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CHAPTER ONE

INTRODUCTION

1.1  Background to the study

Small firms play vital roles in the process of industrialization, sustainable economic growth (Ariyo, 2015); encouragement of entrepreneurship, employment generation (Ogujiuba et al, 2014); reduction of poverty and contribution to the Gross Domestic Products (GDP) of many countries (Taiwo, Ayodeji and Yusuf 2012; Audretch, 2010; Paul, 2015; Rogers, 2012). They perform such vital roles through innovation and the production of various goods and services which empower the process of economic development. For small firms to carry out such important tasks, they need credit facilities in terms of short and long-term loans.

The process of sourcing such funds as well as the effective utilization and efficient management of the funds constitute major challenges for the accountants of SMEs. The challenges require the involvement of well trained/professional accountants which SMEs lack the resources to attract. The role of the accountants in SMEs is often broader than the conventional definition of the accounting function. Apart from the basic accounting functions of providing the accounting information, auditing, tax matters, the SMEs accountant is responsible for providing general leadership in all aspects of financial decision making like working capital management, budgeting and financial planning. It has been noted that the failure to effectively discharge these broad financial management functions have contributed largely to global financial crisis (Osisioma, 2010).

Similarly careless or poor financial management practice has been identified as one of the reasons for small business failures (McMahon and Holmes, 1991; Berryman, 2013). As revealed long ago by Potts (2017) the clearest and most startling distinction between successful and failed small businesses lie in their approach to the generation and utilization of accounting information.  Over the years, there has been a significant increase in government efforts to promote the financing of businesses by initiating policies which help small and medium scale businesses to source funds for business operations. Nigerian banks can access loanable funds from government and international financing institutions like the World Bank which uses the Central Bank of Nigeria (CBN) as the arrow head for on-lending to small businesses (Terungwa, 2012; Olorunshola, 2013; Anyanwu, 2012).

In spite of the various sources of fund made available to them, accessibility to both short-term and long-term credits from banks has not been easy for SMEs because of the poor risk perception which fund providers have of small firms. The poor risk perception can be reduced if quantitative and qualitative financial information details of firms can be ascertained, adequate collaterals provided and effective banking relationships established (Okafor and Onebunne, 2010). Qualitative and quantitative financial details provide required information about the quality of a firm in terms of size, profitability and leverage levels (Merve and Niskanen, 2010); as well as asset base and sales volume (Okafor, 2017). Researchers argue that firms that excel in such variables enjoy easier access to credit at lower interest rate and lower collateral requirements (Okafor, 2017; Cole and Wolken, 2015; Ennew and Binks, 2015).

Fund providers could be reluctant to provide loans even if they are available, where there is absence or incomplete financial information to convince the lender of the financial position of the firm. Therefore, the emerging tasks of the accountant in small firms is not only to provide routine accounting services, but to assist the firms in accessing adequate finances at affordable cost, and to awake the consciousness of the owner manager to the need to adopt proper financial management practices to enhance the growth and profitability of a firm Small and medium enterprise (SMEs) are considered backbone of economic growth in all countries (Rajesh, Surash and Deshmukh, 2014). Small and medium enterprises play an important role in Nigeria’s economic growth, as they constitute 97.2% of the companies in Nigeria (Ministry of Trade and Investment, 2011). It is unfortunate that SMEs performances have fallen short of expectations in Nigeria (Osotimehin, 2012).

The country is still characterised with alarming unemployment rate of 19.7% in 2010 (CIA, 2010), as well as, high level of poverty for more than half of the population still live below the poverty line (Abu and Abdullah, 2010). This shows that Small and Medium- Scale Enterprises are not very effective in this part of the world. Most SMEs die shortly after their establishment and few that survive die following the ageing or physical incapacitation or death of their owners. The failure rate of small business stands around 50 percent in Africa (Adelakun, 2014; Ebiringa, 2011). Huyghebaert and Gucht (2014) have noted that 50% of new entrepreneurial ventures disappear within the first five years after their establishment in USA and probably that of Nigeria is higher. It should be noted that most business failures result in heavy personal loss for the entrepreneur (Bannock, 2010; Watson, 2013).

The country also count losses; the loss in taxation and the business contribution to gross domestic product (GDP) as well as employment, add up to very huge losses for the country as a whole. is limited especially by market constraints. In addition to the SMEs internal limitations such as limited capital, old and poorly maintained equipment, outdated technology, lack of management skills, lack of financing resources and inexperience in the utilization of financial management practices are currently the most serious issues. Financial management plays an important role and has a large area in every activity of SMEs. Obviously, a reasonable and logical financial management practice will assist SMEs increase profitability and therefore will aid them to pass the obstacles. Financial management often led business enterprises to serious problems.

According to Kwame (2010), careless financial management practices are the main cause of failure for business enterprises in Nigeria. Regardless of whether an owner manager or hired manager, if the financial decisions are wrong, profitability of the company will be adversely affected. Consequently, a business organization’s profitability could be damaged because of inefficient financial management practices. Business Enterprises’ have often failed due to the lack of knowledge of efficient financial management practices. Moreover, the uncertainty of the business environment causes business Enterprises to rely excessively on equity and maintain high liquidity and these financial characteristics affect profitability.

Financial management in SMEs is noticed by many researchers. However, in many previous studies about financial management still have some limitations and more so little or no research work has been carried on financial management practices of SMEs especially in a developing country like Nigeria. It is said that, profitability is one of the most concerned goal of enterprise owners, therefore studying about relations between financial management and profitability in SMEs will have more belief in the effectiveness of financial management and to be more helpful in understanding the financial management of SMEs

1.2   Statement of the problem

Most previous researchers have concentrated on examining, investigating and describing the behavior of business enterprises in practicing financial management. Their findings are mainly related to exploring and describing the behavior of business Enterprises’ towards financial management practices.   Also previous research studies came from the developed economic such as the United States of America. There seems to be a lack of evidence from less developed countries like Nigeria. Second, most previous researchers focus on investigating and describing financial management practices. There has been little research examining the effect of financial management practices on profitability (McMahon, et al, 2013).

This lack of empirical evidence from less developed economies like Nigeria and the lack of examination of the effect of financial management practices on profitability are major gaps that needs to be examined. Based on previous research findings and recognition of these gaps, a study of the effect of financial management practice on profitability should be developed and tested by using empirical data from less developed economies (Kieu, 2014). The case of Nigeria is very serious. Most Business Enterprises have not appointed financial managers to be in charge of financial management of the company. Usually, the owners or general managers with the assistance of the accountant control financial matters of the company. On the other hand, most owners or managers have no formal training in management skills, especially financial management Hence,  the effect of financial management practices on the profitability of SMEs is still one of the major challenges

1.3   Objectives of the study

The main objective of this study is to determine the financial management practices and performance of small and medium scale enterprises (SMEs) in  Eket LGA of Akwa Ibom state, Nigeria. Other specific objectives include:

i. To determine the effect of financial reporting and analysis on the profitability of small and medium scale enterprises.

ii. To determine the impact of working capital management on the profitability of small and medium scale enterprises

iii. To determine the effect of accounting information system on the profitability of small and medium scale enterprises.

1.4   Research questions

i. What is the effect of financial reporting and analysis on profitability of small and medium scale enterprises?

ii. What is the impact of working capital management on profitability of small and medium scale enterprises?

iii. What is the  effect of accounting information system on the profitability of small and medium scale enterprises?

1.5   Hypotheses of the study

The following hypothesis stated in null form would be tested in this research work:

H01:  financial reporting and analysis do not have effect on profitability of  SMEs

H02:   working capital management do not have impact on profitability of SMEs

H03: Accounting information system do not have effect on profitability of SMEs

1.6   Justification of the study

In terms of financial management practices, most previous researchers have focused on examining, investigating and describing the behaviour of SMEs in practising financial management. The specific areas of financial management practices including financial reporting and analysis, working capital management, fixed asset management and capital structure management have long attracted the attention of researchers (McMahon, et al. 2013).

Their findings are mainly related to exploring and describing the behaviour of SMEs towards financial management practices. Although they provided such descriptive statistical data and empirical evidence on SME financial management practices, it appears that there still are some gaps in the literature, which need to be addressed. Firstly, most empirical evidence comes from the developed economies such as the United States of America (USA), the United Kingdom (UK), Canada and Australia (McMahon et al. 2013). There seems to be a lack of evidence from emerging economies, especially from transiting economies such as Nigeria Secondly, most previous researchers focus on investigating and describing financial management practices whereas there has been little research examining the impact of financial management practices on the profitability of  Smes (McMahon et al. 2013).

These are major gaps and it is difficult to convince business financial management practitioners of the need for changes in practices until evidence of the effects of financial management practices on the profitability of SME is provided and the relationship between the two variables are discovered. Based on previous research findings and recognition of these gaps, a study of the impact of financial management on SME profitability is justified and a model of the impacts of financial management practices and its effect on profitability should be developed and tested by using the empirical data from emerging economies However, such studies in Nigeria are scanty and more over, literature available in developed nations see (MacMahon, 2014, Nguyen, 2011, Peel et al., 2016) looked at individual constructs of financial management majorly like working capital management. Moreover, the present study looks at a multiplicative effect of various constructs of financial management on business performance of SMEs such as  financial report and analysis and accounting information system. Therefore, this study is important not because it fills the gap, but also it sets out to address this gap knowledge.

1.7  Scope of the study

This study will be conducted by sampling the opinion of respondents from some selected small and medium scale enterprises in Eket, Akwa Ibom state. The small and medium scale enterprises selected will be based on random sampling. The period covered would be from July 2014 to December 2014. For the purpose of this study, the financial management practices that would be examined are: financial reporting and analysis, accounting information system and working capital management.

1.8  Plan of the study

The report of this study will be organized into five (5) different chapters. Chapter one will deal with the introduction of the study; Chapter two will discuss the Review of relevant literature to the study; Chapter three will focus on the research methodology to be adopted; Chapter four of the study will be dedicated to the Presentation and analysis of data; and finally, Chapter five presenting the summary, conclusion, and recommendations.

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