially the FGDs was focusing the introduction session to prime when additional funds were needed, and “involving a new participants for the subsequent financial-capability discus- business partner to serve as a guarantor or provide addi- sion. Participants were eager to discuss at length their tional collateral for a new loan” were the next most negative experience with financial institutions, so it was important decisions. difficult to proceed to the topic of financial capability. Therefore, following the pilot exercise, the introduction FGD participants identified key attitudes and behaviors session was revised to eliminate discussions on financial that defined the concept of financial capability. These atti- institutions and products, opting instead to start with tudes, skills, and behaviors were ranked by how frequently financial decision making. The validation section of the participants mentioned them during the FGDs. The five FGD was also supplemented with an exercise for partici- most important attitudes were (1) adaptability/flexibility, pants. Each was given a printed list of attitudes and asked (2) disciplined/hard-working, (3) farsightedness/long-term to rank the three that were most important. This provided vision, (4) self-confidence, and (5) risk taking. These atti- additional insight into participants’ perceptions regarding tudes (especially adaptability and flexibility) highlight the financial capability. significantly decreased demand from consumers and increased competition among businesses in the current FGDs revealed that most participants perceived their Georgian business environment. experience with financial institutions negatively. This neg- ative perception stemmed from two primary reasons: FGD participants also identified various skills and behav- being rejected for a loan application, and being offered iors a financially capable entrepreneur was thought to loan conditions deemed unacceptable by participants. possess. The five most important skills for financially capa- These unfavorable loan conditions varied between ble entrepreneurs were (1) analytical ability, (2) risk assess- requests for high levels of collateral, the need for guaran- ment, (3) understanding financial products, (4) basic tors, and high interest rates. Nevertheless, participants understanding of accounting concepts, and (5) innova- still recognized business credit as an important source of tion/creativity. Analytical ability and risk assessment were funding; most had tried to acquire a line of credit or a the most commonly mentioned skills; participants recog- short-term loan for any contingency. Several participants, nized the need to evaluate business risks and for business however, recognized that submitting unstructured busi- owners to be able to carry out such an evaluation. More- ness plans, inaccurate cash-flow predictions, or inade- over, participants most frequently cited the following key quate investment proposals were probable reasons for behaviors as being necessary for financially capable busi- the negative interactions they experienced with financial ness owners: (1) creating a business plan, (2) budgeting, institutions. As such, participants acknowledged the (3) relying on/tapping into a team of experts, (4) keeping importance of financial education as well as consulting cash provisions, and (5) minimizing spending. Table 3 with banks and professionals for their business endeavors. summarizes the findings from the FGDs. The numbers in Another common behavior among participants was to parentheses refer to the number of participants who men- research new ways of receiving funding, including search- tioned each attitude, skill, or behavior. ing for potential investors over the Internet and through social networks. Financial-Capability Survey of SMEs   7 TABLE 2: Findings from Focus-Group Discussions ATTITUDES SKILLS BEHAVIORS Analytical (16) Risk assessment (16) Creating a business plan (17) Adaptable/flexible (15) Innovation/creativity (13) Understanding financial products (16) Disciplined/hard-working (13) (Quick) decision making (13) Basic understanding of accounting concepts (15) Farsighted/long-term vision (12) Planning (12) Budgeting (14) Self-confident/intuitive (10) Identify priorities (11) Having access to a team of experts (12) Risk taker (10) Sharing information and best practices (10) Keeping cash provisions (12) Persistent/perseverant (9) Communication (9) Minimizing spending (12) Result-oriented (7) Problem solving (9) Computerized accounting system (11) Honest/Modest (6) Leadership (7) Marketing strategies (11) Motivated (6) Delegation (6) To be aware of all aspects of the business (11) Appetite for learning (5) Negotiation (5) Up-to-date financial reports (11) Delegator (4) Learning from mistakes (3) Use short-term credit for turnover (11) Extroverted (3) Knowledge of regulations (legal and fiscal) (10) Ambitious (3) Projecting sales, costs (10) Rational (2) Setting financial goals (10) Responsible (2) Using self-generated resources (10) Being a role model (2) Using financial ratios to make decisions (10) Detailed-oriented (2) Assessing the risk and exposure of the company (9) Trustworthy (2) Marketing analysis, competitive analysis (9) Competitive (1) Monitoring receivables (9) Diligent (1) Offering discount and low price (9) Patient (1) Reporting taxes on time, complying with government requirements (9) Careful (1) Action plan, timeline (8) Self-critical (1) Analyzing and developing business opportunities (8) Resourceful (1) Attracting investors (7) Long-term financial planning (7) Access to owner’s personal funds (6) Increasing sales (6) Payment facilities for early payers (6) Frequent calculations of ratios (5) Knowledge of payment instruments and cash-flow management tools (5) Deep understanding of accounting concepts (4) Researching new technologies (3) Strict, documented internal procedures (3) Diversifying the financial risk (1) Keeping family and business expenses separate (1) Keeping technical data on production (1) Proceeding with legal documents for contracts (avoiding informality) (1) Starting very small (1) Source: WBG Focus Group Discussions, Georgia 2016. 8   Investigating the Financial Capabilities of SMEs 2.2.2:  Step 2: Expert Interviews parentheses refer to the number of experts who men- tioned each issue, personal trait, or behavior. Following the FGDs, interviews were conducted with 12 experts on Georgian SMEs. These professionals included bankers, lending companies, and university professors 2.2.3:  Key Results and Lessons Learned who were selected based on their knowledge of SMEs Based on findings from the FGDs, concepts were selected and their financial issues, particularly in the context of to be evaluated through a questionnaire. These strongly Georgia. The expert interviews had two purposes: The connected concepts gave insight into financial knowl- first was to gain a deeper understanding of important edge, and were categorized into attitudes, skills, and financial-capability behaviors by corroborating findings behaviors. Furthermore, findings revealed the importance from the FGDs. The second was ensure that no important of certain personal traits, skills, and attitudes, such as concepts were overlooked. Expert interviews were con- being analytical and possessing risk-assessment skills, as ducted with the interview guide that can be found in opposed to simple knowledge of financial concepts and annex B. This guide was similar to the final FGD guide, products. It is important to note that skills and attitudes though it asked questions more suited to the perspective concerning financial capability need to be understood in and reality of a financial service provider than that of a tandem; one explains the other, and both lead to a series user. During expert interviews, no difficulties arose that of specific behaviors. Hence, by measuring behaviors, the required modifying the guide. survey tool inherently measured attitudes and skills while avoiding response bias that might have been caused by The expert interviews also revealed several traits that hin- asking participants to assess their own attitudes and skills der, and others that enhance, financial capability. Among directly. Behaviors, on the other hand, were categorized issues thought to detract from financial capability, the into “general” (for instance, having access to experts, three most frequently mentioned were bad/no business being aware of all business aspects, and so forth), “choos- plans, poor financial training, and insufficient financial ing and using financial products and services,” “cash man- education. The most oft-cited personal traits of a finan- agement,” “accounting,” and “expansion and planning.” cially capable business owner were good planning skills, analytical skills, and farsightedness, in addition to behav- Although there were many similarities among findings iors of understanding financial products, cash-flow man- from the FGDs and expert interviews, several differences agement, and early payer discounts. Table 3 summarizes arose, especially with regard to factors that impede finan- the findings from expert interviews. The numbers in cial capability. Among issues that negatively affect financial TABLE 3: Findings from Expert Interviews MAIN ISSUES PERSONAL TRAITS BEHAVIORS Bad (no) business plans (7) Planner (6) Seeking to understand financial products (8) Poor financial training (6) Analytical (6) Cash-flow management (7) Education problems (5) Farsighted (5) Early-payer discounts (3) Insufficient collaterals (4) Adaptive (4) Minimizing spending (3) No ratio calculations (3) Innovative (3) Accounting (7) Not understanding tax system, Risk taker (3) Cost benefit calculations (2) avoiding paying taxes, filing late (2) Detail-oriented (3) Break-even analysis Disciplined (3) Budgeting Analyzes mistakes (3) Cost-volume-profit analysis Quick decision maker (2) Formal up-to-date bookkeeping Leader (2) Seeking professionals’ advice (6) Knowing their business inside out (5) Financial management: stocks, account payables, ratios turnover, income statements, and balance sheet (4) Risk assessment (4) Seeking to understand contracts and laws (2) Social media marketing (1) Source: WBG Expert Interviews, Georgia 2016. Financial-Capability Survey of SMEs   9 capability, the one reported most frequently by experts 2.3.2:  Concepts Covered was “submitting a poor business plan to a financial institu- The seven questionnaire sections outlined in table 4 tion, or not having one at all.” Many FGD participants, cover three main topics: (1) categorization of respon- however, lacked the financial capability to distinguish a dents, (2) financial capability, and (3) financial inclusion. good financial plan from a bad one, although they did rec- The survey instrument considers the core elements of ognize the importance of having an effective business financial capability to be (i) attitudes, (ii) behaviors, (iii) plan. Some FGD participants disclosed that they did not skills, (iv) financial knowledge, and (v) financial-product have the necessary expertise to prepare business plans awareness. These elements were cross-referenced to and turned to professionals for assistance instead. In a sim- questions or subquestions. ilar manner, whereas experts stated that lack of knowledge and understanding of financial ratios, and not understand- ing the Georgian tax system, were two major deterrents SELECTION OF TEST PARTICIPANTS AND 2.4:  to financial capability, these were not mentioned by FGD PILOT IMPLEMENTATION participants. This disparity indicates the need to educate business owners about basic financial concepts that are Between March and June 2017, the pilot Financial Capa- essential to operate a business successfully. bility Survey of SMEs was implemented on 600 SMEs in 24 countries3 across different regions and income levels by an The overwhelming majority of characteristics used to international consulting firm headquartered in Canada.4 describe the financially capable individual during expert Once the pilot questionnaire was finalized (see section interviews were also mentioned during FGDs. However, 2.3), it was sent to the firm’s country teams for testing. In there were differences in their ranking of importance. For each country, 25 enterprises were randomly selected from instance, experts deemed planning the most important current and validated enterprise sample frames that were personal trait, whereas FGD participants placed more in use for other ongoing enterprise surveys. Enterprise importance on the individual’s ability to assess risk and size, measured by number of employees, was the main creativity. criterium for this selection; only small5 and medium-size enterprises6 were considered. The 600 selected compa- nies were then interviewed face to face. The participants in KEY FEATURES OF THE FINALIZED 2.3:  the pilot survey (see section 2.5) had the following key QUESTIONNAIRE characteristics (see annex C): 47 percent of SMEs were classified as medium-size enterprises, while the remaining Once a list of findings was identified through FGDs and 53 percent were small. (See figure 19.) Slightly less than expert interviews, the next step was to design appropriate half of the interviewed main financial decision makers were questions to measure them. Available questions from male (49 percent, see figure 17.) More than 50 percent of existing surveys of financial capability were reviewed, the main financial decision makers had completed tertiary building on previous survey stocktaking. New questions education, including university or other higher education, for concepts not adequately covered by the existing sur- 28 percent either had some or had completed vocational veys were subsequently designed. or technical schooling, while around 15 percent had com- pleted only senior secondary schooling. (See figure 18.) Ranking all companies by their reported annual sales in 2.3.1:  Organization of the Finalized Questionnaire 2016 and dividing them into four groups, 25 percent of The survey questionnaire was organized in seven sec- SMEs fell in the lowest segment (up to $7,000), 25 percent tions. As section 2.2.3 indicates, the SME Financial Capa- fell in the second-lowest quartile (between $7,001 and bility Questionnaire was elaborated based on the findings $27,000), 25 percent were in the second highest segment from FGDs and expert interviews. The fully developed (between $27,001 and $99,750), and 25 percent were in questionnaire includes 62 core questions, the majority of the highest quartile (more than $99,750, see figure 23). which lead to subquestions. In total, the questionnaire Twenty-nine percent of companies were located in low-in- has 294 variables. The questionnaire was divided in seven come countries, 33 percent in lower middle-income coun- sections: (SC) screener section, (A) accounting, (B) cash tries, 21 percent in upper middle-income countries, and and cash management, (C) expansion, (D) choosing and 17 percent in high-income countries. (See figure 22.) Most using financial products and services, (E) financial literacy, of the SMEs were registered (85 percent), and almost two- and (F) financial attitudes. Table 4 outlines the purpose of thirds of companies used formal financial products. (See each section figure 21 and figure 24.) Fifty-four percent of enterprises used their own funds or retained earnings as their main 10   Investigating the Financial Capabilities of SMEs TABLE 4: Content of the Questionnaire NUMBER OF SECTION PURPOSE QUESTIONS SC Screener section Provide information on the types of enterprises interviewed. This data •  16 will allow establishment of various topologies based on SME size, main economic activities, level of sales, type of location (country income classification), main source of financing, maturity of the company, registration status, managing of business and household finances, and characterization of the main financial decision maker. A Accounting Understand SMEs’ knowledge of accounting concepts (including assets, •  10 liabilities, and profits) and business aspects, including financial manage- ment, marketing management, and business strategies. Obtain a broad indication of the preparation of and adherence to a •  written budget, the setting and revision of specific goals in terms of gross profit margins, debt relative to equity, or other financial aspects. Collect information on the preparation, content, update, and computer- •  ization of financial statements and capture the usage of records in order to evaluate cash-flow and/or sales variation. B Cash and cash •  Understand SMEs’ global cash-flow situation in the last fiscal year and if 6 management the companies keep cash reserves beyond what is needed for their regular  operations. Obtain indication of the strategies used by SMEs when they are in need •  of cash flow. Understand how the companies assess risks or reasons that prevent them •  from doing so. C Expansion Understand if the companies have expanded the size or scope of their •  4 business. This includes capturing business aspects (plan creation, competi- tive analysis, budget, research of new technologies, analysis of new or alternative opportunities) considered for the expansion or new project. Identify companies that started with a business plan and establishments •  that have a structured financial plan (term and aspects included in this plan). D Choosing and •  Understand whether enterprises typically seek financial advice. This 8 using financial includes questions to determine the type of financial advisors, the products and frequency, the circumstances for seeking advice, and the reasons for not services asking advice. Obtain a broad indication of the current and historical levels of financial- •  product usage and the satisfaction level with these products. Identify the methods typically used by the companies when they make •  payments to suppliers and receive payments from customers. Obtain information on the preferred method (internal versus external •  financing) used to finance fixed assets and working capital. Understand to what degree access to finance is an obstacle to the opera- •  tions of the company, the frequency of collateral requirements, and the possibility to negotiate the term or conditions for these requirements. E Financial •  Obtain a broad indication of companies’ level of financial knowledge 13 knowledge  by asking the main interviewed decision makers to solve a quiz covering basic computation and financial concepts. •  Understand companies’ willingness to learn financial-management skills. F Financial attitudes Capture underlying attitudes toward risk, making investments, making •  5 decisions, action orientation, learning from mistakes, and reviewing goals. Source: WBG SME Financial Capability Questionnaire, 2017. Financial-Capability Survey of SMEs   11 source of financing, 28 percent borrowed from financial and behaviors through diverse qualitative questions with institutions or the government, while the remaining 18 various measurement levels (nominal and ordinal), as sec- percent obtained goods and services from suppliers as a tion 2.3.2 illustrates. A number of questions emerge from source of financing. (See figure 25.) Less than 50 percent of exploring these variables: Is there some differentiation the companies developed their activities in services or across enterprises? Are SME financial attitudes related? trade sectors, 39 percent in manufacturing or construction, How are they related? Could groups of enterprises be and 12 percent in agriculture, forestry, and fishing. (See identified based on these relationships? All of these ques- figure 26.) tions pointed toward a single subject: SME financial capa- bility. To understand this topic, the following four-step analysis was conducted: (1) aggregation of financial-capa- 2.5:  FINANCIAL-CAPABILITY ANALYSIS bility core elements; (2) factor analysis: constructing com- ponents; (3) factor analysis: constructing domains; and (4) 2.5.1:  Methodological Overview cluster analysis: identifying vulnerable groups. Table 5 summarizes the purpose of each step, and annex D pres- How can SME financial capability be defined? How can ents their methodological particularities. vulnerable groups be identified? These questions were answered in four steps. The Financial Capability Survey of The following subsections (2.5.2, 2.5.3, 2.6.1, 2.6.2, 2.6.3) SMEs recorded different financial attitudes, motivations, present the results of the SME financial-capability analysis. TABLE 5: Summary of Steps to Analyze SME Financial Capability STEP TO ANALYZE SME FINANCIAL CAPABILITY AND THEIR KEY QUESTION PURPOSE 1. Aggregation of financial Estimate an aggregated exploratory indicator based on the core elements •  capabilities core elements of financial capability (attitudes, behaviors, skills, financial knowledge, and financial-product awareness) in order to observe differences across Is there some differentiation enterprises as the first step to understand SME financial capability. across the enterprises? 2. Factor analysis: Explore the relations between the different behavioral variables recorded •  constructing components by the instrument through a factor analysis known as principal component analysis (PCA). The main aim of this analysis is to determine the underlying Are SME financial attitudes dimensions of SME financial attitudes. related? How are they related? 3. Factor analysis: Establish if the SMEs’ main dimensions of financial capability could be •  constructing domains combined in a single domain or a small number of domains through a “second factor analysis.” How are SME financial components related? Is there one single domain? 4. Cluster analysis: Determine subgroups among pilot participants that exhibited particular •  indentifying vulnerable groups strengths or weaknesses with regard to financial capability. Can groups of enterprises be identified based on financial capability relationships? Are there vulnerable groups? Source: WBG SME Financial Capability Survey, 2017. 12   Investigating the Financial Capabilities of SMEs Aggregation of Financial-Capability Core Elements 2.5.2:  The aggregation of the financial-capability core elements reveals differences 1. Aggregation of financial among SME financial-capability levels. The estimation of the exploratory indi- capabilities core elements cator of “behavioral” variables, as detailed in section 2.5.1 and annex D, reveals that pilot participant enterprises are not all at the same level in terms Is there some differentiation across the enterprises? of financial capability. In fact, as figure 2 illustrates, companies scored 116 points on average, and none obtained fewer than 85 points. There are differ- ences between small and medium-size enterprises (see figure 2): while almost 85 percent of small enterprises scored 125 points or less (112 points on average), only 66 percent of medium-size companies attained 125 points or less (121 points on average). These results indicate that medium-size enterprises have comparatively higher levels in “behav- ioral” variables. FIGURE 2: Density of the “Aggregation of the Financial-Capability Core Elements” Indicator 16% General 13.8% 14% 13.2% 13.0% 11.8% 12% 10% 8.8% 8.8% 8% 7.2% 6% 4.7% 4.5% 4.2% 4% 2.8% 1.8% 1.7% 1.3% 2% 0.0% 0.7% 0.8% 0.3% 0.3% 0.2% 0.0% 0% 0–85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 200 20% Small size 18.9% (1–19 employees) 18% 16% 14% 12.9% 13.2% 12.3% Mean: 112 12% < = 125: 84.2% 9.5% 10% 8% 7.3% 6.9% 6% 5.0% 4% 3.2% 2.8% 1.3% 1.6% 1.6% 1.3% 2% 0.0% 0.6% 0.6% 0.3% 0.6% 0.0% 0.0% 0% 0–85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 200 16% 15.5% Medium-size 14.5% (20–99 employees) 14% 12.7% 12% 11.0% 10% 9.5% Mean: 121 < = 125: 66.4% 8% 6.7% 7.4% 6.7% 6% 4.2% 4.2% 4% 1.8% 1.4% 2% 1.4% 0.0% 0.4% 0.7% 1.1% 0.4% 0.0% 0.4% 0.0% 0% 0–85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 200 Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   13 2.5.3:  Factor Analysis: Constructing Components In the SME pilot data set, 13 main components of financial capability were 1. Aggregation of financial identified, some of which referred to behaviors and others to attitudes or moti- capabilities core elements vations. Once the aggregated indicator illustrated the general differences in financial-capability levels, a PCA was conducted. (See annex D for methodolog- Is there some differentiation 2. across analysis: Factor the enterprises? ical detail.) This analysis highlighted 13 uncorrelated components with different constructing components financial attitudes, motivations, and behaviors. Table 6 presents the relation- Are SME financial attitudes ships across SME financial attitudes. These represent the relevant attitudes related? How are they related? (“behavioral” variables) that define each dimension. TABLE 6: Main Identified Financial Components from PCA COMPONENT OR FACTOR LOADING DIMENSION TOPIC (BEHAVIORAL VARIABLE) FROM PCA \ 1 Risk taking Assessing the risk and exposure of the company 0.62 Do not play 0.84 Gamble for low stakes 0.85 Play but never beyond the limit 0.84 Play for high stakes, beyond the limit 0.83 Do not play, hate losing –0.85 When playing, I sometimes stake my all 0.84 Do not play on principle 0.86 2 Analyzing and developing Expand scope of business and research new technology 0.94 business opportunities Expand scope of business and create business plan 0.98 Expand scope of business and marketing analysis 0.99 Expand scope of business and budget sales and cost 0.99 Expand scope of business and analyze new alternatives 0.92 3 Getting information Getting information and advice 0.95 and advice Advice when faced with financial losses or troubles 0.96 Preference for team of experts 0.85 Appetite for learning more about accounting from experts 0.94 Responsible –0.97 4 Controlled accounting Prepare financial statement (content) 0.92 Prepare financial statement (certified) 0.86 Have a computerized accounting system 0.61 Use records to see how much cash is available 0.61 Use records to know about sales 0.44 Use short-term credit for turnover 0.53 5 Controlled budgeting Have a written budget (length of time) 0.98 Stick to the budget 0.92 6 Controlling and Keep cash provisions (establishment) 0.92 keeping cash Cash flow status 0.83 provisions Keep cash provisions (personal) 0.90 7 Reviewing financial To be aware of business-strategy aspect of the business 0.88 strategies Revise goals periodically 0.86 8 Being responsible and To be aware of financial-management aspect of the business 0.80 diligent Learning from mistakes 0.65 Deals well with financial matters 0.87 9 Diversifying cash Minimize spending –0.95 strategies Offering discount and low price 0.92 10 Keeping separate business Keep family and business expenses separate 0.88 expenses Access to owner’s credit funds –0.92 11 Setting detailed financial To be aware of accounting aspects of the business 0.70 goals Set specific financial goals 0.78 12 Planning from the beginning Started with a business plan 0.88 with continuous owners’ Access to owner’s personal funds for cash flow 0.44 support 13 Attracting investors Historically financed by venture capital funds/other equity investors 0.67 Investment by venture capital funds, angel investors, private 0.84 equity funds Source: WBG SME Financial Capability Survey, 2017. 14   Investigating the Financial Capabilities of SMEs Survey participants showed relative strengths in “keeping “attracting investors” (3), “diversifying cash strategies” business expenses,” “being responsible and diligent,” (17), “planning from the beginning with continuous own- “controlling and keeping cash provisions,” “getting infor- er’s support” (21), “controlled budgeting” (27), “setting mation and advice,” “reviewing financial strategies,” and detailed financial goals” (32), and “risk taking” (34). These “controlled accounting.” As depicted in figure 3, enter- low scores are associated to the fact that less than 4 per- prises scored highest on “keeping business expenses sep- cent of SME participants have or ever had investments arate” (58), “being responsible and diligent” (51), from angel investors, venture capital funds, or private “controlling and keeping cash provisions” (49), “getting equity funds. In addition, only between 17 and 26 percent information and advice” (45), “reviewing financial strate- of companies offer discounts to their clients as part of strat- gies” (44), and “controlled accounting” (41). In general, egies to diversify cash, began their operations with a struc- these high scores reflect the fact that almost two-thirds of tured business plan, receive owner’s support (personal respondents keep their finances separate from household funds), set specific financial goals on a regular basis, evalu- expenses, and around half of surveyed enterprises keep ate the risk of their companies, and avoid gambling prac- cash provisions, are conscious of the financial manage- tices. Finally, in the same way in which the “behavioral” ment of the business, are good at dealing with financial variables linked to high scores were analyzed, box 2 matters, and get information and advice, in particular exposes the statistical description of those associated to when they face financial losses or troubles. More than 60 low financial-capability scores. percent of companies learned from their own mistakes, and they prepare a financial statement at least annually. Components were ordered according to the cumulative However, only 49 percent of enterprises include balance, frequency of enterprises possessing them, with the high- cash, and income and equity statements. In addition to the est scores meaning the particular component was present global overview of financial-capability scores, the survey in more companies. Figure 5 and figure 6 present a com- went into greater depth by analyzing “behavioral” vari- parison of component scores by country income classi- ables that compose each dimension where the participants fication. The cumulative figure indicates that the higher showed strengths. Box 1 details the statistical description the concentration in the high scores, the more financially of the variables that went into the scores. capable the group of SMEs is. The displayed cumulative financial-capability results underlined locational differ- On the other hand, pilot participants identified the follow- ences among enterprises. Specifically, companies situated ing areas of financial-capability weakness: “attracting in the upper middle-income and high-income locations investors,” “diversifying cash strategies,” “planning from tended to obtain higher financial-capability scores than the beginning with continuous owner’s support,” “con- those located in low-income countries. Although this ten- trolled budgeting,” “analyzing and developing business dency is generally true, the specific scores vary slightly opportunities,” “setting detailed financial goals,” and “risk across components. To highlight some of the differences taking.” As shown in figure 3, enterprises scored lowest for presented in figures 5 and 6, figure 4 isolates the cumu- FIGURE 3: Average Financial-Capability Scores 70 58 60 51 49 50 45 44 41 40 34 32 30 27 21 21 20 17 10 3 0 Keeping Being Controlling Getting Reviewing Controlled Risk Setting Analyzing Controlled Planning Diversifying Attracting business responsible and Information financial accounting taking detailed and budgeting from the cash investors expenses and keeping and advice strategies financial developing beginning strategies separated diligent cash goals business with provisions opportunities continuously owners’ support Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   15 BOX 1 Topics Associated with Components Where Participants Showed “Strengths” Keeping business expenses separate. Almost two-thirds of cent from media, and 4 percent from other sources. Finally, pilot participants keep household and business expenses sepa- almost half of interviewed managers make the main financial rate, and slightly more than half of respondents have access to decisions alone. the owner’s credit funds. Reviewing financial strategies. Around 38 percent of pilot Being responsible and diligent. Around 46 percent of pilot respondents are aware of business-strategy aspects of the busi- SMEs consider that they deal well with financial matters and are ness. Moreover, 42 percent of SMEs revise their goals periodically. aware of financial-management aspects of the business. More- Controlled accounting. About 72 percent of participants pre- over, over 69 percent declare that they learn from their mistakes. pare a financial statement at least annually: 49 percent of Controlling and keeping cash provisions. According to the respondents include a balance sheet, an income statement, a survey results, 53 percent of SMEs keep cash provisions. In par- statement of change in equity, and a cash flow, and 23 percent ticular, around 40 percent of respondents have a good or very of financial statements don’t contain these four reports (one, good cash flow. two, or three). Only 14 percent of SMEs have an external auditor prepare, check, and certify their financial statements. Around 55 Getting information and advice. Around 49 percent of pilot percent of SMEs have a computerized accounting system: 36 participants get information and advice (33 percent regularly percent (have it and) update their financial statements, and 19 and 16 percent sometimes). In particular, 44 percent of SMEs percent (have them but) do not update them. look for advice when they face financial losses or troubles, and 19 percent ask for advice from teams of experts. On the other On the other hand, 29 percent of enterprises use records to hand, 58 percent of enterprises are interested in learning more know their sales, and 36 percent use them to see how much about accounting: 25 percent from colleagues or social circles, cash is available. Finally, 28 percent of SMEs use short-term 19 percent from experts or experts and other sources, 10 per- credit for turnover. BOX 2 Topics Associated with Components Where Participants Showed “Weaknesses” Risk taking. Only 17 percent of pilot respondents assess the risk Controlled budgeting. Around 29 percent of SME participants and exposure of the company: 8 percent research how many have a written budget: 20 percent for 1–3 months, 5 percent for competitors, 6 percent compare the establishment to similar 6 months, and 5 percent for 12 months. Only 5 percent always ones, 2 percent analyze sale progress, and less than 1 percent stick to the budget, 10 percent often do, 12 percent sometimes evaluate market/political evolution. With regard to gambling, do, and 2 percent never do. between 23 and 26 percent of respondents avoid it (or do not Planning from the beginning with continuous owner’s sup- play), and they don’t exceed their limits: 24 percent don’t play port. Only 22 percent of enterprises had a business plan when games of chance. If playing games of chance, they gamble for they started their business. Around 20 percent of participants low stakes (23 percent) but never beyond the limit of their means have access to the owner’s personal funds. (26 percent), and they don’t stake their all (25 percent). Diversifying cash strategies. While only 21 percent of SME Setting detailed financial goals. Around 29 percent of respon- participants use the strategy of offering discounts to clients that dents set/review specific financial goals: 11 percent regularly, pay early to encourage them to pay faster, about 86 percent 13 sometimes, and 5 rarely. Forty-one percent of SMEs are minimize their spending as part of cash strategies. aware of accounting aspects of the business at an expert (7 per- cent) and advanced level (34 percent). Attracting investors. Less than 4 percent of pilot participants have ever been financed by venture capital funds or other Analyzing and developing business opportunities. Almost 43 equity investors. A mere 3 percent currently have investments expand the size or scope of their business. However, only 16 from angel investors, venture capital funds, or private equity percent project or budget sales/costs, 14 percent conduct mar- funds. keting or competitive analysis, 11 percent create a business plan, 7 percent analyze new or alternative opportunities, and 6 . percent research new technologies. 16   Investigating the Financial Capabilities of SMEs lative distribution of companies situated in low-income The score distribution with regard to “setting detailed and high-income countries with regard to “controlling financial goals” shows that around 51 percent of compa- and keeping cash provisions,” “setting detailed financial nies in high-income locations get 50 points or less. The goals,” and “getting information and advice.” Regional proportion is 92 percent for those in low-income locations. comparisons indicate that while more than a half (55 per- On the other hand, score distributions are similar when cent) of SMEs in low-income countries get scores between considering “getting information and advice.” Almost 41 0 and 20 (18 percent scored 0–10, and 37 percent scored percent of SMEs in low-income locations obtain fewer 11–20), in terms of “controlling and keeping cash provi- than 10 points in this financial capability. This proportion is sions,” only 2 percent of those in high-income countries around 49 percent for those in the wealthiest countries. In obtain scores between 21 and 30. In particular, 58 percent addition, while 59 percent of companies situated in of SMEs in the wealthiest locations have scores in a range low-income countries get scores between 71 and 100 (40 of 41 to 60 (24 percent scored 41–50, and 34 percent percent scored 81–90), this index is 51 percent for SMEs in scored 51–60). high-income locations. FIGURE 4: Comparison of Cumulative Distribution of Selected Component Scores (Low-Income versus High-Income Countries) Controlling and keeping cask provisions 120% 120% 100.0% 99.0% 100.0% 100% Low income 93.7% 100% High income 83.0% 80.0% 80% 80% 68.0% 68.0% 60.0% 60% 55.4% 55.4% 55.4% 55.4% 55.4% 60% 40% 40% 26.0% 18.3% 20% 20% 0.2% 0.2% 0.0% 0.0% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Setting detailed financial goals 120% Low income 120% High income 98.3% 98.3% 100.0%100.0% 95.0% 100.0% 100% 91.4% 92.0% 93.1% 100% 76.6% 76.6% 77.0% 77.0% 80% 80% 61.0% 60% 60% 51.0% 45.0% 38.9% 40% 40% 24.0% 24.0% 20% 20% 9.0% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Getting information and advice 120% 120% 100.0% 100.0% 100% Low income 90.3% 100% High income 91.0% 80% 80% 60% 50.3% 60% 49.0% 49.0% 49.0% 49.0% 49.0% 49.0% 49.0% 54.0% 41.1% 41.1% 41.1% 41.1% 41.1% 41.1% 41.1% 40% 40% 20% 20% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   17 FIGURE 5: Cumulative Distribution of Component Scores across Pilot Countries Grouped by Country Income Classification (I) Risk taking Analyzing and developing business opportunities 100% 100% Percentage of people with scores no greater than Y Percentage of people with scores no greater than Y 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Getting information and advice Controlled accounting 100% 100% Percentage of people with scores no greater than Y Percentage of people with scores no greater than Y 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Controlled budgeting Controlling and keeping cash provisions 100% 100% Percentage of people with scores no greater than Y Percentage of people with scores no greater than Y 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Low income Lower middle income Upper middle income High income Total Source: WBG SME Financial Capability Survey, 2017. 18   Investigating the Financial Capabilities of SMEs FIGURE 6 Cumulative Distribution of Component Scores across Pilot Countries Grouped by Country Income Classification (II) Reviewing financial strategies Being responsible and diligent 100% 100% 90% 90% Percentage of people with scores Percentage of people with scores 80% 80% 70% 70% no greater than Y no greater than Y 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Diversifying cash strategies Keeping business expenses separate 100% 100% 90% 90% Percentage of people with scores Percentage of people with scores 80% 80% 70% 70% no greater than Y no greater than Y 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Setting detailed financial goals Planning from the beginning with continuous owner’s support 100% 100% 90% 90% Percentage of people with scores Percentage of people with scores 80% 80% 70% 70% no greater than Y no greater than Y 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Score Attracting investors 100% 90% Percentage of people with scores 80% 70% no greater than Y 60% 50% 40% 30% 20% 10% 0% 0–10 11–20 21–30 31–40 41–50 51–60 61–70 71–80 81–90 91–100 Score Low income Lower middle income Upper middle income High income Total Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   19 2.6:  SME FINANCIAL CAPABILITY 2.6.1:  Defining SME Financial Capability SME financial capability can be defined as a composite of the knowledge, skills, 1. Aggregation of financial attitudes, and behaviors of SME owners with respect to the financial manage- capabilities core elements ment of their businesses. Rather than a single concept, this term encompasses comprehending basic financial knowledge and implementing sound business Is there some differentiation 2. across analysis: Factor the enterprises? practices that promote the financial health of the owners’ enterprises. As section constructing components 2.5.1 outlines, it is important to evaluate whether the main components of SME Are SME financial attitudes financial capability can be combined into one domain and defined as a single 3. related? Factor analysis: How are they related? whole, or divided into several dimensions and defined as a combination of constructing domains knowledge, skills, attitudes, and behaviors. The second PCA (conducted as How are SME financial detailed in section 2.5.3 and annex D) revealed that it is not possible to group components related? all the components in a single domain with a single score. However, two under- Is there one single domain? lying domains emerged that regrouped diverse attitudes, behaviors, and skills. Table 7 presents how components are related to one another. The identification of domains was based on the meaning of these relationships for SMEs. More precisely, an SME that “sets and reviews financial goals and strategies,” “controls its budget,” “analyzes and develops business opportunities,” and “tries to attract investors” can be viewed as a Mana- gerially Inclined Entrepreneur who organizes the activities of the business in a manner that will be understandable by third parties, such as banks or potential financial investors. On the other hand, an SME that “gets information and financial advice,” “controls and keeps cash provisions to ensure its proper operability,” and in a responsible manner “keeps its business expenses separated from personal or household expenses” can be perceived as a Business Creator Entrepre- neur who is outward looking, keeps business affairs distinct from personal finances, and keeps his or her eyes set on the cash situation of the enterprise. TABLE 7: Underlying Financial Domains from Factor Analysis DOMAIN COMPONENT7 Managerially Inclined Entrepreneur Analyzing and developing business opportunities Controlled budgeting Reviewing financial strategies Being responsible and diligent Setting detailed financial goals Attracting investors Business Creator Entrepreneur Getting information and advice Controlling and keeping cash provisions Keeping separate business expenses Source: WBG SME Financial Capability Survey, 2017. 20   Investigating the Financial Capabilities of SMEs 2.6.2:  Factors Associated with Higher SME trolled accounting,” “setting detailed financial goals,” Financial Capability “reviewing financial strategies,” and “analyzing and developing business opportunities.” Companies in the Regression results and intracategory comparison suggest highest level of sales achieved higher component a significant relationship between financial-capability scores than those in the lowest level. The most import- components and level of sales, type of enterprise, loca- ant differences were in terms of “controlled account- tion of enterprise by income level of the country, finan- ing” (82 versus 14), “analyzing and developing business cial-product awareness, financial knowledge, ownership opportunities” (43 versus 15), and “controlled budget- of transactional accounts, access to finance, years of oper- ing” (40 versus 12). The balance was positive or almost ation, and a weaker relationship with the main economic zero for companies in the lowest segment with regard activity. Regression analysis was conducted to identify the to “getting information and advice” (55 versus 66) and type of enterprises most strongly associated with high “planning from the beginning with continuous owner’s scores for each component. Regression results show dif- support” (22 versus 21). ferences with the overall fit and the number of significant parameters. (See tables 10, 11, and 12.) In fact, it was pos- • Country income classification. The location of enter- sible to identify three sets of components according to prises was meaningfully related to “controlled account- their overall fit (measured by the adjusted R2 and the ing,” “controlled budgeting,” “setting detailed number of significant parameters). Table 8 presents these financial goals,” “being responsible and diligent,” sets in decreasing overall fit order. On the other hand, in “reviewing financial strategies,” “analyzing and devel- terms of explanatory variables, sales level, type of enter- oping business opportunities,” and “attracting inves- prise, income level of the country, financial-product tors.” As confirmed by the regressions and depicted in awareness, financial knowledge, and main economic figure 5 and figure 6, high scores are linked to the activity were meaningful characteristics leading to higher wealthiest locations. Financial-capability components scores. To observe the differences between these catego- that vary most compared to companies located in ries of enterprises, figures 7, 8, and 9 illustrate average low-income countries were “controlled accounting” (D financial-capability scores. The following paragraphs 57), “setting detailed financial goals” (D 36), “analyzing expose the main deviations between the various categori- and developing business opportunities” (D 27), and zations of companies. “controlled budgeting” (D 17). Enterprises in low-in- come countries score higher than those in high-income • Sales levels. This characteristic was significantly associ- countries on “getting information and advice” (D 10). ated with “getting information and advice,” “con- TABLE 8: Set of Components According to Their Overall Fit SET R2 COMPONENTS A 0.210–0.744 • Analyzing and developing business opportunities • Getting information and advice • Controlled accounting • Controlled budgeting • Planning from the beginning with continuous owner’s support B 0.123–0.179 • Risk taking • Reviewing financial strategies • Keeping separate business expenses • Setting detailed financial goals • Attracting investors C 0.023–0.097 • Controlling and keeping cash provisions • Being responsible and diligent • Diversifying cash strategies Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   21 FIGURE 7: Average Financial-Capability Scores by SME Relevant Characteristic (I) Country income classification Risk taking Analyzing and developing business Attracting investors opportunities 47 Planning from the beginning with 43 40 Getting Information and advice continuously owners’ support 50 28 35 46 32 27 40 43 28 21 19 13 3 13 Setting detailed financial goals 41 0 Controlled accounting 49 33 60 13 1 18 75 30 18 3 12 17 15 38 40 Keeping business expenses 58 56 20 35 42 Controlled budgeting separated 61 59 29 42 44 42 55 61 Controlling and keeping cash provisions Diversifying cash strategies 49 50 58 56 Being responsible and diligent 59 Reviewing financial strategies Low income Lower middle income Upper middle income High income Source: WBG SME Financial Capability Survey, 2017. FIGURE 8: Average Financial-Capability Scores by SME Relevant Characteristic (II) Sales level (first quartile vs. fourth quartile) Risk taking Analyzing and developing business Attracting investors opportunities Planning from the beginning with 45 Getting Information and advice continuously owners’ support 43 53 27 22 21 15 45 7 82 Setting detailed financial goals 46 Controlled accounting 18 0 14 13 12 55 40 Keeping business expenses 66 27 37 40 Controlled budgeting separated 46 61 58 53 Controlling and keeping cash provisions Diversifying cash strategies Being responsible and diligent Reviewing financial strategies First quartile Fourth quartile Source: WBG SME Financial Capability Survey, 2017. 22   Investigating the Financial Capabilities of SMEs FIGURE 8, continued Type of enterprise Risk taking Analyzing and developing business Attracting investors opportunities Planning from the beginning with Getting Information and advice continuously owners’ support 38 64 27 31 22 27 27 Setting detailed financial goals 33 3 Controlled accounting 55 20 29 3 31 20 17 22 40 18 Keeping business expenses 43 Controlled budgeting separated 74 44 49 55 44 52 Controlling and keeping cash provisions Diversifying cash strategies Being responsible and diligent Reviewing financial strategies Small (5–19 employees) Medium (20–99 employees) Source: WBG SME Financial Capability Survey, 2017. FIGURE 8, continued Financial-knowledge score Risk taking Analyzing and developing business Attracting investors opportunities 53 53 Planning from the beginning with Getting Information and advice continuously owners’ support 63 53 23 41 13 14 Setting detailed financial goals 19 73 Controlled accounting 39 16 0 14 9 14 52 41 Keeping business expenses 69 37 30 Controlled budgeting separated 40 45 67 Controlling and keeping cash provisions Diversifying cash strategies 62 67 Being responsible and diligent Reviewing financial strategies Low (Financial knowledge score) High (Financial knowledge score) Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   23 FIGURE 8, continued Financial-literacy score Risk taking Analyzing and developing business Attracting investors opportunities Planning from the beginning with Getting Information and advice continuously owners’ support 38 33 50 33 23 25 45 Setting detailed financial goals 5 Controlled accounting 37 0 18 52 19 8 6 54 18 29 Keeping business expenses 25 32 29 73 Controlled budgeting separated 41 54 53 49 Controlling and keeping cash provisions Diversifying cash strategies Being responsible and diligent Reviewing financial strategies Low-medium (Financial literacy score) High (Financial literacy score) Source: WBG SME Financial Capability Survey, 2017. FIGURE 9: Average Financial-Capability Scores by SME Relevant Characteristic (III) Ownership of transactional accounts Risk taking Analyzing and developing business Attracting investors opportunities Planning from the beginning with 39 Getting Information and advice continuously owners’ support 32 26 47 25 19 42 37 4 52 Setting detailed financial goals Controlled accounting 15 1 24 23 8 16 29 56 18 Keeping business expenses 62 Controlled budgeting separated 39 42 47 52 47 Controlling and keeping cash provisions Diversifying cash strategies 53 Being responsible and diligent Reviewing financial strategies Doesn’t own transactional accounts Owns transactional accounts Source: WBG SME Financial Capability Survey, 2017. 24   Investigating the Financial Capabilities of SMEs FIGURE 9, continued Access to finance Risk taking Analyzing and developing business Attracting investors 45 opportunities 39 Planning from the beginning with 33 54 Getting Information and advice continuously owners’ support 41 26 44 6 52 Setting detailed financial goals 35 19 3 40 Controlled accounting 32 20 46 17 28 Keeping business expenses 23 Controlled budgeting separated 59 48 43 56 Diversifying cash strategies 50 Controlling and keeping cash provisions 50 56 Being responsible and diligent Reviewing financial strategies Doesn't have access to finance Has access to finance Source: WBG SME Financial Capability Survey, 2017. FIGURE 9, continued Years of operation Risk taking Analyzing and developing business Attracting investors 60 opportunities Planning from the beginning with 38 Getting Information and advice continuously owners’ support 31 42 44 16 51 Setting detailed financial goals 39 3 Controlled accounting 0 35 27 12 2 16 12 57 28 65 18 Keeping business expenses Controlled budgeting separated 45 41 53 52 49 Controlling and keeping cash provisions Diversifying cash strategies 53 Being responsible and diligent Reviewing financial strategies Youngest enterprises (Op. 2013–2016) Oldest enterprises (Op. before 1989) Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   25 FIGURE 9, continued Main economic activity Risk taking Analyzing and developing business Attracting investors opportunities 36 Planning from the beginning with 35 Getting Information and advice continuously owners’ support 29 46 26 44 32 22 20 42 6 21 Setting detailed financial goals 31 4 Controlled accounting 19 37 43 32 32 20 41 2 16 21 22 17 Keeping business expenses 57 18 58 60 Controlled budgeting separated 47 40 47 50 46 50 Controlling and keeping cash provisions Diversifying cash strategies 51 44 52 Being responsible and diligent Reviewing financial strategies Agriculture, forestry, fishing Manufacturing, construction Trade & Services Source: WBG SME Financial Capability Survey, 2017. • Type of enterprise. This characteristic was significantly • Financial-product awareness. Financial-product knowl- associated with 9 of 13 capability components. “Con- edge was closely and positively linked to 11 of 13 capa- trolled accounting,” “diversifying cash strategies,” bility components. In particular, financial-product “controlled budgeting,” “setting detailed financial awareness had little to do with “being responsible and goals,” and “attracting investors” were the compo- diligent” or “setting detailed financial goals.” The nents that did not show a strong correlation with this score comparison between enterprises with a high level explanatory variable. Medium-size enterprises showed of awareness of financial products and those with a low better results than their small counterparts with regard level of awareness revealed that the former obtained to average scores. There were small differences (0–7) better results, with deviations from 13 points to 58 with “risk taking,” “planning from the beginning with points. On the other hand, as described in section continuous owner’s support,” “setting detailed finan- 2.3.2, financial-product awareness8 is one of the core cial goals,” “controlled budgeting,” “reviewing finan- elements of financial capability. Upon further explora- cial strategies,” and “attracting investors.” However, tion, the survey results indicate that SME participants score variations increased (12–37) when “getting infor- are familiar with 4.6 different products (see figure 10), mation and advice,” “controlled accounting,” and mainly with checking and savings accounts, as can be “controlling and keeping cash provisions” were ana- seen in figure 11. Small enterprises located in low-in- lyzed. “Keeping separate business expenses” was part come and low middle-income countries were further- of this last group of components, but the difference more less likely to know about financial products, as was in favor of small enterprises. figure 12 presents. 26   Investigating the Financial Capabilities of SMEs FIGURE 10: Distribution of Financial-Product Awareness Scores 20% 18.8% 18.3% 18% 16.0% 16% 14% 13.0% 12.3% 12% 10% 8% 6.5% 6% 5.2% 3.7% 4.2% 4% 2% 1.0% 1.0% 0% 0 1 2 3 4 5 6 7 8 9 10–13 Source: WBG SME Financial Capability Survey, 2017. FIGURE 11: Overview of Financial-Product Awareness by Type of Products 80% 77% 70% 58% 60% 56% 50% 46% 43% 42% 40% 37% 36% 30% 26% 20% 16% 10% 7% 7% 6% 0% Checking Insurance Government Term Loan or Loan or Electronic Internet Electronic Trade Investment Investment Factoring/ or saving products subsidy deposits line of line of payments Banking payments financing from from leasing account programs credit from, credit through through a venture private microfinance from a mobile money capital funds, equity organization, banks phone transfer or angel funds cooperatives or service investors credit union Source: WBG SME Financial Capability Survey, 2017. • Financial knowledge. Regression results suggest a core elements of financial capability. A deeper explo- relationship between planning components and finan- ration indicated that SME participants are able to cial literacy.9 (See tables 10, 11, and 12.) In fact, this answer 7.6 of 10 questions correctly. (See figure 13.) In characteristic is linked to “analyzing and developing particular, more than two-thirds of SMEs were able to business opportunities,” “reviewing financial strate- perform simple divisions, estimate simple and com- gies,” and “planning from the beginning with continu- pound interest, compare bargains, and understand ous owner’s support.” Companies that show a low inflation, as can be seen in figure 14. Medium enter- financial-literacy level obtained lower component prises that have a high level of sales, are managed by scores than those that have high financial knowledge. men, and are located in upper middle-income and The score deviation between these two groups varied high-income countries were more likely to know about from 4 points to 35 points. The balance was positive or financial concepts, as figure 15 presents. zero for enterprises with a low financial-literacy level • Main economic activity. Regression results indicate regarding “analyzing and developing business oppor- that the sector where enterprises develop their activi- tunities,” “diversifying cash strategies,” and “keeping ties was linked to three capability components: business expenses separate.” Similar to financial-prod- “reviewing financial strategies,” “risk taking,” and uct awareness, financial knowledge is one part of the Financial-Capability Survey of SMEs   27 FIGURE 12: Average Financial-Product Knowledge by Type of Enterprise, Country Income Classification, Gender, and Main Economic Activity 7.00 6.54 5.00 4.73 6.40 6.33 6.31 4.47 6.00 4.19 4.00 5.00 4.54 4.00 3.00 3.39 3.15 3.00 2.65 2.00 2.00 1.00 1.00 0.00 0.00 Low Lower Upper High Low Lower Upper High Agriculture, Manufacturing, Trade & Income Middle Middle Income Income Middle Middle Income forestry, construction Services Income Income Income Income fishing Small (1–19 employees) Medium (20–99 emloyees) Main economic activity 8.00 7.10 7.00 Male 6.73 6.58 6.38 6.42 6.39 Female 6.04 6.00 5.33 5.00 4.58 4.50 4.00 3.55 3.21 3.24 3.07 3.00 2.76 2.75 2.00 1.00 0.00 Low Lower Middle Upper Middle High Low Lower Middle Upper Middle High Income Income Income Income Income Income Income Income Small (1–19 employees) Medium (20–99 emloyees) Source: WBG SME Financial Capability Survey, 2017. FIGURE 13: Financial-Literacy Distribution 25% 23.5% 20.7% 20% 18.3% 15% 14.3% 12.7% 10% 7.2% 5% 2.8% 0.0% 0.0% 0.0% 0.5% 0% 0 1 2 3 4 5 6 7 8 9 10 Source: WBG SME Financial Capability Survey, 2017. 28   Investigating the Financial Capabilities of SMEs FIGURE 14: Financial-Literacy Quiz Overview (Percentage of Correct Answers) 100% 87% 90% 84% 83% 80% 78% 78% 77% 76% 80% 70% 59% 58% 60% 50% 40% 30% 20% 10% 0% Simple Inflation Compare Simple Compound Increase Purpose of Risk Repay Income division bargain interest interest price insurance diversification credit stream product to protection return to the original price Source: WBG SME Financial Capability Survey, 2017. FIGURE 15: Average Financial-Literacy Score by Sales Level (First Quartile versus Fourth Quartile), Country Income Classification, Type of Enterprise, and Gender Sales level Gender Main economic activity 10.00 8.00 7.66 7.52 8.00 7.49 7.63 7.59 9.00 8.58 7.00 7.00 8.00 6.98 6.00 6.00 7.00 6.00 5.00 5.00 5.00 4.00 4.00 4.00 3.00 3.00 3.00 2.00 2.00 2.00 1.00 1.00 1.00 0.00 0.00 0.00 First quartile Fourth quartile Male Female Agriculture, Manufacturing, Trade & forestry, construction Services Type of enterprise and country income classification fishing 10.00 9.19 8.85 9.00 8.11 8.29 7.66 8.00 7.03 7.08 7.00 6.24 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Low Lower Middle Upper Middle High Low Lower Middle Upper Middle High Income Income Income Income Income Income Income Income Small (1–19 employees) Medium (20–99 emloyees) Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   29 “attracting investors.” (See tables 10, 11, and 12.) In companies with and without transactional accounts. terms of average scores, the biggest differences were On the other hand, “planning from the beginning with seen with enterprises operating in the trade and ser- continuous owner’s support,” “risk taking,” “analyzing vices sector and agriculture, fishing, and forestry sector and developing business opportunities,” “controlled with regard to “analyzing and developing business accounting,” and “getting information and advice” are opportunities” (29 versus 21). Agriculture, fishing, and the biggest variations between SMEs with access to forestry enterprises scored 37 points on “controlled finance and those without it. accounting,” while manufacturing enterprises scored • Years of operation. Results also suggest that number 43 points on this component. of years in operation matters in terms of financial capa- • Ownership of transactional accounts and access to bilities. (See figure 9 and tables 10, 11, and 12.) Com- finance. Results show important differences in terms of parison between the youngest enterprises (3 years and financial capabilities between enterprises with and less) and oldest enterprises (27 years of operation or without transactional accounts. (See figure 9 and tables more) indicates that the latter group outperformed 10, 11, and 12.) These differences are also pronounced their youngest counterparts in 10 financial capabilities. between SMEs that have access to finance10 and those (See table 9.) The most important difference is in terms that don’t have this type of access. As table 9 exposes, of “analyzing and developing business opportunities” enterprises with transactional accounts or companies (D 60), followed by “controlled accounting” (D 16), with access to finance obtain higher average scores for “controlled budgeting,” and “setting detailed finan- 12 financial capabilities. (“Keeping business and cial goals” (D 12). There is no difference in “being household expenses separate” was the only excep- responsible and diligent,” and the youngest compa- tion.) In particular, “controlled accounting,” “con- nies got better scores with regard to “planning from trolled budgeting,” “setting detailed financial goals,” the beginning with continuous owner’s support” (D 4) “risk taking,” and “analyzing and developing business and “getting information and advice” (D 2). opportunities” are in the top of disparities among TABLE 9: Differences of Component Scores by Ownership of Transactional Accounts, Financial Access, and Years of Operation DIFFERENCES (AVERAGE SCORES) Has transactional Has access to Oldest enterprises accounts vs. doesn’t have finance vs. doesn’t vs. youngest COMPONENT transactional accounts have access to finance enterprises Controlled accounting 28 11 16 Controlled budgeting 21 7 12 Setting detailed financial goals 14 3 12 Risk taking 13 13 7 Analyzing and developing business 13 13 60 opportunities Planning from the beginning with continuous 10 23 –4 owner’s support Controlling and keeping cash provisions 10 8 8 Reviewing financial strategies 8 7 8 Being responsible and diligent 6 6 0 Getting Information and advice 5 10 –2 Attracting investors 4 3 1 Diversifying cash strategies 2 6 6 Keeping separate business expenses –6 –13 8 Source: WBG SME Financial Capability Survey, 2017. 30   Investigating the Financial Capabilities of SMEs TABLE 10: Regression Results of Component Scores across Pilot Countries (I) ANALYZING AND GETTING RISK DEVELOPING BUSINESS INFORMATION CONTROLLED CONTROLLED VARIABLE TAKING OPPORTUNITIES AND ADVICE ACCOUNTING BUDGETING Financial-knowledge score 2.1496 *** 3.3218 *** 1.8161 ** 1.7131 *** 1.7658 Financial-literacy score –0.1463 1.5812 ** 0.2931 0.7506 0.8959 Main decision maker is a man –4.6694 ** 2.6508 0.2674 0.3893 2.8462 Small (5–19 employees) (baseline) Medium (20–99 employees) 4.9390 * –6.7407 *** 42.3579 *** 12.5444 *** –2.3550 Years of operation 0.0527 1.1471 *** 0.0648 –0.0249 0.0617 Registered (baseline) Not registered 1.5472 2.0533 –1.4062 –0.1526 2.1667 Low-income (baseline) Lower middle-income –3.4077 –2.6527 –5.6323 5.5341 *** 10.0593 Upper middle-income 4.3880 –7.7262 ** 0.8969 16.3774 *** 25.1364 High-income 7.3956 –14.9011 *** –2.2525 17.2481 *** 18.3771 First quartile (baseline) Second quartile –3.0499 4.5048 –14.9445 *** 7.2516 *** –2.5029 Third quartile 4.8799 2.7078 –24.5535 *** 14.6737 *** –6.9924 Fourth quartile 2.5364 15.9284 *** –22.1825 *** 42.9304 *** 5.7148 Has formal financial products 2.5233 –2.2640 1.9019 0.7815 4.6823 Own funds or retained earnings (baseline) Borrowed (from financial –0.2655 –1.3332 4.5343 –1.4364 4.4663 institutions or government) Obtaining goods and services 2.0578 –4.3708 * 1.0578 0.4151 2.7186 from suppliers Agriculture, forestry, fishing (baseline) Manufacturing, construction –6.9120 ** 0.7857 –0.3927 1.4744 –2.6135 Trade and services –4.6163 3.7088 1.1420 –0.1375 –1.1403 Adj R-squared 0.1359 0.5293 0.2317 0.7444 0.2101 Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   31 TABLE 11: Regression Results of Component Scores across Pilot Countries (II) ANALYZING AND GETTING RISK DEVELOPING BUSINESS INFORMATION CONTROLLED CONTROLLED VARIABLE TAKING OPPORTUNITIES AND ADVICE ACCOUNTING BUDGETING Financial-knowledge score 1.2074 * 1.2620 *** 0.3266 1.7545 ** –3.9105 Financial-literacy score 1.1012 1.6680 *** 0.3192 –1.3599 –0.5181 Male –1.2008 0.5930 –0.5087 2.3012 –0.2574 Small (5–19 employees) (baseline) Medium (20–99 employees) 8.6063 ** –3.4643 * –4.6737 ** –0.4199 –32.2952 Years of operation 0.0075 0.0271 –0.0641 –0.0440 0.1461 Registered (baseline) Not registered –0.1591 2.2971 –3.2279 –4.4590 3.8028 Low-income Lower middle-income –2.8643 3.3365 5.7168 ** –2.5167 6.1670 Upper middle-income 3.2124 6.3494 ** 11.2530 *** 1.8659 12.0113 High-income 5.5515 10.0175 ** 9.8452 ** 8.5283 12.5736 First quartile (baseline) Second quartile 1.5286 3.7017 2.4666 1.9870 0.4750 Third quartile 4.3181 4.5226 * 3.9080 1.6582 –3.7345 Fourth quartile 7.3343 6.7427 * 7.7833 ** 9.0640 8.4922 Has formal financial products 0.5096 –2.1131 –0.5620 –6.1901 * –0.5673 Own funds or retained earnings (baseline) Borrowed (from financial 2.9974 1.0358 –0.5710 2.1681 –4.8184 institutions or government) Obtaining goods and services –1.6268 –0.5185 –3.5299 2.3861 0.5185 From suppliers Agriculture, forestry, fishing (baseline) Manufacturing, construction –1.7554 5.4204 ** –1.8534 –0.7009 –0.8186 Trade and services 1.2964 3.0054 –2.4495 0.9438 1.2171 Adj R-squared 0.0643 0.1653 0.0975 0.0237 0.1658 Source: WBG SME Financial Capability Survey, 2017. 32   Investigating the Financial Capabilities of SMEs TABLE 12: Regression Results of Component Scores across Pilot Countries (III) PLANNING FROM THE SETTING DETAILED BEGINNING WITH ATTRACTING VARIABLE FINANCIAL GOALS CONTINUOUS OWNER’S SUPPORT INVESTORS Financial-knowledge score 0.0493 6.0481 *** ** 0.6495 Financial-literacy score 0.4908 1.6171 * 0.0799 Male 2.2192 3.5338 –0.1628 Small (5–19 employees) (baseline) Medium (20–99 employees) –3.8638 –5.6106 ** 0.1609 Years of operation 0.0381 -0.1956 *** –0.0341 Registered (baseline) Not registered 4.5879 –1.6378 –0.1650 Low-income Lower middle-income 7.6883 *** 0.8163 –1.2747 Upper middle-income 14.2485 *** –5.0910 –0.1776 High-income 19.4896 *** –16.1574 *** 10.9276 *** First quartile (baseline) Second quartile 0.6532 3.9396 1.5155 Third quartile 10.2833 *** 4.7407 * 3.1682 Fourth quartile 12.4185 *** 0.3981 –0.2291 Has formal financial products 1.1699 0.6556 –0.1713 Own funds or retained earnings (baseline) Borrowed (from financial institutions or government) –0.0971 2.6491 –1.9191 Obtaining goods and services from suppliers 2.8123 –0.7744 –2.2486 Agriculture, forestry, fishing (baseline) Manufacturing, construction –2.3164 –1.2818 –1.9268 Trade and services –1.0615 0.0989 ** –3.8789 Adj R-squared 0.1797 0.2350 0.1235 Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   33 2.6.3:  Identifying SMEs to Target Enterprise segmentation identified five groups of pilot participants in terms of 1. Aggregation of financial financial-capability components. As section 2.5.1 explains, to complete the capabilities core elements evaluation of SME financial capability, a cluster analysis was used to segment Is there some differentiation the pilot population according to the range of 13 component scores. (See sec- 2. across analysis: Factor the enterprises? tion 2.5.3.) As a result of this process, five groups of enterprises were identified. constructing components It was not possible to conclude whether one cluster of companies was overall Are SME financial attitudes more capable than another. However, on average, companies in one cluster 3. related? Factor analysis: How are they related? were more financially capable in one (or more) component than enterprises in constructing domains another cluster. Table 13 shows the average characteristic of companies that How are SME financial belong to each cluster. The following paragraphs present differences across the 4. components Cluster analysis: related? five groups. indentifying Is vulnerable there one single groups domain? Can groups of enterprises be identified based on financial capability relationships? Are there vulnerable groups? TABLE 13: Average Characteristic of the Clusters VARIABLE CLUSTER 1 CLUSTER 2 CLUSTER 3 CLUSTER 4 CLUSTER 5 TOTAL Risk taking 30.37 34.83 43.57 30.77 36.87 33.89 Analyzing and developing business opportunities 25.86 23.79 49.70 18.79 27.42 27.07 Getting information and advice 0.39 83.80 78.13 56.87 44.40 44.79 Controlled accounting 34.25 35.00 63.64 37.19 49.87 41.36 Controlled budgeting 23.34 0.46 73.48 2.53 23.77 21.03 Controlling and keeping cash provisions 43.68 41.83 56.76 52.54 51.85 48.62 Reviewing financial strategies 44.92 39.87 52.59 42.14 42.72 44.07 Being responsible and diligent 51.31 48.26 59.67 45.97 51.85 50.64 Diversifying cash strategies 0.50 2.91 14.05 1.19 94.16 17.33 Keeping separate business expenses 83.51 95.85 44.21 11.06 58.78 58.03 Setting detailed financial goals 31.53 27.04 41.52 27.60 36.41 31.88 Planning from the beginning with continuous 17.84 20.73 44.80 14.65 17.27 20.90 owner’s support Attracting investors 2.75 0.52 6.41 2.26 4.33 3.00 Financial-knowledge score 4.05 4.03 7.50 4.07 4.44 4.56 Financial-literacy score 7.43 7.32 8.72 7.37 7.58 7.59 Main decision maker is a man 0.46 0.50 0.56 0.46 0.51 0.49 Financial decisions are made by the main decision 1.00 0.00 0.29 0.32 0.47 0.50 maker (alone) Medium (20–99 employees) 0.16 0.52 0.58 0.71 0.54 0.47 Registered 0.85 0.82 0.88 0.82 0.90 0.85 Low-income 0.24 0.41 0.03 0.43 0.26 0.29 Lower middle-income 0.39 0.34 0.22 0.37 0.26 0.33 Upper middle-income 0.20 0.16 0.54 0.12 0.15 0.21 High-income 0.17 0.09 0.22 0.08 0.33 0.17 First quartile 0.26 0.38 0.19 0.25 0.15 0.25 Second quartile 0.29 0.24 0.12 0.27 0.24 0.25 Third quartile 0.26 0.18 0.19 0.33 0.20 0.25 Fourth quartile 0.19 0.19 0.50 0.14 0.41 0.25 continued 34   Investigating the Financial Capabilities of SMEs TABLE 13, continued VARIABLE CLUSTER 1 CLUSTER 2 CLUSTER 3 CLUSTER 4 CLUSTER 5 TOTAL Has formal financial products 0.58 0.56 0.94 0.55 0.60 0.62 Own funds or retained earnings 0.60 0.49 0.62 0.48 0.46 0.54 Borrowed (from financial institutions or government) 0.20 0.29 0.26 0.37 0.32 0.28 Obtaining goods and services from suppliers 0.19 0.22 0.13 0.15 0.22 0.18 Agriculture, forestry, fishing 0.10 0.15 0.10 0.12 0.14 0.12 Manufacturing, construction 0.39 0.36 0.38 0.41 0.38 0.39 Trade and services 0.51 0.49 0.51 0.46 0.48 0.49 Years of operation 18.32 18.06 22.40 14.58 19.71 18.07 Oldest enterprises (Op. before 1989) 0.29 0.21 0.32 0.16 0.30 0.25 Old enterprises (Op. 1989–2005) 0.21 0.28 0.29 0.29 0.19 0.25 Young enterprises (Op. 2006–12) 0.25 0.29 0.29 0.24 0.35 0.28 Youngest enterprises (Op. 2013–16) 0.25 0.22 0.09 0.30 0.15 0.22 Number of observations 182 94 78 153 93 600 Source: WBG SME Financial Capability Survey, 2017. The group of noninformed and nondiversified companies cluster showed far higher scores for “controlled budget- (cluster 1). Companies in this cluster had the lowest scores ing,” “controlled accounting,” “analyzing and developing on “getting information and advice” and “diversifying business opportunities,” “planning from the beginning cash strategies.” In particular, this cluster never received a with continuous owner’s support,” “risk taking,” and top score across the 13 components. However, it achieved “attracting investors.” They have a high level of finan- the second highest score in terms of “keeping business cial-product awareness (on average 7.5), a high finan- expenses separate” and “reviewing financial strategies.” cial-literacy score (on average 8.72), and a high level of This group was mostly composed of small enterprises (84 financial inclusion (94 percent). They are also mainly medi- percent) for which the main decision maker was a woman um-size companies (around 60 percent). Almost two- (54 percent) who decided alone. Fifty-five percent of this thirds finance their operations mainly with their own funds group’s enterprises belong in the first quartile (26 percent) (or retained earnings). Around 80 percent of this cluster or second quartile of sales (29 percent). Around 63 per- belongs to the third or fourth quartile in terms of sales, cent of them were located in low-income (24 percent) or and more than two-thirds were located in upper mid- lower middle-income countries. dle-income or high-income countries. This group also showcased the oldest enterprises, on average having 22 The group of informed companies that keep business years of operation. expenses separate (cluster 2). Companies in this cluster had the best scores on “keeping business expenses sepa- Companies in cluster 4 keep cash provisions but do not rate” and “getting information and advice.” However, keep business expenses separate (cluster 4). Companies their most significant weaknesses were associated with in this cluster had one of the best average scores on “con- “controlled budgeting,” “attracting investors,” and trolling and keeping cash provisions,” but they showed “diversifying cash strategies.” Slightly more than half of the worst results with regard to “keeping business companies that composed this group were of medium expenses separate.” “Controlled budgeting” and “diver- size (52 percent). Men or women who do not make deci- sifying cash strategies” are areas that need improvement sions alone equally manage these companies. More than for companies in cluster 4. This group was composed three-quarters of this group were located in low-income mainly of medium-size enterprises (71 percent) that are (41 percent) or lower middle-income countries (34 per- financially managed by women (54 percent) who prefer to cent). Slightly less than two-thirds were enterprises in the make joint decisions. Only 20 percent of the companies low segments of sales: 38 percent were in the first quar- are situated in upper middle-income or high-income tile, and 24 percent were in the second quartile. countries, and less than half belong to the fourth or third quartile with regard to sales. This group was also charac- The group of enterprises with the highest average scores terized by having the lowest enterprise maturity, on aver- are very financially capable (cluster 3). Enterprises in this age 14 years of operation. Financial-Capability Survey of SMEs   35 The group that diversifies cash strategies (cluster 5). Parallel to analyzing financial capability, the second Companies in the fifth cluster scored the best average objective of the survey was to test the developed instru- result on “diversifying cash strategies.” While this group ment. Each participant rated the clarity, ease, and rele- had a score close to 95, other clusters achieved less than vance of the questions at the end of each section of the 15 points on this component. Companies belonging to questionnaire. In general, enterprises understood the cluster 5 also had the second-highest score on “attract- questionnaire and qualified it as relevant, and most did ing investors,” after cluster 3. In general, this group’s not find problematic questions that needed rephrasing. average results for the remaining components were very Data analysis, however, suggested that the question- close to the general average. Fifty-four percent of enter- naire could be refined to improve how actual financial prises that composed this group are of medium size. knowledge was captured. To understand this topic, They had the second-highest level of financial inclusion tables 14, 15, 16, and 17 and figure 16 contrast “declared (after those in cluster 3), use comparatively more options knowledge” versus “measured knowledge.” for borrowing (from financial institutions or the govern- ment), and obtain goods and services from suppliers as Respondents self-declare candidly their lack of financial the main source of financing. Around 41 percent of clus- knowledge when they see in the questionnaire that they ter 5 companies are in the highest quartile, and another are going to be queried about that knowledge. In effect, 20 percent are in the third quartile in terms of sales. They all the respondents who declared having little financial are financially managed by women (54 percent) who pre- knowledge responded “Don’t know” to all questions that fer to make joint decisions. Slightly less than half of these required specific definitions be given to the terms assets, establishments are situated in upper middle-income (15 liabilities, or profits. (See tables 14, 15, and 16.) This shows percent) or high-income (33 percent) countries. The the willingness of respondents to admit their lack of enterprise maturity is also high, with an average of 19 knowledge to avoid having to provide obviously incorrect years of operation. answers and be caught in a lie. This is also generally true of respondents who declared having expert or advanced The characterization of groups suggests that small enter- knowledge, even if in the latter cases their specific answers prises, companies established in the non-wealthiest loca- to knowledge tests are better classification indicators than tions, and companies with low levels of sales are more their self-declarations. vulnerable in terms of financial capability than medi- um-size companies that have a high level of sales and are Multiple-choice questions were furthermore created using located in the wealthiest countries. The overview of clus- answers provided by respondents who declared having ter characteristics, previously described, point toward expert or advanced knowledge. Indeed, when self-de- three main categorizations: type of enterprise, level of clared expert or advanced respondents gave definitions sales, and location in terms of welfare. More precisely, the of financial concepts in open-ended questions, their analysis reveals that small companies that have low levels answers tended to be more or less the same as those of sales and are located in the non-wealthiest countries shown in table 14, allowing the creation of accurate multi- tend to show comparatively fewer strengths. These results ple-choice answers to knowledge questions, and thus suggest that they should be targeted in the World Bank improving the efficacy of the questionnaire during imple- Group’s future strategies and interventions to increase mentation. SME financial capability. The following lessons on questionnaire design were drawn from these observations: (i) Self-declared knowl- FINALIZATION OF THE QUESTIONNAIRE 2.7:  edge should always be accompanied with effective tests of knowledge, because it invites candid answers from all Discrepancies between declared knowledge and actual participants. (ii) Respondents who self-declare little knowledge suggested that the survey questionnaire knowledge should not be queried further on their lack of originally used could be improved. As section 2.2.3 men- knowledge. (iii) Differentiating between respondents’ tions, the main objective of the Financial Capability Sur- knowledge levels requires the administration of specific vey of SMEs was to capture attitudes, behaviors, skills, knowledge questions. (iv) The formulation of choices and knowledge to determine what financial capability (right and wrong answers) should take the form of multi- means for small and medium-size enterprises. (Sections ple choices, and the choices should be extracted from 2.5.3, 2.6.1, 2.6.2, and 2.6.3 answered this question.) answers provided by respondents in the pilot survey. 36   Investigating the Financial Capabilities of SMEs In addition, table 17 presents the assessment of risk products associated with interest (investments, term against the definition of risk. Figure 16 shows respon- deposits, loans, or leasing) versus compound interest; (iv) dents’ understanding of financial products versus quiz declared knowledge about insurance versus purpose of results about financial concepts, as viewed the following insurance; and (v) declared knowledge about loans versus ways: (i) declared knowledge about investment versus repay credit. inflation; (ii) declared knowledge of products associated with interest (investments, term deposits, loans, or leas- The reformulated final version of the questionnaire that ing) versus simple interest; (iii) declared knowledge of considers these results is presented in annex E. TABLE 14: Description of Accounting Understanding versus Definitions Description of understanding about accounting concepts, including assets, liabilities, and profit TOPIC DEFINITION LITTLE BASIC ADVANCED EXPERT TOTAL What does Don’t know 100% 10% 1% 29% “assets” mean All utilization of funds that we have 0% 11% 10% 5% to you? Buildings and machines 1% 0.3% Cash 0.5% 3% 1% Elements used for production of our services 1% 1% Equipment and other durable goods owned 12% 10% 5% Everything on the left-hand side of the 1% 3% 1% balance sheet Inventories 2% 1% Inventory and cash, plus equipment, plus 6% 15% 3% receivables Investments 4% 2% Machinery and fixed stocks 1% 1% Machines and computers 0.5% 0.2% Money 7% 2% Money and cash 1% 1% Profits 3% 1% What is owned by the firm 85% 47% 63% 50% What does Don’t know 100% 10% 28% “liabilities” Debt 3% 2% 2% mean to you? Money owed to employees and others 8% 1% 3% 3% Money owed to suppliers 5% 2% Obligations 6% 18% 3% Owed to other persons 3% 1% Sources of funds 3% 0.2% What is owed by the firm 71% 90% 78% 60% Financial-Capability Survey of SMEs   37 TABLE 14, continued Description of understanding about accounting concepts, including assets, liabilities, and profit TOPIC DEFINITION LITTLE BASIC ADVANCED EXPERT TOTAL What does Don’t know 100% 2% 2% 26% “profits” Cash 2% 1% mean to you? Cash plus money from clients still to come 6% 2% Cash available 4% 2% Excess cash 7% 2% Good sales 0.5% 0.2% Left for investing 3% 1% Market price increases 1% 1% Money for next cycle of acquisitions 9% 1% 3% Money left after the year 9% 3% Revenue minus expenses 57% 96% 100% 59% Source: WBG SME Financial Capability Survey, 2017. TABLE 15: Number of Correct Definitions (Accounting) versus Description of Accounting Understanding by Country Income Classification (I) COUNTRY INCOME CLASSIFICATION NUMBER OF HIGH-INCOME UPPER MIDDLE-INCOME LOWER MIDDLE-INCOME TYPE OF CORRECT ENTERPRISE DEFINITIONS Description of understanding about accounting concepts, including assets, liabilities, and profit Advanced Advanced Advanced Expert Expert Expert Basic Basic Basic Little Little Little Small None 100% 100% 38% 0% 0% 19% 0% 0% 100% 0% 0% 0% employees) (1–19 1 of 3 0% 0% 9% 0% 0% 19% 14% 0% 0% 18% 0% 0% 2 of 3 0% 38% 22% 9% 0% 44% 62% 33% 0% 51% 39% 33% 3 of 3 0% 23% 70% 91% 0% 19% 24% 67% 0% 31% 61% 67% Medium None 100% 100% 21% 0% 0% 29% 0% 0% 100% 0% 0% 0% (20–99 employees) 1 of 3 0% 0% 11% 0% 0% 6% 9% 0% 0% 10% 0% 0% 2 of 3 0% 57% 26% 36% 0% 35% 57% 60% 0% 69% 44% 50% 3 of 3 0% 21% 63% 64% 0% 29% 35% 40% 0% 21% 56% 50% Total None 100% 100% 30% 0% 0% 23% 0% 0% 100% 0% 0% 0% 1 of 3 0% 0% 10% 0% 0% 14% 12% 0% 0% 15% 0% 0% 2 of 3 0% 48% 24% 23% 0% 41% 60% 50% 0% 59% 42% 44% 3 of 3 0% 22% 67% 77% 0% 23% 29% 50% 0% 26% 58% 56% Source: WBG SME Financial Capability Survey, 2017. 38  Investigating the Financial Capabilities of SMEs TABLE 16: Number of Correct Definitions (Accounting) versus Description of Accounting Understanding by Country Income Classification (II) COUNTRY INCOME CLASSIFICATION LOW-INCOME TOTAL NUMBER OF TYPE OF CORRECT Description of understanding about accounting concepts, including assets, ENTERPRISE DEFINITIONS liabilities, and profit Advanced Advanced Expert Expert Basic Basic Little Little Small None 100% 0% 0% N.A 100% 9% 0% 0% (1–19 employees) 1 of 3 0% 0% 0% N.A 0% 11% 6% 0% 2 of 3 0% 34% 33% N.A 0% 43% 40% 18% 3 of 3 0% 66% 67% N.A 0% 38% 54% 82% Medium None 100% 0% 0% 0% 100% 9% 0% 0% (20–99 employees) 1 of 3 0% 0% 0% 0% 0% 4% 4% 0% 2 of 3 0% 25% 28% 0% 0% 46% 41% 43% 3 of 3 0% 75% 72% 100% 0% 41% 55% 57% Total None 100% 0% 0% 0% 100% 9% 0% 0% 1 of 3 0% 0% 0% 0% 0% 8% 5% 0% 2 of 3 0% 30% 31% 0% 0% 44% 40% 33% 3 of 3 0% 70% 69% 100% 0% 39% 55% 68% Source: WBG SME Financial Capability Survey, 2017. TABLE 17: Risk Assessment versus Risk Meaning RISK ASSESSMENT No, I do No, I do not not know know whom No, it No, it is No, there how to I should turn is too too time- TOPIC DEFINITION Yes is no need do it to for help expensive consuming What does Change in client ownership 1% 1% risk mean Ebola coming back 1% 13% 9% 3% 8% 22% to you? Fluctuating income and fixed costs 4% 4% 5% 5% 10% 11% Insolvency of clients 2% 2% 1% 2% 3% Losing clients unexpectedly 5% 2% 1% 2% Losing everything 2% New competitors 2% 6% 5% 3% 3% Not being able to adjust cost 1% Political uncertainty 1% 1% 3% Political uncertainty with trading partners 1% To be nonviable 66% 4% 26% 5% Uncertain income 1% 3% 2% 11% Uncertainty 18% 73% 68% 56% 66% 56% Unexpected taxes and other regulation 1% 2% Source: WBG SME Financial Capability Survey, 2017. Financial-Capability Survey of SMEs   39 FIGURE 16: Understanding of Financial Products versus Financial Concepts Investment understanding vs. inflation Insurance understanding vs. insurance purpose 100% 100% 90% 90% 32% No (knowledge about insurance)— 80% 42% 80% Correct answer about purpose of No (knowledge about investments)— Correct answer about inflation insurance 70% 70% 60% 60% 10% No (knowledge about insurance)— No (knowledge about investments)— Incorrect answer about purpose of 50% 9% insurance Incorrect answer about inflation 50% 40% 40% 45% Yes (knowledge about insurance)— Correct answer about purpose of 30% 41% Yes (knowledge about investments)— 30% insurance Correct answer about inflation 20% 20% Yes (knowledge about insurance)— 10% Yes (knowledge about investments)— 10% Incorrect answer about purpose 8% Incorrect answer about inflation 13% of insurance 0% 0% Declared knowledge about investment vs inflation Declared knowledge about insurance vs purpose of insurance Financial-product understanding vs. simple interest Financial-product understanding vs. compound interest 100% No (knowledge about products associated 100% 12% with interest)—Correct answer about 13% No (knowledge about products 90% 90% 5% simple interest associated with interest)—Correct 5% 80% No (knowledge about products associated 80% answer about compound interest with interest)—Incorrect answer about No (knowledge about products 70% simple interest 70% associated with interest)—Incorrect 60% 60% answer about compound interest 50% 68% Yes (knowledge about products associated 50% 65% Yes (knowledge about products with interest)—Correct answer about associated with interest)—Correct 40% simple interest 40% answer about compound interest 30% 30% 20% 20% Yes (knowledge about products Yes (knowledge about products associated 10% 10% associated with interest)—Incorrect 15% with interest)—Incorrect answer about 17% answer about compound interest simple interest 0% 0% Declared knowledge about products associated with Declared knowledge about products associated with interest (investments, term deposits, loans or leasing) interest (investments, term deposits, loans or leasing) vs simple interest vs compound interest Loan understanding vs. repay credit Accounting understanding vs. literacy results 100% 8.50 8.33 90% 19% No (knowledge about loans)— Correct answer about repay credit 8.25 Financial literacy score 80% 16% 8.00 70% 7.80 60% No (knowledge about loans)— 7.75 Incorrect answer about repay credit 7.55 50% 7.50 40% Yes (knowledge about loans)— 40% Correct answer about repay credit 7.25 7.16 30% 20% 7.00 10% 26% Yes (knowledge about loans)— Incorrect answer about repay credit 6.75 0% Declared knowledge about loans vs repay credit 6.50 Little Basic Advanced Expert understanding understanding understanding understanding Source: WBG SME Financial Capability Survey, 2017. 40   Investigating the Financial Capabilities of SMEs NOTES 2.  Ideally, this explorative research would have been loans or lines of credit from banks; loans or lines of credit conducted in a diverse range of countries, but due to from a microfinance organization, cooperative, or credit budget constraints, it could be done in only one. Georgia union; investment from venture capital funds or angel was selected mainly due to the authorities’ interest in investors; investment from private equity funds; trade conducting the research, and because SMEs play a financing; factoring/leasing; insurance products; and significant role in Georgia’s economy, accounting for 42.7 government subsidy programs. A financial-products percent of employment and 20.6 percent of value added awareness index was constructed based on the number in 2013. Georgia has also made good progress toward of financial products known to survey participants. This economic advancement over the past decade, developing index ranges from 0 to 13, whereby 0 indicates respon- a more favorable environment for businesses. (By the time dents who are not familiar with any of the products the study was launched, the World Bank Group ranked offered in the marketplace. Respondents with a score Georgia 24th among 189 countries worldwide in its 2016 of 13, on the other hand, stated familiarity with all Doing Business report.) products asked about in the survey. United States, Canada, France, Barbados, Georgia, 3.  9. Survey SME participants were asked to take a quiz covering Jamaica, Botswana, Republic of South Africa, Dominican basic computation and financial concepts (simple division, Republic, Zambia, Kenya, Cote d’Ivoire, India, Pakistan, inflation, simple interest, compound interest, compare Philippines, Morocco, Tunisia, Liberia, Sierra Leone, bargain, purpose of insurance, risk diversification, repay Guinea, Burundi, Tanzania, Senegal, and Haiti. credit, increase price product to return to the original price, 4.  Étude Économique Conseil (EEC Canada), a Montreal- and income-stream protection). A financial-literacy index based consulting firm. was obtained based on the number of correct responses 5.  Small enterprises: between 5 and 19 employees. provided by each survey participant to the 10 financial- 6.  Medium-size enterprises: between 20 and 99 employees. literacy questions. This index ranges from 0 to 10, whereby 7.  Risk taking, controlled accounting, and planning from the 0 indicates respondents who answered all questions beginning with continuously owner’s support were loaded incorrectly, while a score of 10 indicates survey participants in different factors. They are not presented in the with a good understanding of fundamental financial underlying domains because of this situation. concepts and the ability to perform simple mathematical 8.  Survey SME participants were asked if they were familiar calculations. with checking or savings accounts; term deposits; Internet SMEs that have loans or lines of credit from banks, 10.  banking; electronic payments through a mobile phone; microfinance organizations, cooperatives, or credit unions, electronic payments through a money-transfer service; or grants. 3 LESSONS LEARNED AND SUGGESTIONS FOR NEXT STEPS The results of the financial-capability analysis (sections variables. It was possible to create scores for these 2.5 and 2.6) revealed that the two main purposes of the meaningful components and analyze the most import- SME survey had been accomplished. First, the SME ant differences across various categorizations. In par- questionnaire based on the findings of the FGDs and ticular, survey participants showed relative strengths in expert interviews were tested in 600 enterprises from 24 “keeping business expenses,” “being responsible and countries. The participants recognized the relevance of diligent,” and “controlling and keeping cash provi- this instrument, and they understood the questions. Sec- sions,” but areas of weakness were identified in ond, it was possible to analyze answers, and, most “attracting investors,” “diversifying cash strategies,” importantly, it was possible to discern the meaning and “planning from the beginning with continuous owner’s components of SME financial capability. The complete support,” and “controlled budgeting.” The analysis process of testing and answer evaluation underlines suggests a significant positive relationship between some important lessons/results: financial-capability components and level of sales (high sales level), type of enterprise (medium-size), • The designed SME questionnaire is applicable across location of enterprises by income level of the country the world, and it is useful to identify manifestations of (wealth locations), financial-product awareness (high financial capability. The pilot analysis indicates that the level), financial knowledge (high level), ownership of main Financial Capability Survey of SMEs accurately transactional accounts, having access to finance, and records different financial attitudes, motivations, and years of operation. behaviors through diverse qualitative questions with various measurement levels (nominal and ordinal). • It is possible to answer the question, “What is SME These manifestations of financial capability came from financial capability?” The third analysis suggests that different countries, levels of sales, wealth regions, sizes the main SME components of financial capability can- of enterprises, economic sectors, business maturity not be combined in a single domain measured by a levels, and business cultures. single score, but rather in two underlying domains: “Managerially Inclined Entrepreneur” and “Business • There are differences across enterprises in terms of Creator Entrepreneur.” The former is an aggregation financial capability. It was possible to derive “behav- of five dimensions: “set and review financial goals ioral” variables from the different financial attitudes and strategies,” “control SME budget,” “analyze and recorded by the survey instrument. The aggregation of develop business opportunities,” “act in a responsi- these core elements highlights the evident disparities ble and diligent manner,” and “attract investors.” The among SME financial-capability levels. Medium-size latter domain is defined by the components “get enterprises achieved the highest levels in the group of information and financial advice,” “control and keep “behavioral” variables. A second complementary anal- cash provisions,” and “keep business expenses sepa- ysis allowed main components (13) of SME financial rate from personal or household expenses.” These capability to be identified from these “behavioral” results suggest that SME financial capability can be   41 42   Investigating the Financial Capabilities of SMEs defined as a composite of knowledge, skills, atti- questions, yields a comprehensive assessment of SME tudes, and behaviors. financial capability, unlike any other instrument avail- able in the world. The survey is most certainly an asset • The set of enterprises can be segmented into groups from a public-policy perspective, as it provides with considering their financial-capability component lev- clarity areas of intervention and support to develop els. Every segment or group could be characterized in and deliver extension services targeting SME owners terms of the strengths and weaknesses of the 13 com- and managers. In particular, while SME bankers have ponents as well as the business environment. It was not an overview of financial capability based on SMEs’ possible to conclude whether one cluster was overall past performance, the financial-capability instrument more capable than another. However, on average, is a tool that allows the identification of strengths, companies in one cluster were more financially capa- underperformance, or gaps at earlier stages of the ble in one (or more) component than enterprises in business-development cycle, allowing for improved another cluster. In particular, segment characterization performance and productivity. This means that tar- suggested that small enterprises, companies estab- geted policies can be conceived and implemented lished in the non-wealthiest locations, and companies in advance to improve SMEs’ performance over time. with low levels of sales were more vulnerable in terms Not only is the improvement of entrepreneurs’ finan- of financial capability than medium-size companies cial capability positive for the enterprises themselves, that had a high level of sales and were located in the but it also influences the way they are perceived in the wealthiest countries. market—for example, attracting investors or affording • The designed SME instrument, which combines access to technical/support programs. self-assessment and direct testing to measure effective • Analysis of the SME instrument is a starting point for financial capabilities, can be understood as an asset for wider evaluation of SME financial capability. The test- public policy. The core elements of financial capabil- ing phase of the survey has ended, and the exploratory ity covered in the questionnaire aren’t recorded solely analysis highlights the instrument’s potential to capture by qualitative questions, where SMEs self-report their and understand SME financial capability as well as to financial capability level. Rather, the instrument also identify vulnerable groups. To have a global view of contains multiple questions that effectively measure SME financial capability, we recommend deploying the the understanding or knowledge of financial concepts survey at a larger scale. in theory and practice. This combination of self-as- sessment and direct testing, together with behavioral ANNEXES ANNEX A FOCUS-GROUP DISCUSSION GUIDE PREAMBLE (APPROXIMATELY FIVE MINUTES) general experience of entrepreneurs in this commu- nity. We are going to be taking notes, but that is only • Welcome the group, and thank participants for coming. to help us not forget any of the opinions or experi- • Introduce yourself and your team members: ences you share.” IF WE USE A RECORDER DURING – ”My name is... (or other names…, working as an THE SESSIONS, WE WILL GET THE AUTHORIZATION economist with EEC Canada, which is completing a OF PARTICIPANTS FIRST. mandate for the World Bank). I will be the modera- tor for this session.” 1.  INTRODUCTION/WARM-UP SESSION – ”I am today present with..., a senior economist from EEC Canada and a financial economist with (Approximately 10–20 minutes, about one to two minutes about 10 years of experience, most of which work- per participant) ing on financing issues. • Ask participants to introduce themselves, including – We are here today with a representative from the their educational background, their type of business, World Bank. He is the main researcher on the proj- when their business started operation, and the types of ect. financial services they use to manage their business – We have with us… and…, who will help us through finances (including informal or formal services, as the session by taking notes and conducting some appropriate). It is better to have a chart or table pre- simultaneous translations. pared beforehand on which you can write down pre- sentation elements. This should first list short IDs of the • EXPLAIN THE PROCESS OF THE SESSION. Tell them participants (nicknames are fine to create a dynamic that you will have time allotments for the topics to be atmosphere), then the identifying sector and number discussed and that you are inviting them all to talk in of years in business, and then the type of financial turn, but that they are welcome to discuss with or products they use, and the names or categories of pro- engage one another. Tell them that your role is not to viders. In this manner, participants can recognize at a decide who is right or wrong but simply to ensure that glance what they said and what others said, and the everybody stays on topic. If you have refreshments session can start in an orderly and dynamic manner. available during the session, invite participants simply Using a large flipchart for would be ideal (so that the to serve themselves, as in all likelihood, the two-hour papers can be used later during the session, or after session will be conducted without a formal break. the session to prepare the summaries). • Introduce the purpose of the discussion: “We would like to learn a bit about how entrepreneurs such as you use financial products, and your personal experiences 2. GENERAL FINANCIAL-MANAGEMENT with financial products. There are no right or wrong ISSUES answers; we are just interested in learning your opin- (Approximately 20 minutes, OR TWO MINUTES PER PAR- ions on a range of topics. Everything that is said here TICIPANTS. BE SURE TO ALLOW EVERYONE A SAY; IF will remain 100 percent anonymous, and we are inter- REQUIRED, PROBE THE SILENT PARTICIPANTS.) ested not as much in your individual story as with the 44 Annex A: Focus-Group Discussion Guide   45 PLEASE KEEP IN MIND THAT THE FOCUS GROUPS 3. SPECIFIC FINANCIAL-MANAGEMENT SHOULD HAVE MINIMAL FRAMING AND MINIMAL ISSUES INTERVENTION FROM THE FACILITATOR IN ORDER TO (Approximately 60 minutes. THERE ARE SIX SUBTOPICS. ALLOW THE FREE FLOW OF IDEAS AND DISCUSSION ALLOCATE 10 MINUTES, AND MAKE SURE THAT YOU AMONG THE PARTICIPANTS. HAVE A MAXIMUM OF A MINUTE PER PARTICIPANT. OTHERWISE, YOU WILL NOT HAVE ENOUGH TIME.) • Let’s talk a bit more about the financial services you mentioned using. What do you use these financial ser- • ONLY IF THE FOLLOWING AREAS HAVE NOT vices for? (Talk them through the different types: sav- ALREADY BEEN MENTIONED, CHECK IF PARTICI- ings, loans, insurance, etc.) How have they helped you PANTS FEEL THEY ARE RELEVANT, AND, IF SO, DIS- manage your business? What have been your positive CUSS THEM IN DETAIL, USING THE FOLLOWING and/or negative experiences using these products? STANDARD PROBES: Are there any financial services you would like to have – What sorts of things do/don’t financially capable access to but have not been able to obtain? entrepreneurs do? • What are the most important financial issues/chal- – What kind of skills and knowledge do financially lenges that you experience as business owners? What capable entrepreneurs have/not have? have you done to overcome these challenges? – What attitudes, motivations or aspirations do/don’t • Now I want to hear your opinion on what we call they have? “financially capable.” Can anyone guess what we – Of all those characteristics mentioned, which do might mean by this term? If participants provide you think are the most important? guesses, use this as starting point to share your expla- nation of financially capable. Otherwise, provide them a. Accounting and recordkeeping with the explanation you have prepared. BE PRE- PARED TO PROVIDE/SUGGEST A DEFINITION OF • As a business owner, how do you handle accounting FINANCIAL CAPABILITY. and recordkeeping? What kind of records do you keep (for example, for expenses, sales, and so forth)? What • Do you think financial capability is important? Why? records are you required to keep by law? What docu- • Thinking about your lives as entrepreneurs and busi- ments do you keep voluntarily? ness owners, what do you think makes for a financially • Probe: Do you separate family and business expenses/ capable business owner? Do you know any business accounts? Why or why not? Do you think it’s important owners whom you would describe as financially capa- to separate the two? ble? Why? What behaviors make you describe them as financially capable? • Discuss with the group the case of someone who claims being good at keeping accounts (STANDARD • What do you think makes a business owner less finan- PROBES). cially capable? What are the main differences you see between a business owner who handles finances well • Then discuss someone who is bad at keeping records and someone who doesn’t? and accounts (STANDARD PROBES). PROBES: b. Cash-flow management – What sort of things do/don’t financially capable • What kinds of cash needs do entrepreneurs usually SME owners do? face? Is it easy for entrepreneurs to know when, where, and how cash needs will arise? Why or why not? – What kind of skills and knowledge do financially capable entrepreneurs have/not have? • What are some good ways you think entrepreneurs can meet additional cash needs? (Probe if they personally – What attitudes, motivations, or aspirations do/ keep a cash cushion.) don’t they have? • Discuss with the group which strategies financially – Anything else? capable entrepreneurs have to increase cash inflows – Of all those characteristics mentioned, which do (such as discounts for cash payments). you think are the most important? • Discuss with the group which strategies financially capable entrepreneurs have to reduce cash outflows PROBE ALL POINTS RAISED FULLY, AND ARRIVE AT A (such as eliminating certain costs). CONSENSUS, IF POSSIBLE; IDENTIFY THE MINORITY VIEW, IF NOT. • Discuss with the group the case of someone who claims to be good at managing money/cash flows (STANDARD PROBES). 46   Investigating the Financial Capabilities of SMEs • Then discuss someone who is bad at managing • And do you know someone who is bad at choosing the money/cash flows (STANDARD PROBES). right sources of funds/financial services for his or her business needs (STANDARD PROBES)? How does he c. Creating and analyzing financial statements or she choose these services? What behaviors make • What kind of financial statements do you think are you say he or she is “bad at choosing the right sources important for entrepreneurs to use (for example, bal- of funds” (for example, paying high costs, having trou- ance sheets, income or cash-flow statements)? Why or ble obtaining finance when needed, and so forth)? why not? Getting and using information and advice on f.  • Discuss with the group which business decisions, if any, financial-management matters should be informed by the use of financial statements. • What sorts of information and advice about financial • Discuss with the group the case of someone who products do entrepreneurs need? What information and claims to be good at creating and analyzing financial advice is available to entrepreneurs in this community? statements (STANDARD PROBES). • What information and advice have you found helpful in • Then discuss someone who is bad at creating and ana- managing your business? (Probe on both information lyzing financial statements (STANDARD PROBES). and advice that is general and information that is prod- uct-specific.) Is there anything that you have found d. Planning for business expansions confusing about the information or advice you get? Is • Ask, Are any of you familiar with the concept of a busi- there any information or advice you wish you could ness plan? If yes, begin a discussion by asking them obtain but are not able to? what it means. If none is familiar with this term, provide • Discuss the case of someone who claims to be good a brief description. at getting information on these issues (STANDARD • Now that you know what a business plan is, have you PROBES). How does that person obtain this informa- ever used something like this in your business? Is it tion? common for entrepreneurs you know to use business • Then discuss someone who is bad at getting informa- plans? Do you think such plans are important for entre- tion (STANDARD PROBES). What makes the person preneurs to use? Why or why not? “bad” at getting financial information? • Discuss with the group what is needed to prepare for • Discuss the case of someone who claims to be good at an expansion (for example, activities related to prod- using the information on these issues (STANDARD ucts, pricing, planning for funding, and so forth). PROBES). How does he or she use this information • Discuss the case of someone who claims to be good at effectively? preparing for growing his or her business (STANDARD • Then discuss someone who is bad at using information PROBES). (STANDARD PROBES). What makes him or her “bad” • Then discuss someone who is bad at preparing for at using this information? growing a business (STANDARD PROBES). e. Financing a business SUMMING UP/CLOSING (APPROXIMATELY 4.  • What sources of funds/types of financial services do 10 MINUTES) entrepreneurs use to fund their businesses? • Is there anything else that relates to money/resources/ • As entrepreneurs, where do you go to fund your busi- finances that is important for SME owners? ness? If at a financial institution, what kind of financial services are available to you? Which do you use, and • Of all the things discussed, which one(s) do partici- how often? pants think are most important for a SME owner to be financially capable? • Do you know anyone who is good at choosing the right sources of funds/financial services for his or her • Thank the participants for coming and talking about business needs (STANDARD PROBES)? How does he these issues. Remind participants about their anonym- or she choose these financial services? What behaviors ity and reassure them that no names will be published make you say he or she is “good at choosing the right in any reports. Provide them with contact details in sources of funds” (for example, paying low costs, get- case they have any further questions or concerns ting finance quickly, and so forth)? ANNEX B EXPERT INTERVIEW GUIDE PREAMBLE sions, choices, or actions that SMEs owners or decision makers face? Introduce yourself and the other people present during the interview. Present the purpose of the research, and • In your opinion, what major financial decisions are define the general objectives of the interview. These SMEs prepared to make and which decisions are they objectives may change as the focus of the interview may less prepared to make? What information or factors vary from one expert to the other. Introduce those present might help them make those decisions? How often do during the interview. Follow the interview guide, and be your clients or SME owners seek help in making those ready to translate key answers. Some experts may speak types of decisions? English, in which case the interview can be conducted • What does the phrase “being financially literate/capa- mostly in English (with key expressions translated for the ble” mean to you? Please take a few minutes and write expert’s comfort). Verify with the expert whether you may down the first things that come to mind. If the inter- record the interview for note taking later. You may want to viewee provides guesses, use this as a starting point to provide interviewees with a generic grid showing ques- share your explanation of financially literate/capable. tions and answers representing demand-anchored issues Otherwise, provide the expert with the explanation you and supply-anchored issues. Present a clear definition of have prepared. BE PREPARED TO PROVIDE OR SUG- financial capability among SMEs, and ask the experts to GEST A DEFINITION OF FINANCIAL CAPABILITY. express an opinion on the definition and elements impact- • Do you think financial literacy/capability is important? ing this capability. Why? • Do you know any business owners (clients or not) whom you would describe as financially capable? GENERAL FINANCIAL-MANAGEMENT ISSUES Why? What behaviors make you describe them as • Let’s talk a bit more about the financial services you pro- financially capable? vide (banks) or know SMEs have (other experts). What • What do you think makes a business owner less finan- financial services do SMEs usually utilize? What have cially capable? What are the main differences between been your positive/negative experiences with these a business owner who handles finances well and some- products? Are there any financial services you would like one who doesn’t? to offer or give access to but have not been able to? • Do you think that business owners with certain types of • What are the most important financial issues/chal- personalities are more likely to experience greater lenges that SMEs face? financial success? Are entrepreneurs with certain per- • What are the biggest constraints that SMEs face in sonalities less likely to experience financial success? obtaining the right financial products for their needs? • What is the most valuable financial advice SMEs should PROBES: be given? – What kinds of things do/don’t financially capable SME owners do? PROBE: – What kind of skills and knowledge do financially Note to interviewer: Use this probe only if the respon- capable entrepreneurs have/not have? dent is having difficulty answering this question. In your – What attitudes, motivations, or aspirations do/ experience, what are the most important financial deci- don’t they have?   47 48   Investigating the Financial Capabilities of SMEs – Anything else? d. Financing a business – Of all those characteristics mentioned, which do • What sources of funds/types of financial services do you think are most important? entrepreneurs use to fund their businesses? Specific financial-management issues • In your opinion, where do entrepreneurs go to fund their business? If at a financial institution, what kind of a. Cash-flow management financial services are available to them? In your experi- ence, which services do they typically use, and how • What cash needs do entrepreneurs usually face? Is it often? easy for entrepreneurs to know when, where, and how cash needs will arise? Why or why not? • In your experience, how does a financially capable entrepreneur choose financial services? What behav- • What are some good ways you think entrepreneurs can iors make you say he or she is “good at choosing the meet additional cash needs? (Probe if in their experi- right sources of funds” (for example, paying low costs, ence, entrepreneurs keep a cash cushion.) getting finance quickly, and so forth)? • What strategies do financially capable entrepreneurs • What are characteristics of someone who is bad at employ to increase cash inflows (for example, dis- choosing the right sources of funds/financial services counts for cash payments)? for his or her business needs (STANDARD PROBES)? • What strategies do financially capable entrepreneurs How does he or she choose these financial services? use to reduce cash outflows (such as eliminating costs)? What behaviors make you say he or she is “bad at choosing the right sources of funds” (for example, pay- b. Creating and analyzing financial statements ing high costs, having trouble obtaining finance when • What kind of financial statements are important for needed, and so forth)? entrepreneurs to use (for example, balance sheets, income or cash-flow statements)? Why or why not?  etting and using information and advice on e. G financial-management matters • Which business decisions, if any, should be informed by the use of financial statements? • What sorts of information and advice about financial products do entrepreneurs need? What information and • What would be the characteristics of someone who is advice is available to entrepreneurs in this community? good at creating and analyzing financial statements (STANDARD PROBES)? • What would be the characteristics of someone who is good at getting information on these issues (STAN- • What would be the characteristics of someone who is DARD PROBES)? How does she or she obtain this bad at creating and analyzing financial statements information? (STANDARD PROBES)? • Discuss someone who is bad at getting information c. Planning for business expansions (STANDARD PROBES)? What makes him or her “bad” at getting financial information? • In your experience, is it common for entrepreneurs you know to use business plans? Do you think such plans • How about someone who is good at using information are important for entrepreneurs to use? Why or why on these issues (STANDARD PROBES)? How does he not? or she use this information effectively? • What do you think is needed to prepare for an expan- • How about someone who is bad at using information sion (for example, activities related to products, pric- (STANDARD PROBES)? What makes him or her “bad” ing, planning for funding, and so forth)? at using this information? • What would be the characteristics of someone who is good at preparing for growing his or her business SUMMING UP/CLOSING (STANDARD PROBES)? • What would be the characteristics of someone who is • Is there anything else that relates to money/resources/ bad at preparing for growing his or her business finances that is important for SME owners? (STANDARD PROBES)? • Of all the things discussed, which one(s) do you think are most important for a SME owner to be financially capable? • Provide the interviewee with contact details in case he or she has any further questions or concerns. ANNEX C PROFILE OF SURVEYED SMEs FIGURE 17: Surveyed SME by Gender of FIGURE 19: Surveyed SME by Type of Enterprise Respondent 51% Female, n = 308 47% Medium (20–99 employees), n = 283 49% Male, n = 292 53% Small (5–19 employees), n = 317 Source: WBG SME Financial Capability Survey, 2017. Source: WBG SME Financial Capability Survey, 2017. FIGURE 18: Surveyed SME by Education of FIGURE 20: Surveyed SME by Beginning Respondent of Operations Youngest enterprises (Op. 2013–2016), 15% Secondary school, n = 133 n = 90 22% Oldest enterprises 25% (Op. before 1989), n = 150 28% Vocational or technical school, Old enterprises n = 171 25% (Op. 1989–2005), n = 151 57% Tertiary education, n = 339 28% Young enterprises (Op. 2006–2012), n = 166 Source: WBG SME Financial Capability Survey, 2017. Source: WBG SME Financial Capability Survey, 2017.   49 50   Investigating the Financial Capabilities of SMEs FIGURE 21: Surveyed SME by Legal Status FIGURE 24: Surveyed SME by Current Usage of Formal Financial Products 15% Not registered, n = 89 38% No, n = 229 85% Registered, n = 511 62% Yes, n = 371 Source: WBG SME Financial Capability Survey, 2017. Source: WBG SME Financial Capability Survey, 2017. FIGURE 22: Surveyed SME by Country Income FIGURE 25: Surveyed SME by Main Source Classification of Financing Obtaining goods and 29% Low income, 18% services from suppliers, n = 175 n = 109 17% High income, n = 100 54% Own funds or retained earnings, n = 321 21% Upper middle income, n = 125 28% Borrowed (from financial institutions or goverment), 33% Lower middle income, n = 170 n = 200 Source: WBG SME Financial Capability Survey, 2017. Source: WBG SME Financial Capability Survey, 2017. FIGURE 23: Surveyed SME by Level of Sales FIGURE 26: Surveyed SME by Main Economic Activity 25% First quartile, n = 152 12% Agriculture, forestry, fishing, n = 72 25% Fourth quartile, n = 150 25% Third quartile, 39% Manufacturing, n = 149 construction, n = 233 49% Trade & Services, n = 295 25% Second quartile, n = 149 Source: WBG SME Financial Capability Survey, 2017. Source: WBG SME Financial Capability Survey, 2017. ANNEX D METHODOLOGY FOR FINANCIAL-CAPABILITY ANALYSIS Tables 18, 19, 20, 21, and 22 present the purpose and methodology of each step followed for the SME financial capability analysis—that is, (1) aggregation of financial-capability core elements; (2) factor analysis: constructing components; (3) factor analysis: constructing domains; and (4) cluster analysis: identifying vulnerable groups. TABLE 18: Steps to Analyze SME Financial Capability (Part I) SECTION 2.5.2: STEP 1 Aggregation of financial-capability core elements The core elements of financial capability (attitudes, behaviors, skills, financial knowledge, 1. Aggregation of financial and financial-product awareness) are covered in the survey instrument by 59 ”behavioral” capabilities core elements variables and two variables that record SMEs’ understanding of financial products and financial concepts. All of these variables were recoded or reorganized in ascending order, Is there some differentiation 2. across analysis: Factor the enterprises? where the lowest level of these derived variables represent the “lowest capability” and the constructing components highest level could be interpreted as the “highest capability.” For example, one of the Are SME financial attitudes variables that capture the general behavior “getting information and advice” was reorga- 3. related? Factor analysis: How are they related? nized into three levels: Enterprises that do not typically ask for financial advice are part of constructing domains the lowest level. Those that ask for advice but not from a team of experts belong to the How are SME financial moderate level. Those that asked for it from a team of experts had the highest level of 4. components Cluster analysis: related? financial capability. Table 19 details the particulars of these “behavioral” variables. In this indentifying Is vulnerable there one single groups domain? context, “lowest capabilities” are when enterprises are not familiar with financial products Can groups of enterprises be or concepts, and “highest capabilities” are when enterprises were familiar with 13 financial identified based on financial products or 10 financial concepts asked by the survey. capability relationships? Are there vulnerable groups? These transformations were made to estimate an aggregated exploratory indicator in order to observe differences across enterprises as the first step to understand SME finan- cial capability. The aggregation of the transformed variables for each enterprise then formed an individual indicator. An enterprise that was part of the “best situation” for every attitude or behavior gave its indicator 198 points, as figure 27 illustrates.   51 52   Investigating the Financial Capabilities of SMEs SECTION 2.5.2: STEP 1, continued FIGURE 27: Aggregated Exploratory Indicator of Financial Capability Lowest level Lowest level Lowest level Lowest level Lowest level (”lowest (”lowest (”lowest (”lowest (”lowest Lowest capability capability”) capability”) capability”) capability”) capability”) (1 point) Highest capability Highest level Highest level Highest level Highest level Highest level (max. 198 points) (”highest (”highest (”highest (”highest (”highest capability”) capability”) capability”) capability”) capability”) 59 behavioral variables & Understanding of behavioral financial products & Understanding of financial concepts Source: WBG SME Financial Capability Questionnaire, 2017. TABLE 19: “Behavioral” (or Derived) Variables COMBINATION VARIABLE MEANING FROM SECTION VALUES REV_N_A1A Financial-management A1 1 Strongly disagree understanding 2 Disagree 3 Agree 4 Strongly agree REV_N_A1B Marketing aspect understanding A1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_N_A1C Business strategy aspect A1 1 Strongly disagree understanding 2 Disagree 3 Agree 4 Strongly agree REV_REC_SEPFAMBUS Business vs. family budgets SCR3B 0 Together (business and household finances) 1 Separate (business and household finances) REV_BEH_NEWTECH Expand scope of business and C2 1 No research new technology 2 Expand scope but don’t research new technology 3 Expand scope and research new technology REV_BEH_GETINFO Getting information and advice D1 1 No (frequency) 2 Yes, rarely 3 Yes, sometimes 4 Yes, regularly REV_BEH_GOAL_GETINFO Getting information and advice D1 1 No (circumstances) 2 Yes, other (starting or expanding business, accessing finance or bookkeeping) 3 Yes, when faced with financial losses or troubles Appendix D: Methodology for Financial-Capability Analysis   53 TABLE 19, continued COMBINATION VARIABLE MEANING FROM SECTION VALUES REV_BEH_TEAM_GETINFO Getting information and advice D1 1 No (team of experts) 2 Yes, but not from a team of experts 3 Yes, from a team of experts REV_BEH_BUDGET Have a written budget (length of A4 1 No time) 2 Yes, 12 months 3 Yes, 6 months 4 Yes, 1–3 months REV_BEH_STICK_BUDGET Have a written budget (stick to it) A4 1 No 2 Yes, never 3 Yes, sometimes 4 Yes, often 5 Yes, always REV_BEH_UPDATE_FINST Prepare financial statement (content) A7 1 No 2 Yes, not including the four statements 3 Yes, including balance statement, income state- ment, changes in equity and cash-flow statements REV_BEH_CERTIF_FINST Prepare financial statement A7 1 No (certified) 2 Yes, not certified by an external auditor 3 Yes, certified by an external auditor REV_BEH_COMPU_ACCSYS Have a computerized accounting A8 1 No system 2 Yes, formal financial statements prepared were not up to date 3 Yes, formal financial statements prepared were up to date REV_BEH_RISK Risk assessment B4 1 No 2 Evaluate market/political evolution 3 Analyze sales progress 4 Research how many competitors 5 Compare the establishment to similar ones REV_BEH_KEYIND Track and update project milestones D2 0 No 1 Yes REV_BEH_SETFINGOAL Set or review specific financial goals A6 1 No 2 Yes, rarely 3 Yes, sometimes 4 Yes, regularly REV_BEH_LTFINPLAN Long-term financial planning C3 1 No (five years) 2 Yes, plan includes only one aspect 3 Yes, plan includes all relevant aspects REV_BEH_PLANSTART Business plan when the establish- C1 0 No ment started the business 1 Yes REV_BEH_BUSIPLAN Expand scope of business and C2 1 No create business plan 2 Expand scope but don’t create a business plan 3 Expand scope and create a business plan REV_BEH_MARKANAL Expand scope of business and C2 1 No marketing analysis 2 Expand scope but don’t conduct marketing analysis 3 Expand scope and conduct marketing analysis REV_BEH_PROJSALES Expand scope of business and C2 1 No budget sales and cost 2 Expand scope but don’t budget sales and costs 3 Expand scope and budget sales and costs 54   Investigating the Financial Capabilities of SMEs TABLE 19, continued COMBINATION VARIABLE MEANING FROM SECTION VALUES REV_BEH_NEWALTER Expand scope of business and C2 1 No analyze new alternatives 2 Expand scope but don’t analyze new alternatives 3 Expand scope and analyze new alternatives REV_BEH_RECORDCASH Use records to see how much cash A9 0 No the business has at any time 1 Yes REV_BEH_RECORDSALES Use records to know about sales A9 0 No 1 Yes REV_BEH_CASHPROV Keep cash provisions B1 0 No 1 Yes REV_BEH_RATECASHFL Cash-flow rate B3 1 Bad 2 Average 3 Good 4 Very good REV_BEH_CASHPROVPERS Keep cash provisions (personal) B5 0 No 1 Yes REV_BEH_MINSPEND Minimize spending B2 0 No 1 Yes REV_BEH_OFFERDIS Offering discount and low price B2 0 No 1 Yes REV_BEH_MONRECEI Monitoring of receivables B2 0 No 1 Yes REV_BEH_PAYFACILI Payment facilities for early payers B2 0 No 1 Yes REV_BEH_INCRESALES Increasing sales B2 0 No 1 Yes REV_BEH_OWNERFUND Access to owner’s personal funds B2 0 No 1 Yes REV_BEH_OWNERFUNDCR Access to owner’s personal funds C7 0 No or credit 1 Yes REV_BEH_STCREDIT Use short-term credit for turnover B2 0 No 1 Yes REV_BEH_ATTRACKINEVER Attract investors (ever) SCR12 1 No 2 Ever been financed by other equity investors 3 Ever been financed by venture capital funds REV_BEH_ATTRACKINNOW Attract investors (now) D4 1 No 2 Only one type of investment 3 Investment from venture capital funds and private equity funds REV_BEH_INTERFINAN Own internal financing D6 1 No 2 Fixed assets or working capital for internal financing 3 Fixed assets and working capital for internal financing REV_ATT_MANAMONEY Managing money B5 1 I know less about managing money than most people I know (or business peers) 2 I know the same about managing money as everyone else (or business peers) 3 I know more about managing money than most business peers Appendix D: Methodology for Financial-Capability Analysis   55 TABLE 19, continued COMBINATION VARIABLE MEANING FROM SECTION VALUES REV_ATT_APPLEARN Willingness to learn (financial- E2 1 1 skill to learn or improve management skills) 2 2 skills to learn or improve 3 3 skills to learn or improve REV_ATT_ACCLEARN Learn more about accounting A3 1 None 2 Other 3 From media 4 From social circles or colleagues 5 From experts 6 From experts and others REV_SK_DEEPUNDER Accounting concepts A2 1 Little understanding 2 Basic understanding 3 Advanced understanding 4 Expert understanding REV_ATT_RESULTOR Revise goals periodically F1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_INNOVA Like to reflect, play with ideas F1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_LEARNMISTAK Learning from mistakes F1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_GOODFIN Deals well with financial matters F1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_IMPROVE Opportunities to improve F1 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_RISKASSE Behavior toward risk F2 1 None 2 L (low) 3 M (medium) 4 ML 5 H (high) 6 HL 7 HM 8 HML REV_ATT_NOGAMES Do not play F3 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_GAMLOWSAKE Gamble for low stakes F3 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree 56   Investigating the Financial Capabilities of SMEs TABLE 19, continued COMBINATION VARIABLE MEANING FROM SECTION VALUES REV_ATT_GAMNEVERLIMIT Play but never beyond the limit F3 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_GAMEMORELIMIT Play for high stakes, beyond the limit F3 1 Strongly agree 2 Agree 3 Disagree 4 Strongly disagree REV_ATT_NOGAMELOSE Do not play, hate losing F3 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_GAMEALL When playing, I sometimes stake F3 1 Strongly agree my all 2 Agree 3 Disagree 4 Strongly disagree REV_ATT_NOGAMEPRINCI Do not play on principle F3 1 Strongly disagree 2 Disagree 3 Agree 4 Strongly agree REV_ATT_PROFILRISK Risk profile E8 1 Invest in the option with high return in the past month 2 Invest in the option with high return in the previous year 3 Invest with low return and low risk 4 Invest a portion of the money in all of them REV_SK_QUICKDECISION (Quick) decision making F4 1 Tend to postpone making a decision 2 Take a long time to think through 3 Base the decision on gut feeling 4 Convinced –s/he is right 5 Makes up his/her mind quickly REV_SK_MAINFINANDECI Main financial decision maker SCR5 1 Not financial decision maker 2 Only investment 3 Only financing 4 Main financial decision maker (invest and financing) REV_SK_ENTERDECISION Typically make financial decisions SCR2 0 No for the establishment 1 Yes Source: WBG SME Financial Capability Survey, 2017. Annex D: Methodology for Financial-Capability Analysis   57 TABLE 20: Steps to Analyze SME Financial Capability (Part II) SECTION 2.5.3: STEP 2 Factor analysis: Constructing components The aggregated indicators of the first stage (see table 18) highlighted the general dispar- 1. Aggregation of financial ities in financial-capability levels. However, they did not indicate how elements and com- capabilities core elements ponents of financial capability were related to one another or if it was possible to determine financial-capability domains. For these reasons, a second step, a factor analysis known as Is there some differentiation a principal components analysis (PCA) was conducted to explore the relations between 59 2. across analysis: Factor the enterprises? constructing components behavioral variables. In particular, this statistical procedure determined the underlying dimensions of SME financial attitudes. Are SME financial attitudes 3. related? Factor analysis: How are they related? The PCA reduced the original set of variables (59) to a smaller uncorrelated set of variables constructing domains (principal components or dimensions) that aim to account for as much of the variance in the data as possible. This last condition implies that the final set be composed of dimen- How are SME financial 4. components Cluster analysis: related? sions with an important contribution to total variance and have eigenvalues greater than indentifying Is vulnerable there one single groups domain? one (as defined by Kaiser’s criterion, which was chosen as it best fit the type of data obtained). In other words, PCA can be understood as the solution to the maximization Can groups of enterprises be process of the variance of dimensions. identified based on financial capability relationships? The PCA method attributes a single indicator (or score) to each component. These indica- Are there vulnerable groups? tors are a linear combination of the behavioral variables (Kempson, Perotti, and Scott 2013a). BV1 – µ1 BV2 – µ2 BV59 – µ59 Sj = wj1 * σ1 + wj2 * σ +… + wj59 * σ 2 59 Where: Sj = Score of the dimension j. j = 1, ……, J. J is the total number of components. J is unknown at the beginning of the analysis. However, as mentioned previously, J will be the total number of final considered components at the end of the PCA process (maximum variance). BVi = Behavioral variable i. i = 1, ……,59. μi = Mean of the behavioral variable i. σi = Standard deviation of behavioral variable i. wji = Weight of the behavioral variable i in the dimension j (Dj). If BVi is not meaningful for Dj → wji = 0. The weights are also unknown at the beginning of the analysis. However, the PCA method estimates them as part of the solution of the dimensional variance maximization process. The dimension scores (Sj ) have an infinite range of values (– ∞, + ∞). They are rescaled using the extreme values (minimum and maximum) of dimensions for interpretation and comparison purposes. The transformed ranges between 0 (lowest score or most incapable enterprise) and 100 (highest score or most capable enterprise). The rescaled scores are computed as: 100 * (Sj – sminj) Sjresc = (smaxj – sminj) Where: Sjresc = Rescale score of the dimension j. j = 1, ……, J. J is the total number of selected dimensions. Sj = Original score of the dimension j. sminj = Minimum original score of the dimension j. smaxj = Maximum original score of the dimension j. Source: WBG SME Financial Capability Survey, 2017. 58   Investigating the Financial Capabilities of SMEs TABLE 21: Steps to Analyze SME Financial Capability (Part III) SECTION 2.6.1: STEP 3 Factor analysis: Constructing domains Once the second stage (factor analysis: constructing components) identified and quantified 1. Aggregation of financial through scores the relationships between different behaviors, another question emerged: capabilities core elements How are these underlined components related to one another? To answer this question, a third exploratory analysis was conducted to establish if the SMEs’ main dimensions of finan- Is there some differentiation cial capability could be combined in a single domain or a small number of domains. 2. across analysis: Factor the enterprises? constructing components To reach this goal, a second factor analysis (PCA) was developed. SME component scores Are SME financial attitudes were used instead of the individual behavioral variables. Figure 28 illustrates the logical path 3. related? Factor analysis: How are they related? of factor analysis to understand SME financial capability. The second PCA reduced the orig- constructing domains inal set of components (J) to a smaller uncorrelated set of domains (unique domain or prin- cipal domains) that aim to account for as much of the variance in the data as possible. The How are SME financial 4. components Cluster analysis: related? final set of domains was composed of components with an important contribution to total indentifying Is vulnerable there one single groups domain? variance and with eigenvalues greater than one (Kaiser’s criterion). Can groups of enterprises be identified based on financial FIGURE 28: Logical Path of Factor Analysis to Define SME Financial Capability capability relationships? Are there vulnerable groups? Key Factor analysis: Behavioral variables attitudes Constructing components Component1 Factor analysis: Components of financial capability Identifying domains Domain1 Domainsof financial capability Key behaviors Component6 Key Domain2 skills Componentn Source: WBG SME Financial Capability Survey, 2017. The PCA method gets a single score for each one of domains. These indexes are a linear combination of the dimensional variables S1 – µ1 S 2 – µ2 Sj – µj SDk = wk1 * σ1 + wk2 * σ2 +… + wkj * σ j Where: SDk = Score of the domain k. k = 1, ……, K. K is the total number of domains. K is unknown at the beginning of the analysis. However, K will be the total number of final considered domains at the end of the PCA process (maximum variance). Sj = Score of the dimension j. j = 1, ……, J. J is the total number of components. μj = Mean of the dimensional variable j (Sj). σj = Standard deviation of dimensional variable j (Sj). Weight of the dimensional variable j in the domain k (Domaink). If Sj is not meaningful for Domaink → wkj = 0. wkj =  The weights are also unknown at the beginning of the analysis. However, PCA method estimates them as part of  the solution of the domain variance maximization process. The domain scores (SDk) have an infinite range of values (-– ∞, + ∞). They can be rescaled using their extreme values (minimum and maximum) as the second stage previously presented. Source: WBG SME Financial Capability Survey, 2017. Annex D: Methodology for Financial-Capability Analysis   59 TABLE 22: Steps to Analyze SME Financial Capability (Part IV) SECTION 2.6.3: STEP 4 Cluster analysis: Identifying vulnerable groups Stages 1, 2, and 3 addressed questions related to the definition of SME financial capability 1. Aggregation of financial and the inherent interrelationships between behavioral and dimensional variables. However, capabilities core elements whether two or more groups of enterprises could be identified based on these relationships was not answered. To focus on this topic, cluster analysis was used (stage 4) to determine Is there some differentiation subgroups among pilot participants that exhibited particular strengths or weaknesses with 2. across analysis: Factor the enterprises? constructing components regard to financial capability. The clustering process segmented the population of compa- nies according to the range of underlined component scores from step 2. Are SME financial attitudes 3. related? Factor analysis: How are they related? The hierarchical cluster method was used for this segmentation, which is essentially agglom- constructing domains erative iterative clustering. Each company represented an individual cluster at the beginning of the process. In the first iteration, the two most similar clusters were combined, and they How are SME financial 4. components Cluster analysis: related? composed a new cluster. In the next step, another two clusters were merged and linked. The indentifying Is vulnerable there one single groups domain? process continued with the aggregation of similar clusters. The measure to establish the similarity or dissimilarity across enterprises was the Euclidian distance, the square root of the Can groups of enterprises be squared differences of component scores. More precisely, identified based on financial capability relationships? J Are there vulnerable groups? dEuclidian (X,Y ) = A(X – Y ) j j 2 j=1 Where: X j = Score of the dimension j for the enterprise X. Yj = Score of the dimension j for the enterprise Y. j = 1, ……, J. J is the total number of components. Another relevant aspect with regard to the hierarchical cluster method is that its linkage procedure (algorithm) to define or evaluate the distance from a new cluster to another cluster (or others) is based on centroids. The cluster centroids are the average compo- nent scores of the enterprises in the cluster. The distance between two clusters is the distance between the two centroids. Finally, the variance ratio criterion (VRC) is considered to determine the appropriate number of segments in the pilot dataset (Mooi and Sarstedt 2011). This ratio is defined as: SSB (l – 1) VRCl = SSW (n – l) Where: l = Number of segments. n = Number of objects or enterprises. SSB = Sum of the squares between the segments. SSW = Sum of the squares within the segments. The final number of segments l * is that one that minimizes the value of ωl = f (VCRl +1,VCRl , VCRl –1). l * ⇒ min[ωl = (VCRl +1 – VCRl ) – (VCRl – VCRl –1)] Source: WBG SME Financial Capability Survey, 2017. ANNEX E Special Codes Refusal –9 Don’t know –8 Not applicable –7 FINANCIAL-CAPABILITY QUESTIONNAIRE OF SMEs Region name Regioncode Region Code Country State Name of Enterprise: Enterprisename Landline Mobile/Cell phone Respondent: Phone Phonetype Code EEC country manager: Intname Intcode SCREENER SECTION Male Female NOTE TO THE INTERVIEWER: record if respondent is male or female Scr0 S1) Yes No Are you the main decision maker on questions pertaining to FINANCE in this Scr1 establishment? S2) Alone Jointly Do you typically make financial decisions for this establishment by yourself or jointly Scr2 with someone else? (please specify with whom if decisions are made with someone else) S3) Do you agree or disagree that the following statements describe how you manage Agree Disagree your business and household finances? I manage my business finances and household finances together, using the same Scr3a budget and accounts I manage my business finances and household finances separately using separate Scr3b budgets and accounts 60 Annex E: Financial-Capability Questionnaire of SMEs   61 S6) What is the highest level of schooling you have completed (see table S6 below) Scr6 S6. Level of Schooling No schooling 1 Secondary school incomplete 7 Elementary school complete 2 Vocational secondary education complete 8 Elementary school incomplete 3 Vocational secondary education incomplete 9 Basic school complete 4 Post-Secondary Technical / Vocational education 10 Basic school incomplete 5 University, tertiary education 11 Secondary school complete 6 S7) What type of product or service represents the most important portion of the annual sales of this establishment? Scr7 S8) How many employees did this establishment employ when it started Scr8a0 operations? How many employees does this establishment have including full-time, Scr8a part-time, and temporary employees? Full-time Part-time Temporary Of which, how many are full-time, part-time or temporary (fixed-term) Scr8b Scr8c Scr8d employees? S9) Increase Stay the same Decrease In the next 12 months, do you expect the number of full-time employ- Scr9 ees working in your company to increase, decrease, or stay the same? S10) In what year did this establishment begin operations? Scr10 S11) What is the main source of financing your business uses to finance its operations? (see table S11 below) Scr11 S11. Main working capital financing source Own funds or retained earnings 1 Issued new equity shares to new investors 2 Borrowed from banks 3 Borrowed from microfinance institutions, credit unions, financial cooperatives, leasing companies 4 Borrowed from government special loan programs or international development institutions’ loan programs 5 Obtaining goods and services from a supplier on the terms of later payment and advances recovered 6 Other (moneylenders, friends, relatives, pledge, etc.) 7 62   Investigating the Financial Capabilities of SMEs S12) Yes No Has this establishment ever been financed by venture capital funds? Scr12a If No, did any other equity investor finance this establishment? Scr12b S15) S15. Annual turnover/sales What was annual turnover/sales of your company (excluding VAT if it applies) Scr15 Up to 10,000 US$ equivalent 1 in 2016? (see table S15 below) 10,001–50,000 2 50,001–50,000 3 150,001–250,000 4 More than 250,001 5 SECTION A1: ACCOUNTING A1) A1. Extent of agreement To what extent do you agree or disagree with the following statements? (see table A1 below) Strongly disagree 1 Disagree 2 I fully understand the financial-management aspect of my business A1a Agree 3 I fully understand the marketing aspect of my business A1b Strongly agree 4 I fully understand the business strategy aspect of my business A1c A2) A2. Extent of understanding How would you describe your understanding of accounting A2 If Little, Little understanding 1 concepts including notions such as assets, liabilities, and profits? GO TO A3 Fair understanding 2 (see table A2 below) Expert understanding 3 A2A) Table A2A. Meaning of assets Which of the following statements best describes the meaning of the A2a Investments, machinery and 1 term ‘assets’ for a company? (See table A2A) inventory owned by a company All that is owned by a company 2 Money and cash of the company 3 A2B) Table A2B. Meaning of liabilities Which of the following statements best describes the meaning of the A2b Money owed to employees and term ‘liabilities’ for a company? (See table A2B) others 1 Bank debt of the company 2 Sources of external funds of the 3 company A2C) Table A2C. Meaning of profits Difference between all revenue Which of the following statements best describes the meaning of the A2c and all expenses / costs 1 term 'profits’ for a company? (See table A2C) Money for the next cycle of acquisitions 2 Surplus of cash in the bank from 3 operations Annex E: Financial-Capability Questionnaire of SMEs   63 A3) Where do you go to learn more about accounting processes or concepts, A3 or a financial product? (see table A3 below) A3. Sources of information Peer, local business community group 1 Financial advisor / professional accountant 2 Family and friends 3 Government’s or non-profit organisation’s training program 4 Print media (e.g. newspaper, magazines etc.) 5 The internet 6 Other (specify) A3x 7 A4) Yes No Do you have a written budget, which tells you how much you have to pay for rent, electricity, equipment A4a maintenance, transport, advertising, and other costs of the business? If Yes, for what length of period do you typically budget for? (in months) A4b If No, why not? (see table A4 below) A4c A4. Reasons for not budgeting No time 1 It is not useful to my establishment 2 I do not stick to a budget 3 I do not know how to prepare a budget 4 Other (specify) A4x 5 A5) A5. Frequency How often do you stick to your budget? (see table A5 below) A5 Always 1 Often 2 Sometimes 3 Never 4 64   Investigating the Financial Capabilities of SMEs A6) Yes No Do you set or review specific goals in terms of gross profit margins, or debt relative to equity or other A6a financial aspects for your enterprise? If Yes, how often do you set or review specific financial goals for your enterprise? (see table A6a below) A6b If No, why not? (see table A6b below) A6c A6a. Frequency A6b. Reasons for not setting goals Daily 1 No time 1 Weekly 2 It is not useful to my establishment 2 Monthly 3 I do not stick to goals 3 Every three months 4 I do not know how to set goals 4 Every six months 5 Other (specify) A6bx 5 Every year 6 Other (specify) A6ax 7 A7) Yes No Do you or your accountant prepare a financial statement at least annually? A7a If Yes, what type of financial statement do you prepare (DO NOT READ FOLLOWING OPTIONS)? Balance sheet A7b Income Statement A7c Statement of changes in equity A7d Cash-flow statement A7e If Yes, in 2016, did your establishment have its annual financial statements checked and certified A7f by an external auditor? SECTION B: CASH AND CASH MANAGEMENT B1) Yes No Does your establishment usually keep cash reserves beyond what is required for daily operation? B1 Annex E: Financial-Capability Questionnaire of SMEs   65 B2) When in need of cash flow, which of the following strategies do you use? Yes No 1.  Minimise spending (including any measure taken for cost-cutting of the establishment) B2a 2.  Offer discounts and lower price to stimulate sales B2b 3.  Monitor receivables and increase collection efforts B2c 4.  Offer discounts to clients that pay early to encourage them to pay faster B2d 5.  Increase sales B2e 6.  Access owner's personal funds B2f 7.  Access short term credit B2g 8. Other B2h If Other, specify: B2hx B3) Please rate your cash flow in 2016 (see table B3 below) B3 B3. Scale Very good—I always had plenty of cash after paying expenses and salaries 1 Good—I always had sufficient cash after paying expenses and salaries 2 So so—Sometimes I struggled to pay salaries and expenses 3 Bad—I often was not able to pay salaries and expenses on time 4 B4) Yes No Do you assess the risk facing your establishment? B4a If Yes, how do you go about assessing risk? (see table B5b below) B4b If No, why not? (see table B5c below) B4c B5b. Risk assessment B5c. Reasons I compare my establishment to similar ones 1 There is no need 1 I research how many competitors I have 2 I don’t know how to do it 2 I analyse how my sales progress on a yearly/ 3 I do not know who I should turn to for help 3 monthly basis It is too expensive 4 I evaluate how the market is evolving 4 It is too time consuming 5 I evaluate how the political situation might 5 affect my establishment Other (specify) B4bx 6 66   Investigating the Financial Capabilities of SMEs B5) Yes No Do you usually keep cash beyond what you need for your regular operations? B5a When it comes to managing money, which of the following statements best describes you? B5b (see table B5 below) B5. Managing money I know more about managing money than most business peers 1 I know the same as everyone else (or business peers) about managing money 2 I know less about managing money than most people (or business peers) I know 3 SECTION C: EXPANSION C1) Yes No Did you have a business plan when you started the business? C1a If No, why not? (see table C1 below) C1b C1. Main reason for not having a business plan There is no need 1 I don’t know how to prepare one 2 I don’t know who I should turn to for help 3 It is too expensive 4 It is too time consuming 5 C2) Yes No Have you ever expanded the size or scope of your business? C2a If No, what was the main reason for not having it? If Yes, before planning for an expansion or a new project, did you: Yes No (see table C1 above) 1.  Create a business plan C2b C2b1 2.  Conduct marketing or competitive analysis C2c C2c1 3.  Project or budget sales / costs C2d C2d1 4.  Research new technologies C2e C2e1 5.  Analyse new or alternative opportunities C2f C2f1 Appendix E: Financial-Capability Questionnaire of SMEs   67 C3c. Aspects included in plan C3) Yes No Sales 1 Do you financially plan for the long-term, that is five years or more C3a Marketing 2 into the future? Financing 3 If Yes, how many years into the future do you plan for? C3b Investment 4 If Yes, what aspects of your business do you include in this plan? C3c Business development 5 (see table C3c below) Operations 6 Human resources 7 Other (specify)  C3cx 8 SECTION D: ORGANIZATION AND SKILL D1) Yes No Do you typically ask for financial advice? D1a If Yes, how often? (see table D1a below) D1b If Yes, under what circumstances (see table D1b below? D1c If Yes, who of the following people do you ask for financial advice? Yes No 1.  Financial professionals (e.g. accountant, staff of a financial institution, financial consultant) D1e 2.  Legal professionals D1f 3.  Other business owners D1g 4.  Friend or family member D1h 5.  Other, specify: D1jx D1i If No, why not? (see table D1c below) D1k Do you ever conduct your own research (online or through books) when you need financial advice? D1l D1a. Frequency D1b Circumstances D1c. Reasons for asking advice Daily 1 Starting a business 1 There is no need 1 Weekly 2 Expanding a business 2 I don’t know how to do it 2 Monthly 3 Accessing finance 3 I do not know who I should turn to for help 3 Every three months 4 When faced with financial losses or troubles 4 It is too expensive 4 Every six months 5 Bookkeeping 5 It is too time consuming 5 Every year 6 Less than once a year 7 Other (specify)  D1bx 8 68   Investigating the Financial Capabilities of SMEs D4) Have you heard of the following financial services? Y/N If Yes, If No, has your your establishment has establishment never used it, what is ever used it? If Yes, the main reson for this (see table D4 below)? do you are you satisfied currently use it? with the services Yes: 1  No: 2 offered? Yes No Yes No Yes No 1.  Checking or saving account at a D4a D4a1 D4a2 D4a3 D4a4 commercial bank or other financial institution 2. Term deposits D4b D4b1 D4b2 D4b3 D4b4 3. Internet Banking D4c D4c1 D4c2 D4c3 D4c4 4. Electronic payments through a D4d D4d1 D4d2 D4d3 D4d4 mobile phone (e.g. SMS banking) 5. Electronic payments through a D4e D4e1 D4e2 D4e3 D4e4 money transfer service 6. Loan or line of credit from banks D4f D4f1 D4f2 D4f3 D4f4 7. Loan or line of credit from, D4g D4g1 D4g2 D4g3 D4g4 microfinance organization, cooperatives or credit union, 8. Investment from venture capital D4h D4h1 D4h2 D4h3 D4h4 funds, or angel investors 9. Investment from private equity D4i D4i1 D4i2 D4i3 D4i4 funds 10. Trade financing D4j D4j1 D4j2 D4j3 D4j4 11. Factoring/leasing D4k D4jk D4k2 D4k3 D4k4 12. Insurance products D4l D4l1 D4l2 D4l3 D4l4 13. Government subsidy programs D4m D4m1 D4m2 D4m3 D4m4 D4. Main Reason No need 1 Too expensive 5 I don’t trust this type of service 2 My establishment doesn’t qualify 6 I don’t know enough about 3 Products available don’t suit my needs 7 Not easy to use 4 Other 8 Appendix E: Financial-Capability Questionnaire of SMEs   69 D5) To suppliers From suppliers Which of the following methods are typically used when making payments to suppliers and Yes No Yes No receiving payments from customers? Credit card D5a1 D5a2 Mobile phone D5b1 D5b2 Virtual payments (e.g. PayPal, Skrill, etc.) D5c1 D5c2 Bank to bank transfer D5d1 D5d2 Money transfer via money transfer operators (e.g. Western Union, MoneyGram etc.) D5e1 D5e2 Cash D5f1 D5f2 Check D5g1 D5g2 Money order / Cashier’s check D5h1 D5h2 Prepaid cards D5i1 D5i2 Debit cards D5j1 D5j2 D6) Fixed assets Working capital For each type of asset, indicate which type of financing you prefer to use. Yes No Yes No 1.  Internal financing D6a1 D6a2 If No, why? (see table D7 below) D6b1 D6b2 2.  External financing D6c1 D6c2 D7. Main reason Distrust 1 Don’t know enough about alternatives 2 Not easy to gain access to external financing 3 Other 4 D7) Yes No At this time, does the owner or owners of this establishment have any outstanding personal loans D7 that are used to finance this establishment’s business activities? D8) Yes No Did this establishment apply for any loans or lines of credit in 2016? D8a If Yes, did this financing require collateral? D8b If Yes, did you negotiate the requirements and terms and conditions for the collateral and/or requested D8c guarantees? 70   Investigating the Financial Capabilities of SMEs SECTION E: FINANCIAL LITERACY INTERVIEWER READS: The next section of the questionnaire is more like a quiz. The questions are not designed to trick you so if you think you have the right answer, you probably do. If you don’t know the answer, just say so. E1) Imagine that five brothers are given a gift of 1,000 (LCU). If the brothers have to divide the money E1 LCU equally, how much does each one get? E2) Now, imagine that the five brothers have to wait for one year to get their part of the 1,000 (LCU) and E2 inflation stays at 10%. In one year’s time will they be able to buy: (See table E2) Table E2. Able to buy in one year with the share of today More with their share of money than they could today 1 The same amount 2 Less than they could buy today 3 It depends on the types of things that they want to buy (do not read out this option) 4 E3) Suppose you put 1,000 (LCU) into a savings account with a guaranteed interest rate of 2% per year. E3 LCU You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made? E4) How much would be in the account at the end of five years? Would it be: (see table E4) E4 inflation stays at 10%. In one year’s time will they be able to buy: (See table E2) Table E4. Value of a deposit of 1,000 LCU in 5 years More than 1,000 LCU 1 Exactly 1,000 LCU 2 Less than 1,000 LCU 3 It is impossible to tell from the information given (do not read out this option) 4 E5) Let’s assume that you saw a TV-set of the same model on sales in two different shops. The initial retail price E5 of it was 1,000 LCU. One shop offered a discount of 150 LCU, while the other one offered a 10% discount. Which one is a better bargain, a discount of 150 LCU or 10%? (see table E5) Table E5. Better Discount A discount of 150 LCU 1 They are the same 2 A 10% discount 3 Annex E: Financial-Capability Questionnaire of SMEs   71 Table E6. Primary purpose of E6) insurance products Which of the following statements best describes the primary purpose E6 To accumulate savings 1 of insurance products? (See table E6) To protect against risks 2 To make payments or send 3 money Other 4 If other specify E6x E7 Table E7. Safest stock investment Suppose you have money to invest. Is it safer to buy stocks of just one E7 Buy stocks of one company 1 company or to buy stocks of many companies? (See table E7) Buy stocks of many companies 2 E8 Table E8. Investment options If you have an opportunity to invest 1,000 LCU with one of the following E8 Friend with an investment 1 three friends, with whom would you invest? Note the possibility your with highest return in the investment fails and you lose your invested money (See table E8) past month Friend with an investment 2 with the highest return in the previous year Friend with investment with 3 low return and low risk Invest a portion of money with 4 all of them E9 Table E9. Investment options Suppose you obtained a 1,000 LCU loan. You make a fixed payment of E9 Less than 5 years 1 10 LCU each month. At a nominal annual interest rate of 12% (or 1% per Between 5 and 10 years 2 month), how many years would it take to repay the amount you owe? Between 10 and 15 years 3 (See table E9) Never, you will continue to 4 be in debt forever E10 Table E10. Percentage increase In difficult times companies sometimes seek to temporarily lower prices E10 By 30% 1 in hope of attracting new customers. They plan to increase prices at a Less than 30% 2 later day when market conditions improve. If price of a product is 100 More than 30% 3 LCU and is lowered by 30%, how many percentage points does the product price have to be increased by to return to the original price of 100 LCU? (See table E10) 72   Investigating the Financial Capabilities of SMEs Table E11. Income stream E11 protection Suppose you are a farmer facing unpredictable market conditions where E11 Specialize in one crop 1 prices are fluctuating. In order to best protect your income stream, you Grow multiple crops for which 2 should… (See table E11) prices have moved historically in the same direction Grow multiple crops for which 3 prices have moved historically in different directions E12) What kind of financial-management skills do you want to learn most? Code “1” for all that apply, otherwise leave blank. Select up to 3 responses 1. Minimize spending E12a 1. Keep cash provisions E12b 2. Use short term credit for turnover E12c 3. Use self-generated resources E12d 4. Offer discount and lower price E12e 5. Attract investors E12f 6. Monitoring of receivables E12g 7. Payment facilities for early payers E12h 8. Knowledge of payment instruments and cash-flow management tools E12i 9. Accessing finance E12j 10. Other (specify) E12kx E12k F3) F3. Scale To what extent do you agree or disagree with the following statements regarding games of Strongly disagree 1 chance? (see table F3 below) Disagree 2 1. I don’t play F3a Agree 3 2. If playing, I gamble for low stakes F3b Strongly agree 4 3. I may play but never beyond the limit of my means F3c 4. I play for high stakes, sometimes beyond my means F3d 5. I generally don’t play since I hate to lose F3e 6. When playing, I sometimes stake my all F3f 7. I don’t play on principle F3g Annex E: Financial-Capability Questionnaire of SMEs   73 F4) When making a decision which of the following best describes you? Code “1” for the answer that best describes you only, leave the rest blank 1. I typically take a long time to think through and make a decision F4a 2. I base my decision on gut feeling F4b 3. I am convinced that I am right F4c 4. I tend to postpone making a decision F4d 5. I make up my mind quickly F4e REFERENCES Berge, Lars Ivar Oppedal, Kjetil Bjorvatn, and Bertil Tungodden. 2011. “Human and Financial Capital for Microenterprise Development: Evidence from a Field and Lab Experiment.” CMI Working Paper 2011: 1. 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