THE EFFECT OF ACCOUNTING TECHNIQUES ON SMALL BUSINESS PERFORMANCES.

CHAPTER ONE

INTRODUCTION

1.1.          BACKGROUND TO THE STUDY

The Small and medium scale enterprises  sector has been recognized worldwide for its role in economic advancement through ways various like; wealth generation, employment creation, and poverty reduction (Kithae, Gakure, & Munyao, 2012). Small and medium scale enterprises are a fundamental part of the economic fabric in most developing countries, and they play a very important role in furthering growth, innovation and prosperity. Although smaller in size, they are the most important enterprises in the economy due to the fact that when all theindividual effects are aggregated, they surpass that of the larger companies. The social and economic advantages of small and medium scale enterprises cannot be overstated.

 SMEs are defined as non- subsidiary, independent firms which employ less than a given number of employees, this number varies across national systems, other parameters other than the number of employees are used in categorizing businesses as SMEs.

As per the time of the new millennium SMES accounted for 95% of firms and 60-70% of employment creation in majority countries in the world (OECD, 2000). Small and Medium Scale Enterprises are mostly found in the service sector of various economies which in most countries account for two-thirds of employment levels.Being highly innovative, they lead to the utilization of our natural resources which in turn translates to increasing the country’s wealth through higher productivity. Small and medium scale enterprises have undoubtedly improved the standard of living of so many people especially those in the rural areas (Ariyo, 2005).

Accountingtechniques serves as a critical tool for recording, analyzing, monitoring and evaluating the financial condition of organizations,preparation of documents necessary for tax purposes, providing information support to many otherorganizational functions, (Amidu et al., 2011). In the context of SMEs, accounting techniques is important as itcan help the firms manage their short-term problems in critical areas like costing, expenditure and cashflow, byproviding information to support monitoring and control.

Many small business owners are daunted by the mere idea of accounting techniques and bookkeeping. But in reality, both are pretty simple. Keep in mind that bookkeeping and accounting techniques shares two basic goals: to keep track of income and expenses, which improves chances of making a profit, and to collect the financial information necessary for filing various tax returns. There is no requirement that records be kept in any particular way. As long as records accurately reflect the business’s income and expenses, there is a requirement, however, that some businesses use a certain techniques of crediting their accounts: the cash method or accrual method. Depending on the size of the business and amount of sales, one can create own ledgers and reports, or rely on accounting (Williams et al 1999). Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups, that is, assets, liabilities, and equity. Within these primary groups each distinctive asset, liability, income and expense is represented by respective “account”. An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financial-position elements on completion of the time period.

Furthermore, nurturing of the small to medium size enterprises (SMEs) is being hailed for their pivotal role in promoting grassroots economic growth and equitable sustainable development, this nurturing has resulted in increased entrepreneur activities in the SMEs sector in developing countries (OECD, 2000). SMEs play a key role in transition and developing countries These firms, constitute a major source of employment and generate significant domestic and export earnings, thus SME development emerges as a key instrument in poverty reduction efforts and their advancement is key to sustained economic growth, for they are an integral part of a country’s economic fabric and their success affects the well being of the society as engines of job creation, economic growth and innovation.

However, the mortality rate of these small firms is very high. According to the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN) Nigeria, 80% of SMEs die before their 5th anniversary, another smaller percentage goes into extinction between the sixth and tenth year thus only about five to ten percent of young SMEs survive, thrive and grow to maturity. This implies that, the survival rate of SMEs in Nigeria is less than 5% in the first five years of existence. This also suggests that, SMEs in Nigeria have not been able to contribute to development. Among the factors responsible for these untimely close-ups are poor accountingtechniques,lack of concrete record keeping, inadequate accounting information and procedures,lack of finance, weak institutional capacity, lack of managerial skills and training of small-scale enterprises,and tax related issues.

Against the backdrop, maintenance of proper accounting records and techniques is a pre-requisite for the success of every business or enterprise, this involves documenting all transactions of business entities includes assets, liabilities and capital (liquidity). In other to solve limitations such as lack of finance, weak institutional capacity, lack of managerial skills and training of small-scale enterprises, there is need for relevant business and management expertise to manage properly the finance, purchasing, selling, production, and human resources aspect of the business. According to Jones (2012), accounting is important in that, it allow businesses or organizations to understand their financial perspective, and moreso,in order to develop the small business enterprises properly; there is the need for them to adopt proper accounting techniques.

SMEs are also require adequate and also sophisticated accounting techniques and systems to better manage scarce resources and enhance customer and owner/manager values, assist them in controlling costs, measuring and improving productivity and thus ensure the achievement of the business goals.

 

1.2.           STATEMENT OF THE PROBLEM

Most of the existing research literature on accounting in Nigeria SMEs tends to be more biased toward the use of financial accounting techniques and methods by small business onwers, information technology adoption as well as research in credit accessibility for SMEs, more so only remote exists in regard of the adoption of modern accounting techniques by SMEs in Nigeria.

Nandan (2010) argued that like larger firms SMEs also require adequate and sophisticated accounting techniques and systems to better manage scare resources and enhance the firm’s values. Although SMEs may have some constraints in utilizing fully accounting techniques/practices due to their relatively small size and limited resources, like larger firms SMEs face similar forms of complexities, uncertainties and are more prone to failures.

A number of Small Scale Enterprises have not given much attention to accounting techniques in relation to their business transaction, despite its importance in the success of businesses. This could be lack of sound knowledge in accounting practices by owners or respective managers. Also, there was difficulty in ascertaining whether comprehensive accounting methods that satisfied the laws under which it was incorporation had been kept. It was hard to determine to what extent no adherence to laid – down accounting procedure and constituted in the wheel of implementation of good accounting system. Difficult exist in ascertaining how far non – recognition of the necessity of accounting techniques to continued existence and growth of this small scale business, low educational background of owners and the employment of unskilled accounting staff had affected the production of unreliable accounting or financial statement.

In addition, the pace of adoption of modern accounting techniques has been slow by many organizations, mostly Small business enterprises; this has led to the diminishing relevance of major accounting techniques and methods as a vital aid to managerial decision-making. This gap is commonly referred to as „relevance lost” where organisation’s accountants have not entirely abandoned concepts of conventional management accounting despite advancements in the business environment, thereby leading to lack of managerial accounting skills for decision making and lack of technical skills are as much obstacles to developing a small business as is the inability to access credit, which in turn diminish the rate of performances for mostly growing Small and medium scale business enterprises.

According to Goltz (2011), poor accounting techniques are one of the top ten reasons why small-scale businesses fail. i.e. you cannot be in control of a business if you do not know what is going on. With bad numbers, or no numbers, a firm’s is flying blind, and it happens all of the time, this affect the operations and performance of SMEs in Nigeria especially this issue of lack of adoption of good accounting techniques/method which is a worm eating deeply and the large chunk of revenues generated by these SMEs for their growth and survival. These have led to increase in record of dearth of Small and Medium Scale Enterprise (SMEs).

 

1.3.          OBJECTIVES OF THE STUDY

The major objective aim is to examine the effect of accounting techniques on small scale business performance.

Other specific objectives aimed to be achieved are:

1. Evaluate the knowledge levels of accounting techniques among small business owners and how this affects enterpriseperformances.

  1. Investigate the influence of accounting techniques on SMEs performance.
  2. Determine the influence of accounting techniques and practices on financial decision-making by Managers/ operators of SMEs.
  3. Determinethe factors hindering and/or enhancing accounting techniques/practices in small business enterprises.
  4. Examine the relationship between Accounting Techniques and SMEs operations and survival.
  5. evaluate challenges of accounting techniques among small business owners
  6. Suggest possible solution to the challenges confronted by various small scale business

1.4. RESEARCH QUESTION

The research question provides a framework and guidelines through which substantial knowledge of the research study can be understood.

The research question asked includes:

  1. Knowledge levels of accounting techniques among small business owners and how this affects enterprise performances?
  2. The influence of accounting techniques on SMEs performance?
  3. Influence of accounting techniques and practices on financial decision-making by Managers/ operators of SMEs?
    1. The factors hindering and/or enhancing accounting techniques/practices in small business enterprises?
    2. The relationship between Accounting Techniques and SMEs operations and survival?
    3. Challenges of accounting techniques among small business owners?

 

 

 

1.5. STATEMENT OF HYPOTHESIS

The following research hypotheses were developed in order to properly address the problems of the study. The hypotheses are stated in the null form for testing:

HYPOTHESIS ONE

Ho1: Accounting Techniques has no significant influence on SMEs performance

HYPOTHESIS TWO

There is no significant relationship accounting techniques and SMEs’ operation/survival.

 

1.6. SIGNIFICANCE OF THE STUDY

Though, this study was initiated to evaluate the importance of accounting techniques in small and medium scale business, no gain saying that, accounting techniques plays a positive role in the integrity of the decisions as well asthe success of the small scale business.

The significance of this study was to create through documentation, an awareness of the importance of accounting techniques and basic accounting procedures to small-scale enterprises.

It will therefore equally be of immense help to the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN), in evaluating the success of its activities with specific reference to the problem of poor accounting techniques initialization and basic accounting procedures in such industries. It would also assist the Agency in determining or formulating their future plans.

In addition it will be a source of knowledge to small-scale enterprises (SSE) on how to maintain proper accounting records and standards. The result will greatly facilitate the work of the Internal Revenue Services and the Value Added Tax officials in developing strategies to extend the tax net to cover such enterprises which form significant proportion of the Nigerian business community.

Finally, It will also be of use to the student, researchers for further research study, the existing and prospective entrepreneur as well as any interested party. It will assist students in their knowledge build-up and appreciation of the practical accounting situation of the small scale business.

1.7. SCOPE OF THE STUDY

The research work has focused on SMEs because these firms in Nigeria account for more than 90% of the country’s business (Central Companies Directory, 2010). Many studies have been conducted on small-scale enterprise such as accounting methods and small scale productivity, but none of them has looked at the accounting techniques on small scale business. It is for this reason that our study seek to look into the effectof accounting techniques on small business enterprises performances in Osun Metropolis.

 The activities of the regulating body Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN), were also put into consideration. However, the research was limited to small and medium scale enterprises operator in osun metropolis due the schedule of the researcher.

1.8. LIMITATIONS OF THE STUDY

As with all studies, limitations exist and must be acknowledged. Moreover, the outcomes were based on the information solicited from the respondents and such might be subjected to human errors, omissions and possible mis-statements.

The limitations of the study are as given below:

a)     First of all time did not allow the researcher to glean information from all the Small scale business enterprise and all institutions under SMEDAN

b)     The study could not show the whole scenario of the all small scale business in Nigeria.

c)     Because the sample is chosen from the one state Of Nigeria. That’s why the findings and analysis is varying slightly in organization to organization.

d)     The questionnaire was not understood by some respondent.

e)     Some respondent did not give enough concentration to understand the significant of analysis.

f)     The time was not enough to collect the data from the respondent.

 

1.9.  DEFINITION OF TERMS

  1. 1.      Accountant: An accountant is any person who possesses a professional license to practice accountancy from a recognized professional body and has legal capacity and authority to carryout the duties of accountants in taxation and audit practice.
  2. 2.      SMALL SCALE BUSINESS

It is defined as any business undertaken, owned, managed and controlled by not more than two entrepreneurs, has no more than twenty employees, has no definite organizational structure (i.e all employees report to the owners) and has relatively small shares of its market.

  1. Management accounting

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. 

  1. Balance Sheet (Statement of Financial Position) :A snapshot of the financial status or position of an organization at a point in time.
  2. Accrual Basis: A process of accounting that recognizes the impact of transactions on the financial statements in the time periods when revenues and expenses occur instead of when the company pays or receives cash.
  3. Cash Basis: A process of accounting where revenue and expense recognition occur when the company receives and pays out cash.
  4. 7.      Accounting: Accounting is defined as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information.
  5. Financial Measures of performance: financial measures of performance can be referred to as the results of a company’s operations in monetary terms. Financial measures of performance are derived from the accounts of a company or can be found in the company’s profit and loss statement or the balance sheet.

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