Full Project – ASSESSMENT OF FINANCIAL MANAGEMENT PRACTICES OF SMALL SCALE ENTERPRISES FOR IMPROVED PROFITABILITY IN NIGERIA

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CHAPTER ONE

INTRODUCTION

Background of the Study

Profitability in relation to this study is the ability of a SSE to earn reasonable returns on its investment in order to survive and remain competitive. Hosfstrand (2009) stated that profitability is the primary goal of any business venture. The author explained that without profitability, no business will survive in the long run. Hosfstrand further explained that the profitability of a firm is measured with income and expenses. Income is the money generated from the activities of the firm while expenses are the cost of resources used up or consumed by the activities of the business. Small Scale Enterprises owners/operators, like owners of other sizes of business, therefore, commit their resources into business ventures to maximize profits and contribute to the general economic development of the host countries. The contribution of SSEs to the economic growth and development of Nigeria requires that no effort should be spared in identifying ways of improving the profitability of Small Scale Enterprises through enhanced financial management practices.

Financial management is the proper sourcing and utilization of finances of a business in such a manner to attain or achieve set objectives of the business (Abanis, Sunday, Burani and Eliabu, 2013). Vitze (2016), stated that financial management is concerned with the planning, directing, organizing and controlling of a firm’s financial resources in order to achieve the intended objectives. The above definitions point to the fact that financial management has to do with judicious use of financial resources of the firm. The financial management of a business involves financial planning, financial control, financial record keeping, project financing, financial investment decisions and financial reporting practices employed by the business.

Financial planning is the technique used by firms to manage their financial resources. Beniwal (2012) stated that financial planning is the process of determining how goals are to be attained through proper management of finances and it provides direction and meaning to financial decisions. Harvey (2012) also stated that financial planning is the process of determining the financial needs and goals (short and long-terms) of a firm for the future and the means to achieve them. King (2007) noted that lack of financial planning is often the fundamental problem of most Small Scale Enterprises. The question is whether Small Scale Enterprises are doing well in financial planning. This involves estimating financial needs of the enterprise ahead, data gathering, estimating future expenses, and identifying sources of finance among others. However, Okafor (2012) stated that the key tasks which are more fundamental to the survival and performance of the SSEs (such as financial decision making involving budgeting processes and planning) are completely ignored, downplayed or not properly done. After the necessary financial policies have been set by the management of the firm, the next step is to put the necessary control measures and procedures in place to ensure that plans are carried out accordingly through financial control.

Small Scale Enterprises have been variously defined by different authors which differs from one country to another, depending on the criteria used in each country. Some of the criteria used by most countries are number of employees and financial measures such as net profit, annual sales and balance sheet totals. Richards-Gustafson (2016) stated that Small Scale Enterprises generally have fewer than 500 employees in non-manufacturing industries in the United States while in Australia; a Small Scale Enterprise is one that has fewer than 15 employees on its payroll. Richards- Gustafson further stated that in Europe, the number of employees is 250. In the Asian countries, it is 100 employees or fewer. According to Bulunywa (2016), a Small Scale Enterprise in the United States may be a large business in India and a very large one in Uganda.

All over the world, the important role played by Small Scale Enterprises has been severally acknowledged. Kofi, Collins, Adjel and Christian (2014), stated that SSEs are regarded as an integral part of any nation’s economic activity and it is believed that as they grow and expand, the economy also grows. Small Scale Enterprises are seen as the bedrock of the industrial development of many countries of the world, including Nigeria. They have a big potential to bring about social and economic development by contributing significantly to employment generation of many countries, developed and developing countries alike (Egbuna and Agali, 2013). According to the Small and Medium Enterprises Development Agency of Nigeria (2013), Small Scale Enterprises play a pivotal role that goes beyond job creation. They are growth-supporting sector, that not only contributes significantly to improve people’s living standard, but also bring substantial local capital formation and are responsible for driving innovation and competition in developing economies of the world. Ariyo (2016) emphasized that if Nigeria is to reach its full potential in economic and social development, it cannot afford to ignore the contributions of Small Scale Enterprises in the country’s economic development. Small Scale Enterprises, like any other size of businesses, exist mainly to maximize profits, and no business venture is worth going into if it will not be profitable.

Financial control is another variable in financial management which is essential in managing the affairs of any form of business (including Small Scale Enterprises). According to Wakiriba, Ngahu and Wagoki, (2014), financial controls are the procedures designed to protect assets and ensure that all financial transactions are recorded to prevent and reduce errors and fraud. The goal of putting in place a sound financial control system is to enable the organization achieve its objectives, safeguard assets and records, and evaluate operational efficiency. The authors further explained that effective financial control including maintenance of proper accounting records help managers to ensure that the entity is not unnecessarily exposed to financial risks and that the financial information is used only within the business.

Effective financial control measures can improve the performance of a business. On the other hand, ineffective financial control can have negative consequences for the enterprise. Ajonbadi, Lawal, Badmus and Okokiti (2014) stated that the small business subsector is characterized by high rate of failure that can be reduced if owners of these businesses put in place effective financial control tools (such as regular preparation of financial reports to determine the financial health of the enterprise, proper allocation and segregation of duties among employees, proper monitoring of expenses, rotating jobs among employees among others) that bring about meaningful organizational performance.

Small Scale Enterprises also have their own share of the blame for their inability to access credit facilities from banks and other financial institutions. Researches, however, showed that some of the operators did not adopt appropriate practices with regards to their financing needs. For instance, a survey sponsored by the German Technical Corporation in Niger State (2014) revealed that some owners of these firms had no business bank accounts with banks. This practice could make it difficult, if not impossible, for any financial institution to extend loan facilities to such businesses. Another wrong practice was that some SSE owners who were able to obtain financial facilities diverted them to other uses instead of using them for expanding their businesses. Stevens Consulting Ltd (2012), in a report it submitted to UNDP Outcome Office in Minna indicated that some owners of these enterprises in the state diverted funds obtained for business purposes to other uses, especially the male owners, and this created problems in the repayment process. The proper thing is that the facilities should be invested in the business to generate profit from which the facilities should be repaid. Proper financial investment decision of the SSEs became important in this regard.

Financial investment has to do with commitment of funds to acquire financial instruments or other assets in order to gain profitable return. Financial investment is the expenditure of fund on real assets such as factories, land, capital goods, and inventories among others (Agu, 2015). The services of professional accountants are critical in this regard. They can offer advice on profitable options, evaluation of investment projects or even facilitate the processes involved. However, most SSEs owners in Nigeria do not employ such experts because of the huge amount that can be spent on them by way of salaries and allowances. Okafor (2012), lamented that some SSE owners even feel that the services of qualified accountants can be simply dispensed with. This is a wrong line of reasoning, because most SSE owners do not possess adequate knowledge to reach and take investment decisions. In the same vein, an interview with the Director, (Planning, Research and Statistics) in the Niger State Ministry of Investment, Commerce and Cooperatives revealed that most SSE owners in the state rarely invest their surpluses outside their own businesses. Another wrong practice is improper reporting of accounting information to stakeholders and other users.

Financial reporting is needed to inform the owners and other users of financial reports about the performance of the business. Financial reporting is the process of producing financial statements that show the financial status of a business to management, owners, investors and regulatory authorities or agencies (Rouse, 2016). Financial reporting is achieved by means of financial statements which include the income statement showing the income and expenses, and profit or loss for a given period, the balance sheet which shows the financial position of the business, cash flow statement showing sources of funds and how they have been used and statement of changes in equity, especially for large firms engaged in manufacturing activities (Afolabi, 2013).

Statement of the Problem

Despite the important role played by Small Scale Enterprises in the economic growth and development of Nigeria, the sub-sector faces challenges bordering on inefficient financial management practices. It is an undisputable fact that the profitability of any business enterprise vis-à-vis Small Scale Enterprise (SSE) depends largely on the manner in which its financial resources are managed. Poor management of the financial resources of an enterprise will ultimately have a negative impact on its profitability while an efficient and effective management of such resources will impact positively on the profitability of the firm. However, Small Scale Enterprises often seem to possess inadequate knowledge in financial management such as in the areas of financial planning, financial control, keeping of appropriate financial records, project financing, financial investment decisions and financial reporting operations of the businesses. Adopting suggestions that would be made in this study would help SSEs to improve in these variables. Small Scale Enterprises have always had a relatively large percentage of failures and mishaps which are the ultimate price of making wrong or poor financial decisions. In Niger State, it seemed that many Small Scale Enterprises did not manage their financial resources appropriately. According to a survey sponsored by the German Technical Corporation in 2014 which is a staunch supporter of the state government programmes on Small Scale Enterprises, many SSEs operators in the state did not operate business bank accounts with financial institutions in the state.

The implication of this was that such SSEs would not be able to benefit from loan facilities offered by the financial institutions, and would also be losing in terms of interest that their deposits with the financial institutions could have earned. Reports indicated that some of those SSE operators that operated bank accounts and enjoyed loan facilities from financial institutions did not use such facilities to run or expand their businesses. For instance, the Report on Access to Finance from Microfinance Banks in Niger State (2012) revealed that some male owners of SSEs in the state who benefited from loan facilities diverted them to other uses instead of using them for business proposes. This, according to the report, created a lot of problems in the repayment process. Furthermore, an interview by the researcher with the Director (Planning, Research and Statistics) in the Niger State Ministry of Investment, Commerce and Cooperatives on 16^th June, 2016, also recorded that there were challenges of financial records keeping and financial reporting among SSE operators in the state due to inadequate knowledge. Similarly, a director in the state Small Scale Enterprises Agency disclosed in an interview with the researcher on 9^th November, 2016 that the rate of failure among SSEs in the state was high. According to the director, apart from the failures known, many SSEs in the state had collapsed unnoticed. The failures of these businesses meant loss of means of livelihood for their owners, loss of jobs by employees, loss of revenue to the state government and the negative effects on the society. This sad situation might have been caused by the use of wrong financial management practices by the owners. It was, therefore, against this background, that the study sought to identify ways of improving financial management practices of Small Scale Enterprises for improved profitability in Niger State.

Purpose of the Study

The general purpose of this study was to determine ways of improving financial management practices of Small Scale Enterprises for increasing profitability in Niger State, Nigeria. Specifically, the study determined ways of improving the:

1. Financial planning practices of Small Scale Enterprises for improved profitability.
2. Financial control practices of Small Scale Enterprises for improved profitability.
3. Financial records keeping practices of Small Scale Enterprises for improved profitability.
4. Project financing practices of Small Scale Enterprises for improved profitability.
5. Financial investment decisions practices of Small Scale Enterprises for improved profitability.
6. Financial reporting practices of Small Scale Enterprises for improved profitability.

Significance of the Study

The findings of this study would be of immense benefit to management of Small Scale Enterprises, agencies in charge of Small Scale Enterprises at all levels of government, prospective researchers, Associations of Small Scale Enterprises, other forms of businesses (such as medium and large) and Chambers of Commerce and Industry.

The findings of this study would be of benefit to management of Small Scale Enterprises. The management of SSEs, through the findings of the study would become aware of the appropriate means of improving their financial management practices. The SSEs operators would now use the findings of the study to effectively and efficiently manage their financial resources and thereby, improve and increase their profitability.

The findings of the study would also be of value to agencies in charge of Small Scale Enterprises at all levels of government. It would be proper for such agencies to organize training programmes for new and prospective Small Scale Enterprise operators. Such training programmes would improve the efficiency and effectiveness in the management of financial resources of SSEs and by extension, increase their profitability.

Furthermore, the findings of the study would be of benefit to prospective researchers in similar areas. Since research is a continuous process, future research efforts in financial management or any other related field would find the results of the study useful as source of materials for further research. This would help in facilitating and adding value to their works.

Associations or umbrella bodies of Small Scale Enterprises and Chambers of Commerce and Industry would also benefit from the findings of the study. One of the duties of such bodies is to enlighten and encourage their members to embrace best practices in running the affairs of their businesses. It was therefore, hoped that organizations such as the National Council on Industry and Nigeria Association of Small Scale Industries would encourage SSE operators to adopt the suggestions that the study would make to improve their financial management practices and increase profitability.

Other forms of businesses such as medium and large scale enterprises would also benefit from the findings of the study. Businesses may differ but there are certain things which one business may learn from another irrespective of size. One of such things is the techniques needed for successful management of financial resources. Therefore, other forms of businesses would find the results of the study valuable by adopting some of the suggestions that would be offered by the study to equally improve their financial management practices and increase their own profitability too.

Research Questions

The following research questions guided the study:

1. What are the ways of improving the financial planning practices of Small Scale Enterprises for improved profitability in Niger state, Nigeria?
2. What are the ways of improving the financial control practices of Small Scale Enterprises for improved profitability?
3. What are the ways of improving the financial records keeping practices of the Small Scale Enterprises of improved profitability?
4. What are the ways of improving the project financing practices of the Small Scale Enterprises for improved profitability?
5. What are the ways of improving the financial investment decisions practices of the Small Scale Enterprises of improved profitability?
6. What are the ways of improving the financial reporting practices of the Small Scale Enterprises for improved profitability?

Null Hypotheses

The following null hypotheses were tested at 0.05 level of significance:

Ho₁:     There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving the financial planning practices of Small Scale Enterprises for improved profitability in Niger State.

Ho₂:      There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving the financial control practices of Small Scale Enterprises for improved profitability in Niger State.

Ho₃:      There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving financial records keeping practices of Small Scale Enterprises for improved profitability in Niger State.

Ho₄:      There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving project financing practices of Small Scale Enterprises for improved profitability in Niger State.

Ho₅:      There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving financial investment decisions practices of Small Scale Enterprises for improved profitability in Niger State.

Ho₆:      There is no significant difference among the mean responses of university accounting lecturers, polytechnic accounting lecturers and professional accountants on ways of improving financial reporting practices of Small Scale Enterprises for improved profitability in Niger State.

Scope of the Study

This study was delimited to ways for improving the financial management practices of Small Scale Enterprises for improved profitability in Niger state, Nigeria. Specifically, the study focused on how to improve the financial planning, financial control, financial records keeping, project financing, financial investment decisions and financial reporting practices of Small Scale Enterprises for improved profitability. University accounting lecturers, polytechnic accounting lecturers as well as professional accountants in Niger State, Nigeria were surveyed to accomplish the objectives of the study.

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Full Project – ASSESSMENT OF FINANCIAL MANAGEMENT PRACTICES OF SMALL SCALE ENTERPRISES FOR IMPROVED PROFITABILITY IN NIGERIA