Benjamin part of our life. Not only business organizations

Franklin, one of the previous presidents of USA, said that, “An investment in
knowledge always pays the best interest.” Today, knowledge has a fundamental
role in the future of new businesses. According to Bloomberg – one of the
major global provider of financial news, 8 out of 10 entrepreneurs who start
businesses fail within the first 18 months. Perhaps, the specific reasons of
these failures are various; however, lack of financial knowledge is common
for each unsuccessful business. Moreover, the research recently published by
two economists, Annemarie Lusardi and Olivia Mitchell, confirmed that
financial ignorance was widespread all over the world. Thus, these economists
took a survey among the world population in order to find out financial
illiteracy rate among people. For an example, ninety-six percent of Russian
people, who surveyed, could not answer simple three finance questions.
Unfortunately, as a Post-Soviet state, people in Azerbaijan do not take into
consideration the importance of financial literacy. As a result, lack of
knowledge in Finance ends up with troubles for entrepreneurs. So, in
Azerbaijan, financial illiteracy has crucial impacts on small
entrepreneurship such as inefficient planning and ineffective control of
cash-flow; however, potential solutions can be analyzed, and selected in
order to minimize financial illiteracy. One of the consequences of financial
illiteracy in your small business can be poor and inefficient planning. Most
of entrepreneurs in Azerbaijan do not have sufficient knowledge in budgeting
and managerial accounting although it is a part of our life. Not only
business organizations but also the individual take into consideration their
financial condition when they make a decision. For example, the person, who
wants to buy a new building, needs money. That person can take a bank loan,
and buy that building; however, before taking loan from bank, he or she
should plan for future, make some estimations, and answer following
questions: What will be my income? What will be my expenditures? Will I be
able to repay my loan? Such kind of financial planning is necessary when the
individual or an organization makes a decision. However, the case is not so
easy as it seems for entrepreneurs because illiteracy rate of small business
owners (managers) sometimes does not let them analyze financial market, to
find the best financial institution with less interest and long payback
period. Furthermore, good budgeting and planning process require not only
analyzing of the financial institutions or interest rates, but also
consideration of entrepreneur’s revenue, expenses, and net profit.
Underestimation of cost, or overestimation of revenue may result in failure
of the business. For example, Nokia, one of the best multinational
communications, information technology and consumer electronics company, made
a mistake at the end of first decade in 21st century by overestimating its
sales. In detail, this company believed that their sales would increase in
spite of new touch screen products of Samsung and Apple. As a result, Nokia
could not compete, and is still going to down. Therefore, it is necessary to
obtain financial knowledge before starting a new business in order to be able
to analyze the market, your competitors, existing situation, and to make a
right business plan. The second consequence of financial illiteracy for
entrepreneurs is ineffective control of cash-flow. The business does not
consist of only earning money, each entrepreneur should invest some portion
of cash to the financial institutions in order to develop. However, financial
illiteracy causes unnecessary expenses and spending of important resources
immediately. Then, entrepreneurs wake up with no cash and no available fund
on hand. For example, some entrepreneurs try to enlarge their office, to buy
more expensive equipment and brand car which is not actually needed at the
beginning of the business. Instead, they can use this available cash to
invest in research and development because new businesses need strong ideas
and plan in order to survive. On the other hand, entrepreneurs can buy shares
of a strong companies like SOCAR or bond of Government to increase inflow of
cash each month. However, financial knowledge is essential to analyze the
default risk of capital market instruments. Moreover, statistics shows that
people, who has financial knowledge, are more punctual in the control of cash
flow. For example, the study by Hilbert in 2003, indicates the relationship
between financial literacy levels and skills of cash-flow management, credit
management, saving behavior and investment behavior. Generally, Hilbert found
that people who had higher levels of financial literacy had better outcomes
in their finances. For instance, 88 percent of respondents in the study of
Hilbert were paying bills on time. The other 12 percent who did not pay on
time had lower average scores on financial literacy tests relative to the
rest of the respondents. (Financial Illiteracy, Gerald Matasy, 2010, pg.
16-17) It is obvious that financial knowledge facilitates the control of
cash-flow, and it helps to make an accurate decision in order not to default
the business. What has been discussed so far, shows that people with poor
knowledge in Finance are not able to make a right plan, asses risks and
opportunities so, the first solution to eliminate or to minimize financial
illiteracy can be teaching pupils new course named “Importance of Finance in
Business” in secondary school. Since, they have to understand significance of
Financial knowledge at early ages. The books which will be taught in these
course should not be difficult to understand. Terminology and topics should
be comprehensible for secondary school pupils. The main idea of this course
should be to explain importance of Finance, and high cost of financial
illiteracy in business, not to teach all complicated staff about Finance. For
example, the pupils should know what the time value of money is? They should
understand that having one hundred manat today is better than having it in a
month because they can put it in a bank account and can gain interest.
However, they will not need to calculate tough problems in this course.
Moreover, strategy of successful business people like Mark Zukerbeq, Bill
gates, and secrets of their achievements can be discussed in the course and
make it more interesting for pupils. The second solution to increase
financial literacy is self-improvement. Fortunately, there are so many
courses related to finance are taught at universities such as Principles of
Finance, Financial Accounting, Managerial Accounting, Financial Reporting,
and etc. However, it is not enough to cover all details in one semester;
therefore, students who want to be one of the best entrepreneurs of the
Azerbaijan should read extra materials such as news and magazines related to
capital market, economics in the world and etc. Such kind of readings are the
best examples of terminologies which we have already learned at university.
Furthermore, students should be interested in seminars related to financial
literacy and knowledge competitions which are held by popular firms in
Azerbaijan such as BP, Azercell, Deloitte and etc. Experience gained from
these competitions can make students feel as a real entrepreneur before
starting their own businesses. On the other hand, students research about
some new terminologies, learn new information, analyze it, and make some
decisions to solve the cases in such competitions. These kind of activities
improve not only financial literacy of students but also their skills for the
real business environment. To sum up, all facts related to business failures
prove that financial literacy is important to run a business and to survive
in life. Otherwise, financial illiteracy will lead to different problems to
the most of entrepreneurs such as inefficient planning of their businesses,
or ineffective control of their cash flow. However, financial illiteracy
problem can be minimized in distinct ways. First of all, Ministry of
Education can add new course to the curriculum of secondary school pupils. In
this way, pupils can get basic knowledge about finance and financial terms at
early ages. On the other hand, the second solution should be
self-improvement. Each individual, who has plan to develop his/her own
business, should not be satisfied only materials discussed in lecture hours.
Students have to read articles about finance and attend finance seminars and
business case competitions. At least, such kind of experiences will increase
their financial literacy and skills. So, if you have not started to improve
yourself, make it today. Don’t let procrastination steal your time, which you
can spend to improve your financial knowledge to get best interest in future.
Reference 1. Wagner, E. T. (2013, September 12). Five Reasons 8 Out of 10
Businesses Fail. Retrieved from 2. Most People in the
World Have No Idea How to Manage Their Money. (2014, May 7). Retrieved from 3. Financial Literacy. Retrieved from 4. Nokia’s net sales from 1999 to 2016. Retrieved
from 5. Matasy, G. (2010). Financial Illiteracy:
Prevalence, Consequences, and Solutions. In (pp. 16-22). USA.