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Financial Accounting Literacy And Performance Of SMES In Nigeria

ASTRACT

The objective of the study was to investigate the importance of financial literacy on the performance of micro and small enterprises in Nigeria. The study aimed at examining the effect of financial knowledge on the profitability of micro and small enterprises that are owned by entrepreneurs and traders in Nigeria. the effect of financial behavior on profitability of micro and small enterprises and the effect of financial at attitude on profitability of micro and small enterprises.

The study adopted a descriptive research method for obtaining necessary primary data to give clear understanding of the research objectives. This research design helped in observing the importance of financial knowledge, financial behavior and financial attitude on the growth and performance of micro and small enterprises in Nigeria. The study involved samples drawn from micro or small enterprises. To achieve the objectives, a deductive approach was used, where primary data was gathered through issuing of a set of structured questionnaires to a sample population of 52smal businesses. Probability sampling was used to randomly select respondents to collect data.

The study concludes that financial knowledge does not necessarily translate into profits unless it is applied in decisions and other activities of the business. For example, the knowledge of time value of money does not mean ones’ profits will increase unless the business owner applies this knowledge on decisions in running the business. It also concludes that good financial behavior such as budgeting, debt management, savings, record keeping and retirement planning contributes to profitability of SMEss. Also, positive attitude towards future, risk management, social influences and pursuit for acquisition of skills translates into profits for micro and small enterprises.

The study therefore, recommends financial education and training programs by the government along with other institutions, that will encourage application of financial knowledge on activities of business owners. These programs should also be able to motivate and encourage positive attitude toward future orientation and growth of the businesses. The study also recommends that the informal sector should be encouraged to keep records of their transactions to prevent losses and miscalculations.

 

 

TABLE OF CONTENT

ASTRACT

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Research Questions

1.4 Justification of the Study

1.5 Objectives of the Study

1.7 Scope of the Study

1.8 Plan of the Study

CHAPTER TWO

LITERATURE REVIEW AND COCEPTUAL FRAMEWORK

2.1 Theoretical Framework

2.3 Conceptual Framework Concept of financial literacy

2.8 Review of Related Empirical Studies

2.8.2 Empirical Review

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design

3.2 Population

3.3 Sampling Frame

3.5 Data collection

3.5.1 Data Validity and Reliability

3.6 Data Analysis

3.6.2 Test of Significance

CHAPTER FOUR

DATA ANALYSIS, RESULTS AND INTERPRETATIONS

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of the Findings

5.2 Conclusion

5.3 Recommendations

REFERENCES

 

 

 

 

 

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Financial literacy remains an interesting issue in both developed and developing economies, and has elicited much interest in the recent past with the rapid change in the finance landscape. Atkinson and Messy (2005) defined financial literacy as the combination of consumers’/investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.

Financial literacy helps in empowering and educating investors so that they are knowledgeable about finance in a way that is relevant to their business and enables them to use this knowledge to evaluate products and make informed decisions. It is widely expected that greater financial knowledge would help overcome recent difficulties in advanced credit markets. Financial literacy prepares investors for tough financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance.

Financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improves the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. It also provides greater control of one’s financial future, more effective use of financial products and services, and reduced vulnerability to overzealous retailers or fraudulent schemes. Facing an educated lot, financial regulators are forced to improve the efficiency and quality of financial services. This is because financially literate investors create competitive pressures on financial institutions to offer more appropriately priced and transparent services, by comparing options, asking the right questions, and negotiating more effectively. Investors on their part are able to evaluate and compare financial products, such as bank accounts, saving products, credit and loan options, payment instruments, investments and insurance coverage, so as to make optimal decisions (Miller, Godfrey, Levesque and Stark, 2009).

Lack of business and management skills can magnify financial barriers for SMEs. Low levels of financial literacy can prevent SMEs from adequately assessing and understanding different financing options, and from navigating complex loan application procedures. Similarly, the fact that SMEs’ accounting and financial statements are often not transparent makes them risky borrowers and thus less attractive to lenders. Capacity building of SMEs in terms of preparing financial statements and business plans, as well as improving their financial literacy and management training, is shown to have positive impact on SME development. Furthermore, strengthening the horizontal linkages with other SMEs and vertical linkages with larger firms would improve SMEs’ market access. (Hogarth and  Hilgert, 2002).

 

1.2 Statement of the Problem

Quite a number of studies have been conducted in developed countries and have shown significant relationship between financial accounting literacy and the growth and survival of small and medium scale enterprise. However, there are a lot of diverse perceptions about financial accounting literacy and these are caused by several factors. A major concern is the ignorance of owners of SMEs on the importance of book keeping and the proper understanding of the entity concept, thereby causing their business to suffer, due to lack of information (financial in nature) to aid in forecast against future eventuality and expansion. This has necessitated this study to find out the impact of financial accounting literacy on the growth and survival of small and medium scale enterprise in Kwara state, Nigeria. This study will help small and medium scale owners and folks interested in going into similar venture to understand the impact of financial accounting literacy on the growth and survival of SMEs.

 

1.3 Research Questions

The following research questions will be pursued in the course of this work:

  1. What is the impact of financial accounting literacy on the growth of small and medium scale enterprises?
  2. What is the impact of financial accounting literacy on the survival of small and medium scale enterprises?

 

1.4 Objectives of the Study

The main objective of this study will be to determine the importance of financial accounting literacy on the performance of SMEs in Kwara state.

The specific objectives are to:

  1. determine the impact of financial accounting literacy on the growth of small and medium scale enterprises.
  2. determine the impact of financial accounting literacy on the survival of small and medium scale enterprises.

 

1.5 Significance of the Study

Lusardi and Mitchell (2006) found that financial illiteracy is widespread and is particularly acute among specific groups of the population, such as women, the elderly, and those with low education. Agarwal, Driscoll, Gabaix and Laibson (2007) further show that financial mistakes are prevalent among the young and the elderly, who display the lowest level of financial knowledge and cognitive ability. Again a study by the OECD (2005) and the work by Lusardi and Mitchell (2007) which review the evidence on financial literacy across countries show that financial illiteracy is a common feature in European countries, Australia, and Japan. These findings were confirmed in the work of Christelis, Jappelli and Padula (2006), which used micro data from European countries to find that most respondents in Europe scored low on financial numeracy and literacy scales

This study will be very useful in that the previous studies carried out on financial literacy used Europe and other developed countries of the world as its case study, but this study will focus on Nigeria and most especially Kwara state to be specific as it will serve as a guide for SME owners in this part of the world to know the impact of financial accounting literacy on the growth and survival of their enterprise. This study will be very useful in that a lot of businesses in Kwara state today hit the rocks due to illiteracy on financial management matters.

 

1.6 Scope of the Study

This study will focus on all SMEs in Kwara state. However, only three local government areas (Ilorin South, Ilorin North and Ilorin East local government areas) will be selected for this study using simple random sampling technique.

 

 

1.7 Plan of the Study

This study will contain five CHAPTERs. CHAPTER one will serve as the introduction which will include background to the study, the statement of the problem, objectives of the study and research questions. CHAPTER two will deal with the literature review which will contain the conceptual framework, theoretical background and empirical evidence. The third CHAPTER will focus on the report of research methodology, research design, method of data analysis, method of data collection, sampling technique and population of the study. Presentation, analysis and interpretation of data will be covered in CHAPTER four, while CHAPTER five which will be the last CHAPTER will contain summary, conclusion and recommendation

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