Full Project – The effect of financial management practices on the profitability of small and medium scale enterprises SMEs

Full Project – The effect of financial management practices on the profitability of small and medium scale enterprises SMEs

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Small and Medium Enterprises (hence forth, SMEs) have significant role in the economic development of emerging economies Nigeria inclusive. With just a little investment, they are important contributors to the achievement of general business growth and employment in the economy. According to Kadiri (2012), SMEs in both the formal and informal sector of Nigeria employ over 60% of the labour force. More so, 70% to 80% of the daily basic necessities in the country which are not high-tech products but basic materials produced with little or no mechanization, also come from SMEs (Peterise (2003) as cited in Kadiri (2012)).


SMEs started to gain recognition in Nigeria in the early 1970s after the oil boom (Osotimehim and Jegede, 2012). This recognition started from small agricultural holdings  but now extended into different kinds of services such as food processing and restaurant business, retail and wholesale of phones and computer software, metal and furniture assembling, sachet water business, soap and room freshener, tailoring and fashion designing, printing press, making of blocks, among others.


The capacity, experience and organizational abilities of SMEs as entrepreneurs are central to the success of their businesses. The interest on SMEs entrepreneurial capacity has acquired its intensive level almost everywhere in the world. In the developed economies SMEs are viewed as a revitalizing socioeconomic agent, a way of coping with unemployment problems, a potential catalyst and incubator for technological progress, product and market innovation. In most of the developing countries also, SMEs act as catalysts of economic activity in general, and business performance in particular through their roles of job creation and social adjustment.

Performance of a business, that is, how well or poorly a business is doing vis-à-vis owner- manager objectives is crucial to  its success.  One important way good business performance is reported, is through effective and efficient record keeping. When a business is not performing well, certain danger signals such as systematic capital erosion through, say, personal drawings and/or poor profitability, will exhibit themselves and are only detectable if there are up-to-date financial records. Most business owners that do not have adequate or standard Book-Keeping system would not be able to track the signals for these warnings and may tend to optimistically believe that things are getting better in the business flow.


Book-keeping is of central importance to any business, be it large or small. Entrepreneurial qualities are evidently established in organized businesses largely through their ability to organize their financial records. Adequate book-keeping practices are in maintaining  accurate set of accounting books delineating assets, liabilities and income structures. This is necessary for every business if it is to take any vital business decisions and be able to ascertain how much profit the business is making.


The double entry system of record keeping is the standard way to record financial transactions in business. Every entry involves both debit and credit transaction, which is the basic rule for any accounting practise. That is, for every debit entry there must be a corresponding credit entry and vice visa. It involves the use of journals and ledgers to keep track of profit and loss and balance sheet items.  The organized large scale enterprises seem  to have accepted this practice.


The system of double entry compared to single entry is more complicated to apply and maintained but allows for more flexibility and standardization. It helps to minimise errors and identify problems like fraud within the organisation. It appears that most SMEs have not generally imbibed this form of record keeping culture as the standard practice. Most of the SMEs that develop the attitude of record keeping choose the single entry system which is easier to keep, however, very limiting for information, auditing and accuracy checking purposes.

Performance is considered to be the major goal of business enterprises whose tracking may be difficult if there is no sound book-keeping. Poor business performance has long remained unsolved especially for the most part of developing countries like Nigeria where SMEs take up the large part of the economy. It is also among the developing countries with the highest number of this type of businesses that perform poorly and close up before the end of the first five years in business largely attributable to ignorance of keeping books of accounts (IMF, 1999) and lack of sound financial culture (Sejjaaka, 1996 and Wabwire, 1996). Problem of monitoring economic growth is increased in an economy like Nigeria where financial records are not available concerning this growth sector of the economy. Furthermore, financial reporting is not commonly practiced in SMEs raising the question on the relevance and reliability of the financial information from this important sector of the economy.

It is evident, therefore, that application of Book-Keeping system in the SMEs is very significant to the accounting practice especially as it encourages and contributes to the availability of quality financial information of business activities. Although various stakeholders continue to engage in activities aimed at ensuring survival of SMEs, research has shown that effective adoption of Book-Keeping systems by these firms is relatively low in most developing countries as compared to developed countries (International Monetary Fund, 1999).


Thus, poor Book-Keeping culture by the SMEs presents the need to investigate factors that are perceived to influence their attitude towards record keeping. Factors generally considered in this regard are knowledge and skill, ease of application, business performance, management competence and source of finance. SMEs like any other profit-seeking establishments need to strive for the survival of their business through employment of performance enhancing tools like Book-Keeping in their business strategies.


1.1                           Statement of the Research Problem


As stated in Chapter 1.1 above, it has been observed that the practice of Book-Keeping by SMEs in developing countries including Nigeria has been below expectations. It appears that based on attitudes exhibited by SMEs in Nigeria, they do not consider Book-Keeping fundamental to their survival and business performance as compared with the SMEs in the developed countries (Kadiri, 2012). Nonetheless, a good number of them have started imbibing the culture of Book-Keeping. As such efforts to find the determinants of business characteristics amongst the SMEs that are likely to lead them to adopt Book-Keeping should be topical in developing countries like Nigeria.

Furthermore, out of the number of studies conducted on the accounting practice of this very important sector in Nigeria, little significance has been given to what motivates their accounting practice. It is expected that such information should help turn around the poor performance exhibited within SME domain in Nigeria. Subsequent to adopting this culture, they should be able to reveal the accurate financial position of their business  operations which could help them obtaining loans or raise other forms of finance from financial institutions.

It is relevant, therefore, to ask the following questions in terms of what are the factors that determine the SMEs‟ accounting practice:

  1. How does knowledge and skills of entrepreneurs determine book-keeping practice by SMEs in Nigeria?
  2. How does ease of application of the accounting procedures and computer packages is influenced by the SME book-keeping practice in Nigeria?
  3. How business performance by SMEs does influence the attitudes Book-Keeping practice in Nigeria?
  4. How does level of business management competence influence SMEs Book-Keeping practice in Nigeria?
  5. How does source of finance by the SMEs determine their attitude towards book- keeping practice in Nigeria?

1.2           Aim and Objectives of the Study


The aim of this research is to determine Book-Keeping practiced by the SMEs in Nigeria  with a view to identify the significant factors shaping their attitude towards application of Book-Keeping in their businesses. The specific objectives are:

  1. To investigate the extent to which knowledge and skills of the entrepreneurs determines Book-Keeping practice among SMEs in Nigeria.
  2. To investigate the extent to which ease of application of Book-Keeping processes determines Book-Keeping practice among SMEs in Nigeria.
  • To ascertain the extent to which business performance determines Book-Keeping practice among SMEs in Nigeria.
  1. To evaluate to what extent management competence determines Book-Keeping practice among SMEs in Nigeria. .
  2. To evaluate to what extent financing choice/mix determines Book-Keeping practice among SMEs in Nigeria.

1.3           Research Hypotheses


In line with the above stated objectives of the study, the following hypotheses are formulated in Null form:

Ho1: There is no significant relationship between knowledge and skills of the entrepreneurs  of the SMEs and their Book-Keeping practice in Nigeria.

Ho2: There is no significant relationship between ease of application of Book-Keeping procedures by the SMEs and their Book-Keeping practice in Nigeria.

Ho3: There is no significant relationship between business performance of the SMEs and their Book-Keeping practice in Nigeria.

Ho4: There is no significant relationship between management competence within the SMEs and their Book-Keeping practice in Nigeria.

Ho5: There is no significant relationship between financing mix in the SME businesses and their Book-Keeping practice among SMEs in Nigeria.

1.4           Scope of the Study


The study “Determinants of Book-Keeping Practices of Selected Small and Medium Enterprises in Kwara State” is limited to Small and Medium Enterprises in Sabo- Kwara State with a focus on commercial activities of manufacturing, trading and services. The period in which the study was conducted was 2015. Given the wide disparity about what constitute SME as analyzed in sub-chapter 2.2.1, this study sets its boundaries to be the following peculiarities of SME structure, vis: those that relatively have some record keeping structure and capital not exceeding N500,000,000 within the trading, manufacturing and services sectors.

1.5           Significance of the Study


The outcome of this study is sought out to provide information to researchers in accounting and business towards understanding what motivates Book-Keeping and potential good performance in SMEs. It should also be useful to regulatory agencies and other partners ( for instance Central Bank of Nigeria, Securities and Exchange Commission, Federal Inland Revenue Service and so on) for effective monitoring and policy formulation. It would also enable owners and managers of small businesses to appreciate the value of quality Book- Keeping as a pillar for sound decision-making, better planning, high level of profitability and access to finance.

Other value adding outcomes are easy tax assessment and good performance in business enterprises. Furthermore, this research will be of benefit especially to the policy makers by reducing the rigid laws attached to SMEs such as high cost of compliance and levies, revenue collectors of Kwara State by providing easy way to assess tax from the SMEs through formalized records.

Thus, seeking the response of SMEs to financial accounting should be of interest not only to the owners and managers of the businesses, but to the regulatory authorities as well as the general stakeholders.

1.6           Organization of the Study


This work is presented in five chapters with chapter one containing the general introduction. The chapter articulates the research problem and presented the research objectives, hypotheses and the significance of the study. Chapter two contains a review of the relevant literature relating to SMEs, relevant accounting theories and relevant empirical studies to establish the literature gap and find the theoretical framework for the research. Chapter three presents the methodology adopted by presenting the description of the data and the empirical techniques and methods used in conducting the research. Data presentation and analysis is presented in Chapter four. Summary, findings, conclusion and recommendations are contained in Chapter five.


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Full Project – The effect of financial management practices on the profitability of small and medium scale enterprises SMEs