THE CHALLENGES OF EFFECTIVE ACCOUNTING SYSTEM IN SMALL AND MEDIUM SCALE ENTERPRISES (SME’s)


Content

Abstract

Small and medium scale enterprises have long believed to be catalysts for economic growths and national development both in developed and developing countries. In Nigeria where private sector is not well developed SME is assumed to play the role of employment generation, facilitator of economic recovery and national development. The paper examined small and medium scale enterprises in Nigeria and in relation to those challenges which affects SME’S from development capacity to realizing its full potentials as well the prospect for improvement and development for employment generation, economic growth and national development. It suggested therefore that invigorating SME’S with strengthen committed to economic reform would offer a turning point in facilitating the recovery of Nigeria economy and national development.

 

 

 

 

TABLE OF CONTENTS

        Title Page                                                         i                      

        Certification                                                     ii

        Dedication                                                       iii

        Acknowledgements                                          iv

        Abstract                                                           v

        Table of Contents                                             vi

        Chapter One: Introduction

1.1      Background to the study                                 1

1.2   Statement of Challenge                                    5

1.3   Research Questions                                         9

1.4   Objectives of the Study                                    10

1.5      Statement of Hypotheses                                 10

1.6      Significance of the Study                                 11

1.7      Scope of the Study                                           13

1.8      Limitations of the Study                                  16

1.9      Definition of Terms                                          17

Chapter Two: Literature Review

2.1   Introduction                                                     21

2.2   Definition of Small and Medium Scale

Enterprises                                                      23

2.3      Characteristics of Small and Medium Scale

Enterprise                                                        27

2.4   Regulatory Frame Work                                   29

2.5   The Roles of Small and Medium Scale

Enterprise in Economic Growth and

Development                                                    34

2.6   The Need FPR Accounting Information for

SME’s                                                              37

2.7   Definition of Accounting                                  38

2.8   Accounting Challenges of SME’s                      39

2.9   Importance of Accounting Information SME’s  40

2.10  Uses of Accounting Information to SME’s                44

2.11 Financial Statement                                                45

2.12 Setting up Accounting Records                                48

2.12.1 Forms and Records                                       49

2.13 Internal Control a Necessary tool for

Safeguarding SME’s                                                 50

2.13.1 Control over the Accounting System             51

2.13.2 Management System                                     51

2.14 Budgeting and Budgetary Control                    52

2.15 Necessary Books to be kept by SME’s              55

2.16  Source of Fund/Financing for Small and

Medium Scales Enterprise                               58

2.16.1 Sources of Finance for SME’s                               59

2.17 The Role of Financial Institution in Financing

SME’s                                                              64

2.18 Problem Limiting Access to Funds                   67

2.19 Internal Challenges of SME’s                           68

Chapter Three: Research Method and Design

3.1   Introduction                                                     72

3.2      Research Design                                              73

3.3   Description of Population of the Study            74

3.4   Sample size                                                      75

3.5   Sampling Technique                                                75

3.6      Sources of Data Collection                               76

3.7   Method of Data Presentation                           77

3.8   Method of Data Analysis                                  78

Chapter Four: Data Presentation, Analysis and Interpretation

4.1      Introduction                                                     81

4.2      Presentation of Data                                        82

4.3   Data Analysis                                                   83

4.4   Hypothesis Testing                                          107

Chapter Five: Summary of Findings, Conclusion and Recommendations

5.1   Introduction                                                     115

5.2   Summary of Findings                                      115

5.3   Conclusion                                                      118

5.4   Recommendations                                           112

References                                                       124

 


CHAPTER ONE

INTRODUCTION

1.1      Background to the study

Nigeria has always been a strategic country in African with economic and political power. Unfortunately a history of prolonged military rule left the nation civil institutions in ruin the economy grossly mismanaged and individual valves completely misplaced thus preventing Nigeria from attaining its full  potential consequently due to this uncertainty, quite a number of foreign investors have been wary of doing business in Nigeria and with the successful transaction to a civilian government in 1999 the cloud of uncertainty cleared up a bit .However, a significant number of foreign investors are still not expected to rush into the country to do business ,probably until 2004, when Nigerian will test the sustainability of its democracy as it goes to the polls to decide its leadership for the next five years. As part of its strategy to review the economy and uplift the standard of living of Nigerians the government has identified sectors taking the economy with potential for rapid growth .one of such sectoral strategies is the development of small and medium scale enterprises (SME’S). SME’S are know to encourages people centered which help in alleviating poverty creating wealth and employment and stemming rural urban drift. Aware that the challenged facing SME’s in Nigeria are numerous, the government established the small and medium industries development Agency (SMIDA) as an umbrella agency with a mandate to coordinate and support the development of the SME’S sector in the country.

Small and medium scale business if property managed is a catalyst for industrial and economic growth. In fact, successful and big multinational companies in Nigeria today such as Guinness Nigeria PLC events Groups, UAC, John Holt group and other from numerous to mention started small in their home countries

The importance of small and medium scare business cannot be over emphasized. In Nigeria today SME’s faces serious management challenge because most of the operators and owners [entrepreneur] are not well educated our literacy level is still very low.

This study will focus on the challenges of effective accounting system in Nigeria challenge is something new and difficult which requires great effort and determination.

Experiences have shown that most programme set up by both the federal and state government to encourage entrepreneurial development do not bother to prescribed the type of challenge to be maintained by SME’S. This approach has left most SME’S (entrepreneur) operating without adequate challenges of effective accounting records and information. The bankers on their part do not also prescribed the type of accounting books to be kept by their clients, they rely on traditional method of appraising business based on set of accounts prepared by SME’S in the previous 3-5 years and projected income for the following 3-5years without caring about the nature of the accounting system that produced such accounting information. 

A business without an accounting system at all or good accounting system cannot produce any meaningful and reliable accounting information. It is not enough to advance loans or credit to business based on the traditional approach of project appraisal without some sort of monitoring such monitoring include:

a.     Inspection of the books and the accounting system at intervals-say quarterly.

b.     Inspection of actual project for which the loan had been granted also at intervals.                                 

c.     Periodic assessment of the technical and accounting manpower needs of the client.                            

Such monitoring as stated above will greatly improve the record-keeping habits of small and medium scale business owners as study has proved that record kept by them are always incomplete records.       

The importance of good record keeping was confirmed by Awosika, (1979,p.29).when he said that studies of small-scale business failure in the united kingdom and united state of America show that the majority of them had to do with inadequate records.

Absence of records may not be the only cause of challenges to a businessman but it certainly accounts for his inability to see in advance the direction in which the business is going, it is in view of the importance of good record keeping to the survival and well being of SME’S that this project work is embarked upon.                    

1.2   Statement of Problem                                   

Less developed countries (LDCS) have more small and medium scale enterprises (SEM’S) operating within their economics than the developed nations and if these LDCS are to match towards industrialization they have to ensure that their SME’S manufacturing business are assisted to grow effectively hence it is working at the different accounting challenges facing them and how these challenges could be minimized entirely.

Good accounting information for SME’S business and indeed any business at all is sine-quanon for their survival. Accounting information show monetary terms. This makes it pertinent for all business (Small or big) to maintain adequate record that will make it possible for their performance to be assessed with relatives ease.

It is a common saying in the accounting profession that financial management starts where accounting ends. This signifies the importance of accounting to the management of funds. If funds and financial transaction are not properly recorded, management of funds will be impossible. Most of the accounting challenges of small and medium scale business/enterprise in Nigeria are self inflicted because the operators do not keep ­–proper book of accounts either due to ignorance or deliberate attempt not to pay adequate tax by not showing the true performance of their business.

Some of this small and medium scale business does not enjoy the benefit of capital allowance and pioneering status because of lack of adequate records. Some suffer serious fraud as a result of lack of good records and accounting control. What they should have paid as taxes to remain good corporate citizen is usually lost to fraudulent and unscrupulous employees. In some case the fraud is so much that the small and medium scale business so affected dwindles financially and eventually goes into voluntary liquidation. Without good accounting records piecing together all necessary accounting information on adios basis for the purpose of raising additional funds for the growth of the business may be seriously impaired.

According to Anao (1975,p.28). “some business  are handicapped more by the fact that they do not keep good accounting records so that they find it difficult to convince their  bank manager  of their ability to repay the loan”. Entrepreneur can also minimize their difficulties in obtaining capital by conducting their business on sound and honest principles by employing records of the business and conducting detailed feasibility studies of all proposed project before embarking on them.

The question that readily comes to mind is whether SME’S and indeed other business could be properly managed without good accounting records   from desired accounting information could be gotten. The  answer is anybody guess and this was confirm by Osaze (1996,p.224).” the challenges of inadequate financing of SME’S can be partially traced  to the poor  accounting and financial  control system designed to produce data and information  consistent with the goals  and operational character  of the business, but that are also congruent with the expectation of investors and lending financial institutions the small business is liable and more importantly have challenge with obtaining expansion and working capital from external sources.

It is in a view of the above issue that this research work was embarked upon to find solution to the various accounting challenges facing small and medium scale enterprise so as to enhance their performance and so enable them grow into gigantic business

1.3   Research Questions

In order to achieve the objective of this study the following questions will be asked

1. Is poor performance of SME’S in Edo state as a result of improper accounting records being maintained?

2.     In what extents does poor accounting information access of raising funds by the SME’S?

3.     Is there any relationship between the failure of SME’S in Edo State and the poor accounting records and information?

4.     Do SME’S managed by managers with accounting knowledge performed better than others which is managed by managers without accounting knowledge?

 

1.4   Objectives of the Study

In this research work attempts will be made to examine the following;

1.     To examine if the poor performance of SME’S in Edo State is as a result of lack of proper accounting records being maintained.

2.     Whether is it necessary for the chief executive officer of small and medium scale business to have some training in accounting so as to enhance the performance of their business?

3.     The position of the institute of chartered accounting of Nigerian(ICAN)  as to whether small and medium scale business should engage and retain accounting personnel or make do with the service of accounting firms.

4.     The ISAB regulatory framework for SME’S

1.5      Statement of Hypothesis

Hypothesis One

Ho:  There is no significant relationship between SME’S performance and accounting records being maintained.

Hi    There is significant relationship between  SME’S performance and accounting records being maintained.

Hypothesis Two

Ho:  There is no significant relationship between poor accounting information and SME’S ability to raise funds.

Hi    There is significant relationship between poor accounting information and SME’S ability to raise funds.

Hypothesis Three

Ho:  SME’S business does not fail as a result of poor accounting records and information.

HI:    SME’S business fails as a result of poor accounting records and information.

1.6      Significance of the Study

A business whether big or small or medium comprises of people who work with materials and other resources for the attainments of some set objectives including profit maximization. The various transactions that take place day in day out within the organization need to the recorded and the performance of the business need to be measured.

Accounting is the only means of recording transaction such as labour cost or wages cost of materials, daily expenses and salaries cash in-flow and outflows need to be recorded also as well as asset bought for operating the business. Accounting is the only language of communicating the performance of any business at any given time to third parties such as government trade, creditors, shareholders and investors.

This study is aimed at determining the accounting information needs of small and medium scale enterprises the need for entrepreneurs of SME’S to have some knowledge of accounting as a means of improving the performance of such business. It will also look at the importance of proper record keeping as a means of improving and minimizing the frequent failure of SME’S in Nigeria. It is hoped that at the end of the study, the different accounting challenges facing SME’S will be identified and solution proffered. It is also expected that the study will be useful to:

a.           Both prospective and current entrepreneurs

b.          The providers of short term and long term funds such as banks, individual investors and bodies set up by government to encourage entrepreneurial development.

c.           Financial analysis, professional accounting firms that provides financial and accounting services to small and medium scale bodies.

1.7      Scope of the Study

This study is concerned with the accounting challenges of small and medium scale enterprise. The study used small and medium scale enterprise in Benin City as reference point. A business concern is made up of people with different behavioural pattern due to difference in their management cultures, perception and religion and the effects of these on good management record keeping attitude have not been considered in this study. It is in fact assumed that accounting challenges facing small and medium scale business in Benin City, Edo State are also applicable to similar business in other parts of the state including the far north.

According to this study covers financial accounting cost and management accounting. What constitutes a small and medium scale enterprise varies from place to place and from institution to institution and from country to country depending essentially and factually on the country’s level of development. Business before the introduction of SAP and before the March 5th 1993 devaluation of the Naira can readily be classified as cottage or small business in view of the presents values of the naira. Business that will be classified as small or medium scale in Nigeria can hardly be classified as such in the United Kingdom or United State of America because of their level of development.

Taking cognizance of these facts, small and medium scale enterprise/industry in this study is defined by the National Council on industry as an industry where total cost including working capital but excluding cost of land is over N1 million but not more than N40 million and a labour size of between 11 and 35 workers (small scale) while medium scale industry, is the industry where total cost including working capital but excluding cost of land is about N150 million, with a labour size of between 36 and 100 workers.

The study will cover small business and medium business in:

a.           Agro and Allied Business

-              Poultry feed and calcium

-              Egg production and processing

b.     Building material

-              Birds, doors and windows

-              Red and fencing wires, others are

b.          Chemicals and Allied products

c.           Food processing

d.          Textiles and clothing

e.           Chemicals and Allied products

f.            Pharmaceuticals

g.           Timber and wood processing

h.          Tailoring and fashion designing

i.            Bakery catering and hotels

j.            Supermarket

k.          Printing

l.            Educational equipments

m.        Transportation

1.8      Limitations of the Study

Although accounting is the universal language of communicating business activities and important limitation is the fact that the study is only based on small and medium scale enterprise in Edo State. Another important limitation is the extent to which respondents are willing to complete the questionnaires and the significance they attach to this study after limitation includes:

a.           The non-maintenance of adequate accounting records by SME’S.

b.          Fear of espionage and unwillingness of CEO’s of SME’S to dissolve certain information they regard as vital and confidential.

c.           The reliability of information given based on (a) and (b) above

d.          Time constraint

1.9      Definition of Terms

For a thorough understanding of the research, it is expedient for the following terms to be defined:-

a.     Accounting: Is the process of identifying, measuring, recording, classifying and summarized financial transaction or event to generate economic information and communicating and interpreting economic information so as to aid informed judgment and decisions by the end-users of the economic information. Anao, (1996).

b.     Book Keeping: Book-keeping is an aspect of accounting; it is the actual recording and summarizing of financial transaction. It provides the information on both the current value (equity of an enterprise and on its change in value due to profit or loss) over a given time period.

c.     Enterprise: According to Oxford Advance Learner’s dictionary of current English, enterprise means a company or business. It could be state owned/public enterprise. It could also be small and medium sized enterprise.

d.     Business: According to Oxford Advance Learner’s Dictionary, Business means the activity of making, buying selling or supplying goods or services
for money or profit.

e.     Accounting Records: Accounting record refers to the details of documentation raised with respect to the economics transaction of an enterprise from the point of initiation to the point of entry into the final accounts of the enterprises. Such records include the documentary evidence of the transaction and the various entries made in the books of the enterprise.

f.      Industry: One cannot possible define the term without defining a firm therefore, a firm is simply an organization set up to produce a particular good
(or some goods) or services for sales to other organization, government or member of the public. Economic refers to industry to mean all firm producing
the same products for example the foot wear industry in Nigeria would consist of all firms engage in the production and marketing of footwear product in the country.

g.     Challenge: According to the Oxford Advance Learner’s Dictionary, a challenge is difficulty or something that is difficult to understand.

h.     Development: Dictionary business and management by Jerry M. Roseburg (1978) sees development as “A gradual unfolding by virtue of which something comes to be. A criterion of effectiveness that refers to the ability of an organization to increase its capacity to react to existing or anticipated pressure.

i.      Government: According to Dictionary of American Government and politics (1988) the word government is viewed in a four perspective viz.

i.      The apparatus of state consisting of executive, legislature and judicial branches.

ii.     A political entity that has taking authority and jurisdiction over a defined geographical area of some specified purpose, such as five, protection schools.

iii.    The individual who temporarily control the institution of a state or sub national jurisdiction.

iv.    The formal institution and processes through which binding decisions are made for a society.

j.      Policy: It refers to as what everything government decides to do or not to do that is binding the society.

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