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IMPACT OF SOUND FINANCIAL STATEMENT PREPARATION ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Globally, Small and Medium-Scale Enterprises (SMEs) play crucial roles in the support of both developed and developing economies. About 75% of the work forces in Europe are employed by SMEs (Rathnasiri, 2014). The dynamic role of SMEs in developing countries cannot be overemphasized. These enterprises have been recognized as the conduit through which rapid industrialization and other developmental goals of these countries can be achieved. United Nations Commission on Trade and Development (UNCTD) (2014) stated that SMEs were sustaining up to 60% of emerging economies growth output. The SME sector also employed a projected 22% of the adult population in developing countries. The sector employs about 15.5% of the labour force in Nigeria (Kayanula & Quartey, 2013), and has witnessed higher employment growth than micro and large scale enterprises (5% in Nigeria). Although, SMEs form a substantial part of the economy, unfortunately their contribution to the economy is yet to be fully realized due to a myriad of problems. This is evidence by the large number of SMEs spread throughout the country but, with very little to show in terms of sustained growth and diversity in Nigeria’s industrial output. Moreover, most SMEs work on small margins of cash flow, such that when they are faced with financial difficulties, they have neither the necessary resources nor the borrowing power like the bigger companies to sustain their operations (Kayanula & Quartey, 2013).

This problem generally occurs in SMEs due to lack of financial management practices like financial statements for decision to be taken. Cash outflows seem to outweigh cash inflows, access to credit facilities and loans are limited. The result is normally the SMEs operative on losses except the profits they assume which eventually collapse the business. The expansion response of this sector has been restricted by unnumbered issues comprising the unavailability of comprehensive financial statements. The development of the thought of incomplete records emerged from the background that majority of SMEs do not keep correct accounting records. To most of them a simple cashbook to record receipts and payments could be enough. As the business grows and the need for finance acquisition is envisioned, a realization is reached that the need for additional accounting information is required to facilitate the growth and sustainability of these enterprises. The problem of incomplete records, when it comes to preparing period-end financial statements, is that they do not show the actual performance of the business, as to whether it is progressing or retrogressing. As a prerequisite to profitability, sound business practices must be adopted to ensure the business ability to survive in the rapidly changing environment. Small business owners have failed to recognize the importance of putting in place a well-structured system as a means of helping them to provide accurate financial statement through which credit facilities could be obtained from banks and increasing their capital base. Adequate and proper records therefore are important feature of any business unit, as it helps in preparing up to day financial statements that are used in prudent business decision making.

Dawuda and Azeko (2015) observed that poor record keeping or non-availability of financial records lead to mismanagement of resources and poor cash management and this do have negative effect on the growth of SMEs leading to the collapse of some of them. According to Van Aardt et al. (2014) and Rankhumise (2010) poor records keeping makes it difficult to differentiate between business transactions and personal transactions. It is the responsibility of business owners and managers to avoid using assets of the business for personal use at the expense of the business. A primary purpose of preparing financial statement is to make available accurate information to owners and managers of SMEs for use in measuring financial performance. Thus, the significance of financial performance measurement to any business, big or small, is very imperative (Amoako et al, 2014). Haryani (2012) postulates that as profit maximization is most often the main concern of business entities, the accounting bases, concepts and principles adopted have to capture and report all the relevant accounting information to ensure consistency in its measurement. Owing to dire consequence that improper accounting practices can have on SMEs producing incomplete financial statements, it is imperative that the accounting practices of SMEs supply holistic and pertinent financial information needed to improve economic decisions made by entrepreneurs (Amidu and Abor, 2015). Information gathered revealed that majority of SMEs prepare financial statements annually yet most of them have difficulty in accessing finance from financial institutions and also difficulty measuring their financial performance based of the accounting records kept due to inadequacy of the accounting records to help prepare sound financial statements representing the true state of financial standing of the enterprises.

1.2  STATEMENT OF PROBLEM

In a modern business environment, which is becoming more competitive, the survival of firms, be it small or large; depends upon the strategic decisions made by management. This is however done with the help of financial statements analysis, which is a big challenge to most countries having shortage of professional accountants and financial analysts as it is the case to our country. Every manager needs information in order to make the right decision at the right time. In a business organization, the financial data are obtained from the financial statements. Financial analyst must analyze the data in financial statements to provide the meaningful information for use. Without correct information, the decisions made by decision makers may affect the growth of the organization. In this view, a sustained success will depend on how good decisions are made based on the proper analysis of financial statements. The relationship between analysis of financial statements and organization performance is twisted together, the management of an organization is depending on accounting information for taking various strategic decisions and financial statements provide such information. This information is made useful by analyzing and interpretation of financial statements with help of financial analysis techniques. Sharma & Shashi 2001, financial statements are prepared primarily for decision making, but the information provided in financial statements is not an end in itself and no meaningful conclusion can be drawn from these statements alone. The financial analysis helps in making decisions from the information provided in these financial statements. Thus, the proper financial statements analysis assists management in communicating information which is pertinent and purposeful for assessing the performance and effectiveness of the organization. This study is set to investigate the use of financial statement analysis on in assessing the performance of the organization.

1.3  AIMS OF THE STUDY

The major purpose of this study is to examine the critical analysis of the use of financial statement in assessing the performance of an organization. Other general objectives of the study are:
1. To determine the extent to which sound financial statement preparation is carried out among these businesses.
2. To examine the nature of financial statements of an organization.
3. To examine the impacts of sound financial statements preparation on the performance of Small and Medium Enterprises (SMEs).
4. To examine the challenges facing Small and Medium Enterprises (SMEs) in adopting effective financial accounting reporting in Nigeria.
5. To examine the relationship between financial statements and organization performance.
6. To ascertain the contribution of poor credit facilities to inadequate accounting records in SMEs in Nigeria.

1.4  RESEARCH QUESTIONS

1. To what extent is sound financial statement preparation being carried out among these businesses?
2. What is the nature of financial statements of an organization?
3. What are the impacts of sound financial statements preparation on the performance of Small and Medium Enterprises (SMEs)?
4. What are those challenges facing Small and Medium Enterprises (SMEs) in adopting effective financial accounting reporting in Nigeria?
5. What is the relationship between financial statements and organization performance?
6. To what extent do poor credit facilities contributes to inadequate accounting records in SMEs in Nigeria?

1.5  RESEARCH HYPOTHESES

H01: sound financial statement preparation has no significant impact on the performance of small and medium scale enterprises in Nigeria.
H02: Sound financial statement preparation has no significant relationship with the performance of small scale and medium scale enterprises in Nigeria.

1.6  SIGNIFICANCE OF THE STUDY

The researcher hope that this analytical research will play its part in giving attention to the financial performance of an organization, to the organization management as well as users of the financial statements. Also it will be useful for the management on setting of and selection of appropriate financing and operating strategies to be competent in any organization. In addition to that, it helps the researchers to employ their theoretical knowledge in to practice. Besides, the study and frame work designed to evaluate the financial performance of organizations will be expected to serve as an input for future researchers interested in assessing the performance of an organization using financial statements.

1.7    SCOPE OF THE STUDY

The study is based on the impact of sound financial statement preparation on the performance of small and medium scale enterprises, case study of Katagum L.G.A, Bauchi state.

1.8   LIMITATIONS OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9  DEFINITION OF TERMS

Analysis:A systematic examination and evaluation of data or information, by breaking it into its component parts to uncover their inter-relationships or opposite of synthesis. An examination of data and facts to uncover, understand the cause, effect and relationships, thus providing basis for problem solving and decision making.
Financial Statement: Is a summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is it current financial position. The three basic financial statements are the (1) balance sheet, which shows firm's assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm's activities during a stated period.
Assessing: Is the action or an instance of making a judgment about something: the act of assessing something.
Performance: The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the fulfillment of an obligation, in a manner that releases the performer from all liabilities under the contract.