Financial literacy is very important for entrepreneurs because financial markets today become sophisticated compared to two or three decades ago. Financial decisions that must be taken today are increasingly complex, and therefore each individual needs to have financial literacy, at least at the basic level. The development of the financial industry supported by the development of information technology has resulted in financial products becoming more diverse and complex, and more accessible. The improving health services have resulted in the longer life span of the community, which resulted in them needing to create a future financial planner when entering the after-service period.
The development of information technology also makes a variety of information, including information related to finance, can be easily accessed by the public. Various information needs to be sorted, organized, and analyzed so that it can be used as a basis for effective financial decision making, such as decisions related to investments to be made, savings planning, and others.
For the younger generation, financial literacy is also important to have because the financial future is very uncertain, for example the cost of education, credit interest rates, increasing housing prices. This is coupled with the rapid development of financial products resulting in every individual needing to have financial literacy. For those who in the past are considered to have had good financial literacy, it is necessary to continue to update their financial literacy.
Research on financial literacy has increased rapidly since 2009. The main cause of this was the global financial crisis that began in 2008. For the first time in 2009, a national financial education strategy was launched as a policy tool to counter the deep-rooted impact of the financial crisis.
Although many researchers have defined financial literacy but the definition varies, there has been no consistency for those definitions. some emphasize the aspects of management ability in defining financial literacy. This diversity of definitions results in the absence of standard instruments for measuring financial literacy. Some existing instruments only measure aspects of knowledge, while some include not only aspects of knowledge but also actual financial behavior.
Literature on financial literacy in general can be divided into studies that discuss the factors that affect financial literacy and the study of the impact of financial literacy on individual behavior. In terms of behavior, most studies focus on the impact of financial literacy on financial behavior; both financial behavior in general and specific behaviors such as debt behavior, wealth accumulation, saving and investment behavior, stock market participation and retirement planning.
Financial literacy is defined as “the knowledge and understanding of financial concepts and risks, and the skills, motivation and confidence to apply that knowledge and understanding to make effective decisions in a variety of financial contexts, to improve the financial well-being of individuals and societies, and to enable participation in economic life (OECD, 2014).
Financial literacy is the degree to which a person knows important business and financial terms and has the ability and certainty to achieve personal capital through appropriate short-term decision making and thorough long-term financial scheduling, in a variety of economic situations.
Financial literacy is defined as “a person’s competence to manage money”, or, by a more comprehensive definition, as “a combination of awareness, knowledge, skills, attitudes and behaviors necessary to make sound financial decisions, and ultimately achieve the financial well-being of individuals” (INFE, 2012).
People can be financially literate when they have the knowledge, understanding and skills to take care of their personal finances but they cannot be called financially capable unless reflected in their actual behavior. Financial literacy and financial ability are two different but related concepts. The combined effects of financial literacy with financial inclusion bring financial ability, meaning “ability to act” as well as “opportunity to act”. Financial capabilities connect internal capabilities (financial knowledge and skills) and external circumstances (financial products and services) to provide “freedom” that provokes “one’s abilities”.
Increasing the number of entrepreneurs is one of the goals that many countries in the world want to achieve. This is because in addition to generating innovation, entrepreneurship also contributes to economic growth and job creation. An entrepreneur must have financial literacy in order to carry out his functions properly and effectively. Entrepreneurship is integrating personal, financial and resource characteristics, so entrepreneurship is a job or career that must be flexible and imaginative, able to plan, take risks, make decisions and take action to achieve goals. Successful entrepreneurs have above-average levels of financial literacy.
Financial literacy allows entrepreneurs to make effective decisions about the utilization of financial products and services. The financial knowledge that the individual has, allegedly affects the individual’s intention to become an entrepreneur, which has the characteristics of acting to achieve a profit-making mission through risk taking. Financial literacy contributes to entrepreneurial success because an entrepreneur is not only required to have an innovative business model, but also look for sources of funding that can fund the business model to be run.
Financial behavior provides information about the extent to which entrepreneurs are responsible for business finances and budgeting. Good financial behavior can lead to the competitiveness of business enterprises in the global economy while poor financial behavior will result in losses, or even bankruptcy. Based on previous research, financial literacy is significantly associated with financial behaviors such as bookkeeping, savings, cash management, debt management and investment decisions that maximize benefits for entrepreneurial business owners.
Financial literacy plays an important role in the continuity of entrepreneurship in order to be able to budget appropriately to meet expenses, identify financial products or services that meet their needs, and obtain and assess finances independently. Good financial literacy allows entrepreneurs to identify sources of funds are also expected to manage finances for business processes that are succeed. Having good financial literacy can also facilitate access to financial institutions.