Financial Literacy: " Money matters made simple "

Financial literacy is vital because it empowers individuals to make informed decisions about managing personal finances, avoiding financial pitfalls, building wealth, planning for retirement, and being responsible consumers. It also contributes to economic stability and reduces financial stress and anxiety.


Competences addressed/ learning outcomes expand_more

After completing this Learning resource participants will be able to:  

- Understand basic financial terms. 
- Why is financial literacy important?
- What is cost benefit analysis?
- Forecasting for investing
- Budgeting
- Organisational control
- The 3Es: effectiveness, efficiency and economy.
- Budget process
- The 50/30/20 Budget Rule


The objective of this learning resource can be summarised as below:
- Learn the fundamentals about budgeting and financial basics.

Theoretical background expand_more

Once you have settled on your idea and conducted an initial analysis of its potential, the next crucial step is to outline and define the strategies for achieving success and identifying the necessary requirements. Creating a budget and becoming aware of your financial options are among the most important tasks in this process. 

1.  Financial Literacy (recall basic terminology and symbols, explain simple economic concepts, concept of opportunity cost and comparative advantage, read income statements and balance sheets, explain the difference between balance sheet and profit and loss account, build financial indicators, use financial indicators to assess the financial health of a value creating activity, compare financial health of my value-activity with that of competitors).
2.  Cost Benefit Analysis (judge that to use money for, draw up a simple household budget in a responsible manner, draw up a budget for a value-creating activity, judge the cash flow needs of a value creating activity, apply the financial planning and forecasting concepts that are needed to turn ideas into actions, judge the cash-flow needs of a complex project, I can create a plan for the financial and economic long-term sustainability of my value-creating activity).
3. Forecasting for investing (identify the main types of income, can explain the value-creating activities can take different forms and can have different structures of ownership, identify public and private sources of funding, choose the most appropriate sources of funding to start-up, apply for public or private business support programmes, raise funds and secure revenue from different sources, judge an opportunity as a possible investor.

Why is financial literacy important?
Financial literacy is vital because it empowers individuals to make informed decisions about managing personal finances, avoiding financial pitfalls, building wealth, planning for retirement, and being responsible consumers. It also contributes to economic stability and reduces financial stress and anxiety.

● Budgeting is a highly potent financial instrument for businesses. By creating and executing a well-structured short and long-term financial plan, you gain control over your cash flow rather than being at its mercy.
● An effective financial budget comprises both short-term, month-to-month plans for a calendar year and long-term, quarter-to-quarter plans used for financial statement reporting.
● For optimal results, the long-term plan should span at least three years. Additionally, the long-term budget should be regularly updated in conjunction with the preparation of the short-range plan.

During the startup phase, what reasonable assumptions do you need to make about your business to establish a budget?
1.   How much can you expect to sell in Year 1?
2.  What is the projected sales growth for the subsequent years?
3.  How will you determine the pricing of your products and/or services?
4.  What are the production costs of your product, and how much inventory will be required?
5.  What are the estimated operating expenses?
6.  How many employees will you need, how much will you pay them, and what benefits will you offer?
7.  What income tax rate will apply to your business?
8.  What facilities will you require, and how much will they cost in terms of rent or debt service?
9.  What equipment is necessary to start the business, and what are the associated costs? Are there any additional equipment needs in the following years?
10.  If you sell on credit, what payment terms will you offer to your customers, and what payment terms will your suppliers provide to you?
11.  How much capital will you need to borrow, and what collateral will be required? What interest rate will apply to the borrowing?

Organisational control
The 3Es: effectiveness, efficiency and economy.
Efficiency: use it with caution, sometimes it may lead to bad results.
Difficulty of finding valid standards to compare actual performance.

5 major standards:
1. Performance of the organisation in previous time periods. (last years)
2. Performance of similar organisations.
3. Estimates of expected performance (ex-ante).
4. Estimates of what might have been achieved (ex-post).
5. The necessary performance to achieve defined goals and objectives (benchmarks).
- you can measure performance using results.

- Examples of indicators of effectiveness: how you are effectively providing the satisfaction that you as a company wanted to.
-  Financial measures of performance: Profitability, ROCE

Economy is a critical aspect of organizational performance, as it emphasizes the careful allocation and utilization of resources, ensuring that inputs are minimized while outputs are maximized. This dimension of the 3Es framework involves cost control, resource optimization, and efficient resource allocation strategies. Achieving economy in business operations often leads to improved profitability and sustainability.

- a controlling mechanism.
What are the budgets for?
-  A system of authorisation.
-  A means of forecasting and planning.
-  Sets budget holders personal targets.

Budgeting style influences attitudes towards the budget process and actual performance.
-  socialise accountability concept.
-  A source of information for decision making.

Budget process: participation or imposed? Top-down or bottom-up budgeting?
Adjusting participation depends on circumstances and budget holder’s environment (people, environment, culture, adaption). 
Lesson for practice: High degree of sensitivity and excellent communication skills needed, human element. Plus, technical skills (see for example zero based budgeting, activity-based budgeting).

o  Static budget
-  Budget prepared for a single level of sales volume is a static budget.
-  Static budgets are prepared at the beginning of the year.
-  Differences between actual results and the static budget are static budget variances.

o Flexible budget
- Budget prepared for multiple levels of sales volume.
- Flexible budgets are prepared at the beginning of the year for planning purposes and at the end of the year for performance evaluation.
-  Differences between actual results and the flexible budget are flexible budget variances.

Budget variances
- Managers compare actual results to budgeted results in order to monitor operations and motivate appropriate performance.
-   Differences between budgeted and actual.

Investigation may find that:
- Inefficiencies in operations that can be corrected.
- Efficiencies in operations that can be replicated in other areas of the organisation.
- Uncontrollable outside factors that require changes in the budgeting process.

Criticism of budgeting
1.  Meeting only the lowest targets.
2. Using more resources than necessary (eg Zero based budgets).
3. Making the bonus- achieving the budget whatever it takes (even undesirable actions).
- eg pricing (heavy discounts) in order to achieve sales targets. 
4. Competing against other divisions, business units and departments.
- thinking undesirable actions through competitive behaviour.
5. Spending what is in the budget.
- even when there is no need to buy something.
6. Provide inaccurate forecasts.
7. Meeting the target, but not beating it.
8. Avoiding risks (that were not calculated in the budget).
9. Encouraging rigid planning and incremental thinking.
10. Time consuming (and costly).
11. Producing inadequate variance reports (not answering why and how)
- they don’t look for reasons behind answers.
12. Ignoring key drivers of shareholder value: focus on short term financial numbers.
13. A yearly rigid ritual.
14. 12month commitment, risky due to uncertainty.

The Balanced Scorecard
-  Traditional MA focused mainly on financial performance measures.
-  Greater emphasis is now being given to incorporating non-financial measures into the formal reporting system.
-  To integrate financial and non-financial measures the Balanced Scorecard emerged.
BSC seeks to link performance measures to an organisation’s strategy: should be used to clarify, communicate, and manage a strategy.

BSC advocates looking at the businesses from 4 different perspectives by seeking to provide answers to the following questions:

1. How do customers see us? Customer perspective.
2. What must we excel at? Internal business perspective.
3. Can we continue to improve and create value? Learning and Growth perspective.
4. How do we look to shareholders? Financial Perspective.

To implement the BSC the major objectives for each of the 4 perspectives should be articulated and these objectives should be translated into specific performance measures, targets and initiatives.
-   A critical assumption of BSC is that each performance measure is part of a cause-and effect-relationship. 

The 50/30/20 Budget Rule is a budgeting approach that involves dividing your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.
50% on needs:
●  Needs are essential expenses necessary for survival, such as rent, car payments, and healthcare.
●  This category covers your must-haves and does not include discretionary spending like dining out or entertainment subscriptions.
●  Half of your after-tax income should be sufficient to cover your needs and obligations.
●  If your needs exceed this limit, you may need to cut back on wants or consider downsizing your lifestyle, like opting for a smaller home or a more modest car.
30% on wants:
●  Wants encompass all non-essential expenses, such as dining out, entertainment, shopping for non-essential items, etc.
●  This category includes the little extras that make life enjoyable and entertaining, like going to the movies or purchasing luxury items.
●  It also covers upgrade decisions, such as choosing a more expensive option when a cheaper alternative is available.
20% on savings:
●  Aim to allocate 20% of your net income towards savings and investments.
●  This includes contributing to an emergency fund in a bank savings account, making contributions to an Individual Retirement Account (IRA) or mutual fund account, and investing in the stock market or other investment vehicles.

Step-by-step implementation expand_more

One effective design thinking tool for developing financial literacy activities is the "Empathy Map." The Empathy Map helps you gain a deep understanding of the learners' needs, behaviours, and emotions, enabling you to design activities that resonate with them.

Here's how to use the Empathy Map:
1.   Create the Empathy Map: Draw a large chart divided into four quadrants. Label the quadrants as "Says," "Thinks," "Feels," and "Does."
2.  Empathise with Learners: Gather a diverse group of learners who represent your target audience for the financial literacy activities. Conduct interviews, surveys, or observation sessions to understand their financial experiences, attitudes, and challenges.
3.   Complete the Empathy Map: During the sessions, encourage participants to share their thoughts, feelings, and behaviours related to financial matters. Record their responses in the corresponding quadrants of the Empathy Map.
-  "Says": What do the learners say about their financial experiences? What are their thoughts on financial concepts?
-  "Thinks": What thoughts and beliefs do they have about money, budgeting, saving, investing, etc.?
-  "Feels": What emotions do they associate with financial decisions and challenges?
-   "Does": What actions and behaviours do they exhibit concerning their finances?
4.  Identify Insights: Analyse the completed Empathy Maps to identify common themes, pain points, and motivations shared by the learners. These insights will help you understand their perspectives and design relevant activities.
5.  Ideate Based on Insights: With a deeper understanding of your learners' needs, brainstorm financial literacy activity ideas that address their specific pain points and motivations. Consider using various formats, such as interactive workshops, online modules, or educational games.
6.  Prototype and Test: Develop prototypes of the activities and test them with a small group of learners. Gather feedback to understand what works well and what needs improvement.
7.  Iterate and Refine: Based on the feedback, make necessary revisions to the activities, incorporating the learners' suggestions and preferences. Continue iterating until the activities align closely with the learners' needs and expectations.

By using the Empathy Map as a design thinking tool, you can create financial literacy activities that are tailored to the unique needs and experiences of your target audience, ultimately enhancing the effectiveness of the learning experience.

Empathy Map: (Free Empathy Map template to gain insights about your ‘customers’, and find out how to improve your project)

Time needed and group sizeexpand_more

TIME: 3 hours
GROUP SIZE: 15-20 learners (split into groups of 4-5 for the group activity)

Materials needed for implementationexpand_more

- Computer to open the links and videos.
- Pens
- Some papers (draw the empathy map)

Further resources: Videos and/or useful linksexpand_more


1.  Lusardi, A., & Tufano, P. (2009). Debt literacy, financial experiences, and overindebtedness. National Bureau of Economic Research, Working Paper No. 14808.
2. Atkinson, A., & Messy, F.-A. (2012). Measuring financial literacy: Results of the OECD/INFE Pilot Study. Journal of Pension Economics & Finance, 11(2), 260-276.
3. Huston, S. J. (2010). Measuring financial literacy. The Journal of Consumer Affairs, 44(2), 296-316.
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