Financial Literacy As A Tool To Improving On The Profitability Of Small Scale Enterprises
Small scale businesses/enterprises play a vital role in developing as a well as developed countries, this is added to the ongoing reforms by the Central Bank of Nigeria for a sustainable financial literacy framework for small and medium scale enterprises (SMEs) in the country. The significance of this study therefore lies in the attempt to document the factor that is truly critical to the profitability of small scale enterprises but which has not been appreciated, recognized or factored into the various incentive schemes and policy measures being put up for SSEs in the state and nation at large. The critical factor is financial literacy among SSEs which is a pivotal requirement to its success and profitability. In addition, this research will equip owners of small scale enterprises by encouraging them to give the keeping of proper accounting records a greater priority in the objectives of their business. With this, adequate information about the business would be accurately known. Also awareness will be created in this study on the urgent need to improve on the financial literacy level of SSE owners as well as improve on their accounting practices. This will help formalize their business operations in a way that will suit their little nature. Furthermore, apart from the result of the study contributing to the “knowledge bank” of small scale enterprises, it will stimulate more researchers into this area since the research literature work in this field is still minimal.
1.1 Background of the Study
Take for instance Mr. Okon Etim, a middle-aged sole-proprietor who dropped out from primary school to start “pure water” business and now is a coca-cola dealer in Calabar. Mr. George Obi, a fresh University of Calabar graduate with a degree in business management who decides against going back home and starts up a hire-purchase “ke-ke” business in Calabar.
Allow me to point out however that while these are two small scale enterprises with a lot of potential, the later i.e Mr. George Obis’s has the “financial literacy advantage” as he must have gone through formal financial training in the course of his schooling against the former i.e. Chief Okon Etims’s who although has gained a lot of experience all the way from his pure water selling days but lacks formal financial training.
Financial literacy as the name implies occupies center stage in the quest to achieve an overall degree of success in an organization, (Bernhedm, 2008). Financial literacy or the lack of it has played a key role in the success and failure of our nations businesses for the past centuries. Therefore financial literacy enhances to a reasonable degree, a business’ goal of financial profit. This has encouraged companies and businesses to make sure that, adequate and proper books of account are kept, to ensure the reliability of their financial statements and, in the long run, improve their level of profitability.
Reducing the poverty rate as well as the reliance of the people on government and so called “white collar” jobs are part of the Millennium Development Goals (MDGs), these can be achieved through the growth and development of small scale enterprises.
The littleness of small scale businesses from the cradle has been the bedrock of industrialization in developing countries of the world. Globally, small enterprises have contributed enormously in improving the standard of living of the people by providing jobs to relieve the society of social embarrassment, stimulating indigenous entrepreneurship and utilizing scarce resources.
Small scale enterprises also play important roles in economic growth and development of every nation. They are a veritable vehicle for the achievement of national macro-economic objectives in terms of employment generation at low investment cost and enhancement apprenticeship training.
Furthermore, profit can analogously be viewed as the life-blood of a business and hence the accounting bases, concepts and principles adopted ought to capture and report all the relevant information to ensure reliability in its measurement (Nelson and Oiwas, 2011). Also Ewikaselu and Oyende (2009) made it clear that no business can work effectively without being financially literate and also having one form of accounting records or the other. It can therefore be deduced that appropriate financial literacy is important for a successful management of any business whether big or small.
Financial literacy is therefore said to be crucial and cannot be overemphasized as it enables small scale enterprises to be able to supply complete and relevant financial information needed to improve on decisions made by them, and also enhance their profitability. This research study therefore examines financial literacy and its influence on the profitability of small scale enterprises.
1.2 Statement of the Problem
It is a sad fact that in today’s Nigeria, small scale enterprises have not performed creditably well and they have not played an expected significant role. This is in spite of the fact that, since the 1999, administration, policy measures, schemes and support schemes have been put in place to develop the small scale enterprise sub-sector and to increase its performance.
The lack of financial literacy which is evident in their inability to keep complete accounting records is a major suspect in the failure of small scale enterprises. This unfortunately has resulted into a situation where small scale enterprises cannot capture adequately the business profit. This is because in the process of calculating profit, financial data are assembled in a way that can help make informed judgment and take decisions about the business. However, this financial data cannot be assembled without adequate financial literacy. This problem has ultimately affected the profitability of small scale businesses.
In addition to the above is the lack of financial risk and opportunities, use of business funds for personal transactions, limited access to bank credit facilities and insurance policies. However these and many more can be addressed by being financially literate.
Hence, the researcher believes that these inherent problems could be attributed to the neglect of financial literacy by small scale enterprises.
1.3 Objectives of the Study
The main objective of this study is to clearly promote financial literacy as a tool to improving on the profitability of small scale enterprises, particularly in Calabar Municipality of Cross River State. The specific objectives of the study are as follows:
- To examine the extent to which financial literacy is adopted by small scale enterprises in Calabar municipality.
- To determine the extent to which accounting records enhance the profitability of small scale enterprises.
- To ascertain the problems that hinders the utilization of accounting records by small scale enterprises.
1.4 Research Questions
The study developed the following research questions that will guide the researcher in the quest to finding solutions to these research problems?
- To what extent is financial literacy adopted by small scale enterprises in Calabar Municipality?
- To what extent does accounting records enhance the profitability of small scale enterprises?
- Are there problems that hinder the utilization of accounting records by small scale enterprises?
1.5 Research Hypothesis
In order to set a good base for carrying out the research, the following hypotheses were posed, believing that by the time adequate answers have been provided, the ,study would have covered necessary grounds. To achieve this, the study seeks to test the following three (3) operational hypotheses outlined in the null form:
- H0: the extent to which financial literacy is adopted in order to influence small scale enterprises’ profitability is significantly low.
- H0: the utilization of accounting records does not significantly influence the profitability of small scale enterprises.
- H0: there are no significant problems hindering the utilization of accounting records by small scale enterprises.
1.6 Limitation and Delimitation of the Study
With a large percentage of business in the state falling within the small scale enterprise sub-sector, the need to clearly define the scope and area of the study becomes imperative.
The study is therefore confined to the small scale enterprises operating in Calabar Municipality of Cross River State, and yet it is easy to use the result of this research to gain insight into the entire small scale enterprises.
Calabar Municipality has been chosen because of the peaceful nature and the serene vicinity, as it is a necessary panacea for the survival of the business and also for the study. Thus, all the necessary information needed for this study will be collected from this region of the state.
A study of this nature could not have been carried out without any hitch. Notable among the constraints was the scarcity of relevant empirical literature in financial literacy among small scale enterprises. Empirical information on problems of small scale enterprises are abundant in literature but work done on financial literacy is still scanty and that was a serious limitation of the study.
Despite this challenge, this study represents a true picture of all that was obtained from small scale businesses in Calabar Municipality Metropolis.
1.7 Significance of the Study
Small scale businesses/enterprises play a vital role in developing as a well as developed countries, this is added to the ongoing reforms by the Central Bank of Nigeria for a sustainable financial literacy framework for small and medium scale enterprises (SMEs) in the country.
The significance of this study therefore lies in the attempt to document the factor that is truly critical to the profitability of small scale enterprises but which has not been appreciated, recognized or factored into the various incentive schemes and policy measures being put up for SSEs in the state and nation at large. The critical factor is financial literacy among SSEs which is a pivotal requirement to its success and profitability.
In addition, this research will equip owners of small scale enterprises by encouraging them to give the keeping of proper accounting records a greater priority in the objectives of their business. With this, adequate information about the business would be accurately known.
Also awareness will be created in this study on the urgent need to improve on the financial literacy level of SSE owners as well as improve on their accounting practices. This will help formalize their business operations in a way that will suit their little nature.
Furthermore, apart from the result of the study contributing to the “knowledge bank” of small scale enterprises, it will stimulate more researchers into this area since the research literature work in this field is still minimal.
Lastly, it will by my pre-requisite for the award of Bachelor of Science (B.Sc) Degree in Accounting.
1.8 Organization of the Study
This study is presented in five (5) chapters. These chapters are organized in a sequential manner that will aid careful investigation and early achievement of the objectives.
- Chapter one is a preview of the background of the study and the problems that necessitated the research. This leads to the outline of objectives, significance of the study, research questions and operational hypotheses within the sample score of small scale enterprises in Calabar Municipality of Cross River State.
- Chapter two presents the review of relevant works as it relates to the study. Also, theories about the dependent and the independent variables were discussed. It also examines the theoretical framework of financial literacy and small scale enterprises.
- Chapter three reveals the methods of data collection in relation to the research design, population and sample with emphasis on the model specification, estimation, validation and reliability of research instrument.
- Chapter four presents and analyses the data and also findings, dealing with the extent to which small scale enterprises adopt financial literacy and conversely the utilization of accounting records by SSEs and its influence on profitability.
- Chapter five summarizes major findings from the study, recommends tentative policy thrust and also states suggested areas for further research.
1.9 Operational Definition of Terms
Financial literacy and accounting literacy are expressions or terms that are often used interchangeably. It is also important to note that the concept of financial literacy and small scale enterprises from empirical literatures available lack a consensus definition. Therefore, for the purpose of this research and in order to reduce, if not totally eliminate ambiguity, the following definitions are given as peculiar to the study:
Financial literacy is used to describe the ability to understand basic accounting and finance concepts i.e. how money works, as well as its application i.e. the ability to use such knowledge and skills to manage financial resources effectively for a lifetime of financial wellbeing.
Financial literacy is a set of skills and knowledge that allow an individual make informed and effective decisions with all of their financial resources.
Profitability can be defined as the businesses ability to generate revenue in excess of the cost incurred in producing this revenue. When the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity then it can be said that profit was made.
Small Scale Enterprises
Small scale enterprises can be defined as a business with an employment level of not more than five (5) persons and an annual turnover of less than five hundred thousand Naira (N500,000).
1.10 Historical Background of Small Scale Enterprises
Economic history is well stocked with enough insights into the humble beginnings of present-day grand corporations. Evidences abound that almost all the multi-national grant corporations we have today were once small enterprises, growing as their industry grew. Even as the international level, in the early stages of her industrialization, Japan’s economy was dominated by traditional industries, and by a large number of small scale firms drawing their strengths not from the abundance of capital but rather from the supply of labor (Oyechukwu, 2011).
In concrete terms, small scale enterprises constitute a greater percentage of all registered businesses in Nigeria, and they have been in existence for quite a long time.
Pre-Independence Historical Development
Prior to Nigerian independence, the business climate was almost totally dominated by the colonial and other European multi-national companies like United African Company (UAC), GB Dlirant, Unilever PLC, Leventis Stores etc Towards the tail end of the 1990s, the Nigerian Industrial Development Bank (NIDB) was founded to assist potential entrepreneurs to get involved in agricultural exploration of natural resources, commence and industrial production.
However, few Nigerians (mostly the semi-illiterates) benefitted from the generous government attitude of this time. This was because during this time, Nigerians considered the civil service to be more prestigious than business despite the creation of the Colony Development Loans Board by the colonial administration.
1970 – 1976
A major remarkable breakthrough in small scale business came about through the indigenization Decree of 1972 and later the Nigerian Enterprise Promotion Act of 1977. There were genuine attempts by the federal government to make sure that Nigerians play an active role in the development of the economy.
Later in its 1970 – 1974 National Developments Plan, the federal government gave special attention to the development of small scale industries particularly in rural areas. This was in recognition of the roles of small scale businesses as the seedbeds and training grounds for entrepreneurship.
1980 – 1989
Within this decade, government policy measures placed emphasis on the technological aspects of industrial development of small scale industries in Nigeria. Various Nigerian governments within this decade embarked in creative measures to direct efforts towards the maximum exploitation of national resources and tuned to discourage capital intensive mode of production in the light of abundant resources available. Some basic policies were formulated and these policy measures as constructed placed a great emphasis on the technological aspect of industrial development of small scale enterprises.
It is worthy of note that the introduction of the Structural Adjustment Program (SAP) during the Babangida’s regime made matters worse for employers of labor and created a veritable ground for self-employment.
During this period, both federal and state governments have contributed to the growth of small scale enterprises in Nigeria especially in the rural areas. Various fiscal and non-fiscal incentives have been established for investors and entrepreneurs in the small scale sector of the economy. Of special mentioning was the strategy adopted by the federal government towards the training and motivation of unemployed graduates to be gainfully employed in out-of –school entrepreneurship development programs. Thus on the presentation of viable and feasible projects, approved loans are disbursed through pre-selected commercial, banks assisted by National Directorate of Employment (NDE).
The Peoples Bank of Nigeria (PBN) was also in the vanguard of granting soft loans to unemployed youth artisans, and this was aimed by diverting attention of youths from government salaried jobs, to that of gainful self-employment. Thus, the Peoples Bank in collaboration with the National Directorate of Employment were solely charged with the responsibility of generating employment through their various programs for thousands of unemployed Nigerians.
2000 – DATE
During this period, government at all levels has become increasingly interested in grooming young potential youths to be self-employed and be successful entrepreneurs. To show its seriousness, the federal government has through its educational agencies like the National Business and Technical Educational Board (NBTEB), the Nigerian Universities Commissioned (NUC) and the National Youth Service Corps (NYSC) gave a directive that entrepreneurship development courses be incorporated into curriculum of secondary and tertiary institutions as well as NYSC program.
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