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Effect of Fuel Subsidy Removal on the Profitability of Small and Medium Enterprises in Nigeria: The Mediating Role of Cost Accounting Practices and the Moderating Role of Financial Management Efficiency

Abstract

The removal of fuel subsidies in Nigeria represents one of the most significant economic policy reforms undertaken by the Federal Government in recent years. The policy was introduced to reduce government expenditure, improve fiscal sustainability, eliminate market distortions, and redirect public resources toward critical sectors of the economy. However, the immediate consequence of the policy has been a substantial increase in the prices of petroleum products, leading to higher transportation costs, increased production expenses, inflationary pressures, and declining purchasing power. These developments have had profound implications for Small and Medium Enterprises (SMEs), which constitute a significant proportion of Nigeria's productive sector and contribute substantially to employment generation, economic growth, and poverty reduction. While some SMEs have struggled to remain profitable under the prevailing economic conditions, others have demonstrated resilience through effective financial and cost management strategies. Against this background, this study investigates the effect of fuel subsidy removal on the profitability of Small and Medium Enterprises in Nigeria, while examining the mediating role of cost accounting practices and the moderating role of financial management efficiency.The study is anchored on the Contingency Theory, Resource-Based View (RBV), and Stakeholder Theory. These theoretical perspectives explain how organizations adapt their internal resources, accounting systems, and financial management practices to respond to changes in the external business environment. Specifically, the study seeks to determine the direct effect of fuel subsidy removal on SME profitability, assess whether cost accounting practices mediate this relationship, and examine whether financial management efficiency moderates the impact of fuel subsidy removal on organizational profitability.A quantitative research design will be adopted, utilizing a structured questionnaire to collect primary data from owners, managers, accountants, finance officers, and other key decision-makers of Small and Medium Enterprises operating across different sectors in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of manufacturing, trading, agricultural, and service-based SMEs. The collected data will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and Structural Equation Modeling (SEM) to examine the direct, mediating, and moderating relationships among the study variables. The measurement model will be evaluated using reliability and validity tests, including Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA), to ensure the robustness and consistency of the research instrument.The study anticipates that fuel subsidy removal will exert a significant negative effect on the profitability of SMEs due to increased operating costs, higher transportation and logistics expenses, rising energy costs, reduced consumer demand, and inflation-induced declines in business performance. However, it is expected that effective cost accounting practices will partially mediate this relationship by enabling SMEs to identify cost drivers, control unnecessary expenditures, improve budgeting accuracy, enhance pricing decisions, and allocate resources more efficiently. Through systematic cost planning, variance analysis, standard costing, budgeting, and cost control mechanisms, SMEs are expected to mitigate some of the adverse financial effects associated with the subsidy removal policy.Furthermore, financial management efficiency is expected to moderate the relationship between fuel subsidy removal and SME profitability. Enterprises that demonstrate efficient financial management through prudent cash flow management, effective working capital administration, sound investment decisions, efficient debt management, timely financial reporting, and strategic financial planning are expected to be more resilient to the economic shocks associated with fuel subsidy removal. Conversely, SMEs with weak financial management systems may experience greater financial distress, declining profitability, liquidity challenges, and increased risk of business failure. The interaction between external economic reforms and internal financial capabilities is therefore expected to explain differences in profitability among SMEs operating under similar market conditions.This study is expected to contribute significantly to the accounting, finance, and entrepreneurship literature by extending existing knowledge on the consequences of macroeconomic policy reforms on business performance. Unlike previous studies that focused primarily on the direct economic effects of fuel subsidy removal, this research integrates cost accounting practices as a mediating variable and financial management efficiency as a moderating variable, thereby providing a more comprehensive explanation of how SMEs can respond strategically to policy-induced economic shocks. The findings will provide valuable insights for policymakers, government agencies, SME development institutions, accounting professionals, financial managers, investors, and business owners on the importance of strengthening internal accounting and financial management systems as mechanisms for improving business resilience. The study will also inform policy formulation aimed at supporting SMEs through targeted interventions, capacity-building programmes, and financial assistance initiatives that enhance their ability to withstand macroeconomic reforms and sustain long-term profitability in Nigeria.

Keywords: Fuel subsidy removal, profitability, Small and Medium Enterprises (SMEs), cost accounting practices, financial management efficiency, mediation, moderation, macroeconomic policy, Structural Equation Modeling (SEM)