CHAPTER
ONE
INTRODUCTION
1.0
BACKGROUND
Small and Medium-sized
Enterprises (SMEs) play a major role in economic development through employment
creation and income generation. SMEs are sometimes referred to as Micro, Small
and Medium Enterprises (MSMEs). They cover non farm activities such as
manufacturing, mining, commerce and services. There are different criteria for
categorizing SMEs. Commonly used criteria are total number of employees, total
investment and sales turnover (Burns & Dewhust 1996; Bushong 1995; Holmes
et al. 2003).
In the context of Nigeria,
SMEs are those enterprises engaging up to 29 employees, in most cases family
members, with capital amounting up to N100,000. Majority of SMEs fall under the
informal sector. SMEs are formalized undertakings engaging between 1 and 29
employees, with capital investment from N100, 000.
According to World Bank
(2006); Nigeria is characterized by low capital formation, SMEs are the best
option to address this problem. SMEs tend to be more effective in utilization
of local resources using simple affordable technology. SMEs play a fundamental
role in utilizing and adding value to local resources. In addition, development
of SMEs facilitates distribution of economic activities within the economy and foster equitable
income distribution. Other relevance of SMEs to the socio-economic development
of Nigeria includes innovation, contribution to the growth of GDP, job creation
and many others. Bookkeeping or financial recordkeeping therefore is an
essential ingredient for the success or failure of SMEs in developing
countries.
In spite of the
significant gains from the growth of SMEs to the Nigerian economy, there are a
number of challenges facing the sub-sector. Among many of these challenges in
Nigeria is lack of access to finance and these has been largely due to lack of
business records to enable them access credit from banks. It is estimated that
25 to 30% of SMEs under 5 years collapse every year (Ministry of Trade and
Industry 2004).
To address the challenge
of lack of access to finance among SMEs, they must address the problem of
bookkeeping. In Nigeria, credit facilities to SMEs are in the form of loans or debt
financing offered by banks, which provide growth capital for SMEs. However,
there are numerous obstacles to these SMEs in accessing credit facilities
hence, the difficulty of access to capital, high interest rates charges are
partially the result of incomplete (or no) accounting records, and the
inefficient use of accounting information. Poor record keeping and accounting
information also made it difficult for financial institutions to evaluate
potential risks and returns (World Bank 1978), making the banks unwilling to
lend to SMEs. As a result, SMEs pay high interest rates or fall back on the
middlemen or money lenders, whose loans are costly and often restrictive.
Modern bookkeeping when
practiced would provide the necessary information that will critically affect
major business decisions and also facilitates effective monitoring the
financial development or failure of the business. For instance, the evaluation
of financial consequences takes a big part in every decision
that the owner will make. Without reliable financial information and accurate
records, it will be intricate to project the impacts of a certain course or
action. It must be noted that, profitability is revealed only with accurate
records.
According to Stephen Thompson (2004), “proper
bookkeeping business needs. He also indicated that, a basic bookkeeping report,
when done correctly, should be able to answer these questions”.
1. How
much income are you generating every month, and how much will you be expecting
in the future?
2. How
much cash is under your list of receivables and when will they turn to actual
cash?
3. Which
of your product lines or services are bringing in the most amount of profit,
break-even, end/or draining your resources?
4.
How does the data compare with last year or the
last quarter?
5.
How does the data compare with projections?
6
How does all this information compare with the competition? Are you leading or
falling behind?
It
is thus, the objective of this study to analyses the significance of
bookkeeping and its effects to the growth of SMEs in Nigeria.
1.1
STATEMENT OF THE PROBLEM
Even
though SMEs are the base of the coun on their mode of recordkeeping in Nigeria. R
(BAC) of the NBSSI have
shown that, recordkeeping is a major problem facing the country. Their figures
as at March 2004 suggest that, 264 small and medium enterprises were contacted
by their out fit in the Uyo. Out of these figures, only 145 were identified to
be practicing basic bookkeeping and according to this report, the manner in
which it is done could not support any effective financial management of these
businesses (2004 NBSSI/ BAC, annual report).
Further studies in 2006
reveals similar trend and the problem is peculiar with small businesses which
constitute about 90% of the informal sector in the Nigerian economy. The
concern has risen as to why such a significant number of SMEs fail to keep
proper records of the various activities within their business. As indicated,
records must be kept in such a manner that would enable the business assessable
income and allowable deductions to be readily ascertained. Proper record
keeping will enable tax officials assess correctly the profit of the business
to enable them perform proper tax assessment of these businesses.
Generally, a business
needs to keep sufficient records in order to run the business efficiently and
effectively. Lack of proper recordkeeping system in Nigeria is affecting
industrial statistics compilation for the country and this does not assist the
government in planning for the sector.
It does not also support
businesses to access loans from financial institutions because track record
reveals the viability and profitability, hence the ability for repayment of the
loans granted to these SMEs.
In spite of all these problems associated with
lack of bookkeeping, many businesses still fail to keep proper records leading
to high failure rate of about 30% of businesses annually in Nigeria (Nigeria
Bureau of Statistics report, 2003-2004).
In situation where they even survive, inaccurate
records normally have an impact on businesses negatively and do not reveal the
true stance of business.
In view of the above challenges faced by both the
SMEs and the Government, and also having recognized the fact that SMEs remai is
the need to do a thorough study to discover some of the reasons for lack of
proper or no recordkeeping in the country. This project therefore, is an effort
to do an in-depth study
and analysis of various known and unknown reasons
for lack of proper recordkeeping and the advantages in using modern systems in
bookkeeping like computer support systems by SMEs in the Uyo.
1.2 Objectives
of the Study
A. General Objective
This study aims at assessing the significance of
bookkeeping practices to the development of SMEs in the Uyo?
B. Specific
Objectives
1. To
assess whether SMEs in the Local Government Area were practicing bookkeeping.
2. To
examine methods of recordkeeping by SMEs.
3. To
determine how recordkeeping enhances the development of SMEs.
4. To
examine the challenges to proper record keeping.
1.3
Research Questions
1. Does
businesses in the Local Government Area practiced bookkeeping?
2. What
methods were used in bookkeeping by SMEs?
3. Does
recordkeeping enhances the development of SMEs?
4.
Are there challenges facing SMEs in recordkeeping?
1.4
Significance of the Study
The significance of the
study is to draw awareness on the importance of recordkeeping in businesses.
Lack of data hampers a comprehensive analysis, and would subject businesses to
the risk of hitting cash flow crisis, misappropriation of funds and businesses
may slip off many opportunities to grow and expand.
The
significance of the study seeks to highlight on such benefits as to:
1. help
businesses improve bookkeeping practices and to enable the Internal Revenue
Service to evaluate their business activities
2. help
businesses keep accurate and updated records and financial activities
3.
help simplify records and
summarized financial transactions into a usable form. That would provide the
base for data compilation for the country.
To fill the existing gap in knowledge and act as a
stepping stone for future researchers who would like to conduct studies on the
same topic or similar topics.
Furthermore, the study
will also enable researcher to fulfill partial requirements for the award of
Master Degree in Business Administration from Kwame Nkrumah University of
Science and Technology (KNUST), where the researcher studies.
1.5
Limitations of The Study
The main limitation of the
study was, the Small and Medium Scale Business Development Agency of Nigeria
and the Ministry of Trade and Industry found it difficult to provide all the
needed information for the study, because there was no adequate information on
records aspect on SMEs in the Local Government Area as well as the regional
offices.
Again, inadequate finance
and time to move round the Local Government Area to gather data and also to
deal with the entire population were some of the challenges.
Also 136 questionnaires
were administered but only 126 were retrieved for the study. This was due to
the fact that most of the respondents fail to return the questionnaire.
1.6 The Scope of
Study
The scope of the study is to look at the general
effects of proper bookkeeping how it can support the growth of SMEs and also
the reasons for their failure to maintain good record keeping, in the Uyo.
1.7
The Methodology
Among the data
the research employed include both primary and secondary data.