FINANCIAL LITERACY AND FINANCIAL DECISION-MAKING AMONG SMALL AND MEDIUM-SIZED ENTERPRISES: A CONCEPTUAL REVIEW

Abstract

Small and medium-sized enterprises (SMEs) routinely make financing, investment, liquidity, debt, risk and control decisions under severe information and resource constraints. Although financial literacy is frequently associated with SME performance and access to finance, the mechanism through which it improves enterprise-level outcomes remains conceptually underdeveloped. This paper develops an integrative conceptual review of financial literacy and financial decision-making in SMEs. Drawing on human capital theory, the resource-based view and bounded rationality, the review argues that financial literacy should be treated not merely as factual financial knowledge but as a multidimensional owner-manager capability comprising knowledge, applied skills, financial attitudes and disciplined behaviour, and an increasingly important digital financial component. The synthesis shows that financial literacy is most consequential when it improves the quality and consistency of financial decision processes: interpreting financial statements, comparing financing alternatives, forecasting cash flows, evaluating investment trade-offs, pricing risk, managing debt and applying budgeting and control routines. Evidence from prior SME research supports positive links between financial literacy, financial statement use, loan repayment, access to finance, growth and performance, but also shows that education does not automatically produce durable behavioural change. The paper therefore proposes a mechanism-based framework in which financial decision-making capability translates financial literacy into SME resilience, survival and performance, while contextual factors such as access to finance, advisory support, firm characteristics and environmental uncertainty condition the strength of this translation. The study contributes by shifting the literature from an outcome-dominant view of financial literacy to a decision-process perspective and provides testable propositions for future research. Practical recommendations emphasise decision-linked, context-specific financial capability development rather than generic financial education.