The Effect Of Financial Management Practices On The Profitability Of Small And Medium Scale Enterprises (SMEs) In Kwara State, Nigeria

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The Effect Of Financial Management Practices On The Profitability Of Small And Medium Scale Enterprises (SMEs) In Kwara State, Nigeria


Abstract


This study aims to determine the effect of financial management practices on the profitability of small and medium scale enterprises (SMEs) in Kwara state, Nigeria. The data collected would be analyzed using simple percentage on the tables presented and linear regression analysis (multivariate techniques) because it would investigate the relationship between financial reporting and analysis, working capital management and accounting information system and enterprise’s profitability. The result of the first hypothesis however revealed that there is a strong positive relationship between the financial report and analysis and profitability of SMEs. i) Working capital management has a positive effect on the profit of small- and medium-sized enterprises. The results of the second hypothesis also revealed that financial reporting, analysis, accounting system, and working capital have a negative impact on the bottom line of the enterprise.


Chapter One


Introduction

1.1 Background to the Study

Small and medium enterprise (SMEs) are considered backbone of economic growth in all countries (Rajesh, Surash and Deshmukh, 2008). 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, 2008; Ebiringa, 2011). Huyghebaert and Gucht (2004) 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, 1980; Watson, 2003). 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, 1993).

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, 2004). 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 effect of financial management practices on the profitability of small and medium scale enterprises (SMEs) in Kwara state, Nigeria. Other specific objectives include:

  1. To determine the effect of financial reporting and analysis on the profitability of small and medium scale enterprises.
  2. To determine the impact of working capital management on the profitability of small and medium scale enterprises
  3. To determine the effect of accounting information system on the profitability of small and medium scale enterprises.

1.4 Research Questions

  1. What is the effect of financial reporting and analysis on profitability of small and medium scale enterprises?
  2. What is the impact of working capital management on profitability of small and medium scale enterprises?
  3. 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. 1993).

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. 1993). 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. 1993).

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, 1998, Nguyen, 2001, Peel et al., 1996) 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 Ilorin, Kwara 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.

  1. Chapter one will deal with the introduction of the study; Chapter two will discuss the Review of relevant literature to the study;
  2. Chapter three will focus on the research methodology to be adopted;
  3. Chapter four of the study will be dedicated to the Presentation and analysis of data; and finally,
  4. Chapter five presenting the summary, conclusion, and recommendations.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

This chapter consist of discourse on summary, conclusion and recommendations. Followed by this is the limitations of this research.


5.2 Summary

This research examined the effect of financial management practises on the profitability of SMEs in Kwara State, Nigeria. This study has five chapters in all namely; chapter one which is the introduction, chapter two which comprise the review of literature, chapter three, the research methodology, chapter four, the presentation and analysis of data and lastly the chapter which includes the summary, conclusion and recommendation.

Data for this study was obtained through the administration of questionnaire. The data was however analysed with descriptive and inferential statistics. In the chapter one of this study, three hypotheses were however stated in line with the objectives and research questions.

The result of the first hypothesis however revealed that there is a strong positive relationship between the financial reporting and analysis and profitability of SMEs. The second also revealed that there is a strong positive relationship between working capital management and the profitability of SMEs and the last hypothesis also gave a similar result.


5.3 Conclusion

The outcome of this research study was not shocking as it was as expected. The result of this study can however be used for further research and can also be used in decision making as care and precautions were in writing up this study. The findings of this study can however be summarised that;

  1. Working capital management has a positive effect on the profit of SMEs.
  2. Financial reporting and analysis also has a positive impact on the profitability of SMEs.
  3. Accounting information system has a positive impact on the profitability of SMEs.

5.4 Recommendations

As indicated in this research, financial management practices has impact on the profitability of SMEs in Kwara. SMEs should endeavour to improve on their financial management practises as the impact of their growth on the growth of the Nigerian economy cannot be over-emphasised. Even if SMEs adopt good financial management practices, this is not enough to ensure the growth of SMEs. The federal government should ensure that good operating environment is provided to SMEs so they can perform well. Tax incentives can also be granted to them to ensure their survival. Financial institutions should grant more loan to SMEs so they can invest more into their business.


5.5 Limitations

This research studied SMEs in Kwara State thereby if generalizations might be inefficient or inappropriate if they are made on the SMEs in Nigeria. It might even lead to wrong generalizations if it is on Kwara state as just a very little percentage of the population was examined. The researcher encountered quite a number of ups and downs which could have made this study more useful. The researcher’s primary limitations was insufficient fund. The researcher could have obtained quality materials to include in the literature review but was financially constrained. The researcher also was faced with insufficient time which made it impossible cut across a fair percentage of the population. However, upon all these limitations, enough effort was made to ensure that the research study is of high quality and can be useful for further research and decision making.


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