IMPACT OF SOUND FINANCIAL STATEMENT PREPARATION ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES: CASE STUDY OF KATAGUM L.G.A, BAUCHI STATE
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) (2004) 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. (2008) 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, 2005).
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
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
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
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
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
5. What is the relationship between financial statements and
6. To what extent do poor credit facilities contributes to
inadequate accounting records in SMEs in Nigeria?
1.5 RESEARCH HYPOTHESES
H01: soundfinancial 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
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 LIMITATION 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
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.
1.8 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 fulfilment of an obligation, in a
manner that releases the performer from all liabilities under the contract.