THE IMPACT OF FINANCIAL LITERACY ON THE SUSTAINABILITY AND PROFITABILITY OF SMALL AND MEDIUM ENTERPRISES (SMES) IN LAGOS STATE, NIGERIA

Abstract

Small and Medium Enterprises (SMEs) form about 96% of Nigeria’s businesses and are essential to job creation and economic growth, especially in Lagos State. Despite their significance, many SMEs in Lagos struggle with sustainability and profitability due to low levels of financial literacy among owners and managers. This paper examines the role of financial literacy in improving SME performance, using Hawley’s Risk Theory of Profit as the guiding framework. The review highlights key components of financial literacy, such as budgeting, saving, investing, credit management, taxation, and risk management, and explains how they influence business decisions. The study identifies major barriers to financial literacy, including low educational background, limited training opportunities, digital gaps, and poor record-keeping practices. Findings indicate that financial literacy enhances access to finance, strengthens decision-making, improves cost control, ensures tax compliance, and increases business resilience. The paper recommends integrating financial education into entrepreneurial programs, expanding access to financial tools, and promoting policy incentives to support SME development in Lagos State.