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FINANCIAL LITERACY AS A
TOOL TO IMPROVING ON THE PROFITABILITY OF SMALL
Abstract:
Small scale businesses/enterprises play a vital role in
developing as a well as developed countries, this is added to the ongoing
reforms by the Central Bank of Nigeria for a sustainable financial literacy
framework for small and medium scale enterprises (SMEs) in the country.The
significance of this study therefore lies in the attempt to document the factor
that is truly critical to the profitability of small scale enterprises but
which has not been appreciated, recognized or factored into the various
incentive schemes and policy measures being put up for SSEs in the state and
nation at large. The critical factor is financial literacy among SSEs which is
a pivotal requirement to its success and profitability.In addition, this
research will equip owners of small scale enterprises by encouraging them to
give the keeping of proper accounting records a greater priority in the
objectives of their business. With this, adequate information about the
business would be accurately known.Also awareness will be created in this study
on the urgent need to improve on the financial literacy level of SSE owners as
well as improve on their accounting practices. This will help formalize their
business operations in a way that will suit their little nature.Furthermore,
apart from the result of the study contributing to the “knowledge bank” of
small scale enterprises, it will stimulate more researchers into this area since
the research literature work in this field is still minimal.
CHAPTER ONE – INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
Take for instance Mr. Okon Etim, a middle-aged
sole-proprietor who dropped out from primary school to start “pure water”
business and now is a coca-cola dealer in Calabar. Mr. George Obi, a fresh
University of Calabar graduate with a degree in business management who decides
against going back home and starts up a hire-purchase “ke-ke” business in
Calabar.
Allow me to point out however that while these are two small
scale enterprises with a lot of potential, the later i.e Mr. George Obis’s has
the “financial literacy advantage” as he must have gone through formal
financial training in the course of his schooling against the former i.e. Chief
Okon Etims’s who although has gained a lot of experience all the way from his
pure water selling days but lacks formal financial training.
Financial literacy as the name implies occupies center stage
in the quest to achieve an overall degree of success in an organization,
(Bernhedm, 2008). Financial literacy or the lack of it has played a key role in
the success and failure of our nations businesses for the past centuries.
Therefore financial literacy enhances to a reasonable degree, a business’ goal
of financial profit. This has encouraged companies and businesses to make sure
that, adequate and proper books of account are kept, to ensure the reliability
of their financial statements and, in the long run, improve their level of
profitability.
Reducing the poverty rate as well as the reliance of the
people on government and so called “white collar” jobs are part of the
Millennium Development Goals (MDGs), these can be achieved through the growth
and development of small scale enterprises.
The littleness of small scale businesses from the cradle has
been the bedrock of industrialization in developing countries of the world.
Globally, small enterprises have contributed enormously in improving the
standard of living of the people by providing jobs to relieve the society of
social embarrassment, stimulating indigenous entrepreneurship and utilizing
scarce resources.
Small scale enterprises also play important roles in economic
growth and development of every nation. They are a veritable vehicle for the
achievement of national macro-economic objectives in terms of employment
generation at low investment cost and enhancement apprenticeship training.
Furthermore, profit can analogously be viewed as the
life-blood of a business and hence the accounting bases, concepts and
principles adopted ought to capture and report all the relevant information to
ensure reliability in its measurement (Nelson and Oiwas, 2011). Also Ewikaselu
and Oyende (2009) made it clear that no business can work effectively without
being financially literate and also having one form of accounting records or
the other. It can therefore be deduced that appropriate financial literacy is
important for a successful management of any business whether big or small.
Financial literacy is therefore said to be crucial and cannot
be overemphasized as it enables small scale enterprises to be able to supply
complete and relevant financial information needed to improve on decisions made
by them, and also enhance their profitability. This research study therefore
examines financial literacy and its influence on the profitability of small
scale enterprises.
1.2 STATEMENT OF
THE PROBLEM
It is a sad fact that in today’s Nigeria, small scale
enterprises have not performed creditably well and they have not played an
expected significant role. This is in spite of the fact that, since the 1999,
administration, policy measures, schemes and support schemes have been put in
place to develop the small scale enterprise sub-sector and to increase its
performance.
The lack of financial literacy which is evident in their
inability to keep complete accounting records is a major suspect in the failure
of small scale enterprises. This unfortunately has resulted into a situation
where small scale enterprises cannot capture adequately the business profit.
This is because in the process of calculating profit, financial data are
assembled in a way that can help make informed judgment and take decisions
about the business. However, this financial data cannot be assembled without
adequate financial literacy. This problem has ultimately affected the
profitability of small scale businesses.
In addition to the above is the lack of financial risk and
opportunities, use of business funds for personal transactions, limited access
to bank credit facilities and insurance policies. However these and many more
can be addressed by being financially literate.
Hence, the researcher believes that these inherent problems
could be attributed to the neglect of financial literacy by small scale
enterprises.
1.3 OBJECTIVES OF THE
STUDY
The main objective of
this study is to clearly promote financial literacy as a tool to improving on
the profitability of small scale enterprises, particularly in Calabar Municipality
of Cross River State. The specific objectives of the study are as follows:
§ To examine the
extent to which financial literacy is adopted by small scale enterprises in
Calabar municipality.
§ To determine the
extent to which accounting records enhance the profitability of small scale
enterprises.
§ To ascertain the
problems that hinders the utilization of accounting records by small scale
enterprises.
1.4 RESEARCH
QUESTIONS
The study developed the following research questions that
will guide the researcher in the quest to finding solutions to these research
problems?
§ To what extent is
financial literacy adopted by small scale enterprises in Calabar Municipality?
§ To what extent
does accounting records enhance the profitability of small scale enterprises?
§ Are there
problems that hinder the utilization of accounting records by small scale
enterprises?
1.5 RESEARCH
HYPOTHESIS
In order to set a
good base for carrying out the research, the following hypotheses were posed,
believing that by the time adequate answers have been provided, the ,study
would have covered necessary grounds. To achieve this, the study seeks to test
the following three (3) operational hypotheses outlined in the null form:
§ H0: The extent to
which financial literacy is adopted in order to influence small scale
enterprises’ profitability is significantly low.
§ H0: The
utilization of accounting records does not significantly influence the
profitability of small scale enterprises.
§ H0: there are no
significant problems hindering the utilization of accounting records by small
scale enterprises.
§
1.6 LIMITATION AND
DELIMITATION OF THE STUDY
With a large percentage of business in the state falling
within the small scale enterprise
sub-sector, the need to clearly define the scope and area of the study
becomes imperative.
The study is therefore confined to the small scale
enterprises operating in Calabar Municipality of Cross River State, and yet it
is easy to use the result of this research to gain insight into the entire
small scale enterprises.
Calabar Municipality has been chosen because of the peaceful
nature and the serene vicinity, as it is a necessary panacea for the survival
of the business and also for the study. Thus, all the necessary information
needed for this study will be collected from this region of the state.
A study of this nature could not have been carried out
without any hitch. Notable among the constraints was the scarcity of relevant
empirical literature in financial literacy among small scale enterprises.
Empirical information on problems of small scale enterprises are abundant in
literature but work done on financial literacy is still scanty and that was a
serious limitation of the study.
Despite this challenge, this study represents a true picture
of all that was obtained from small scale businesses in Calabar Municipality
Metropolis.
1.7 SIGNIFICANCE
OF THE STUDY
Small scale businesses/enterprises play a vital role in
developing as a well as developed countries, this is added to the ongoing
reforms by the Central Bank of Nigeria for a sustainable financial literacy
framework for small and medium scale enterprises (SMEs) in the country.
The significance of this study therefore lies in the attempt
to document the factor that is truly critical to the profitability of small
scale enterprises but which has not been appreciated, recognized or factored
into the various incentive schemes and policy measures being put up for SSEs in
the state and nation at large. The critical factor is financial literacy among
SSEs which is a pivotal requirement to its success and profitability.
In addition, this research will equip owners of small scale
enterprises by encouraging them to give the keeping of proper accounting
records a greater priority in the objectives of their business. With this,
adequate information about the business would be accurately known.
Also awareness will be created in this study on the urgent
need to improve on the financial literacy level of SSE owners as well as
improve on their accounting practices. This will help formalize their business
operations in a way that will suit their little nature.
Furthermore, apart from the result of the study contributing
to the “knowledge bank” of small scale enterprises, it will stimulate more
researchers into this area since the research literature work in this field is
still minimal.
Lastly, it will by my pre-requisite for the award of Bachelor
of Science (B.Sc) Degree in Accounting.
1.8 ORGANIZATION
OF THE STUDY
This study is presented in five (5) chapters. These chapters
are organized in a sequential manner that will aid careful investigation and
early achievement of the objectives.
Chapter one is a preview of the background of the study and
the problems that necessitated the research. This leads to the outline of
objectives, significance of the study, research questions and operational
hypotheses within the sample score of small scale enterprises in Calabar
Municipality of Cross River State.
Chapter two presents the review of relevant works as it
relates to the study. Also, theories about the dependent and the independent
variables were discussed. It also examines the theoretical framework of
financial literacy and small scale enterprises.
Chapter three reveals the methods of data collection in
relation to the research design, population and sample with emphasis on the
model specification, estimation, validation and reliability of research
instrument.
Chapter four presents and analyses the data and also
findings, dealing with the extent to which small scale enterprises adopt
financial literacy and conversely the utilization of accounting records by SSEs
and its influence on profitability.
Chapter five summarizes major findings from the study,
recommends tentative policy thrust and also states suggested areas for further
research.
1.9 OPERATIONAL
DEFINITION OF TERMS
Financial literacy and accounting literacy are expressions or
terms that are often used interchangeably. It is also important to note that
the concept of financial literacy and small scale enterprises from empirical
literatures available lack a consensus definition. Therefore, for the purpose
of this research and in order to reduce, if not totally eliminate ambiguity,
the following definitions are given as peculiar to the study:
FINANCIAL LITERACY
Financial literacy is used to describe the ability to understand
basic accounting and finance concepts i.e. how money works, as well as its
application i.e. the ability to use such knowledge and skills to manage
financial resources effectively for a lifetime of financial wellbeing.
Financial literacy is a set of skills and knowledge that
allow an individual make informed and effective decisions with all of their
financial resources.
PROFITABILITY
Profitability
can be defined as the businesses ability to generate revenue in excess of the
cost incurred in producing this revenue. When the amount of revenue gained from
a business activity exceeds the expenses, costs and taxes needed to sustain the
activity then it can be said that profit was made.
SMALL SCALE ENTERPRISES
Small scale enterprises can be defined as a business with an
employment level of not more than five (5) persons and an annual turnover of
less than five hundred thousand Naira (N500,000).
1.10
HISTORICAL BACKGROUND OF SMALL SCALE ENTERPRISES
Economic history is well stocked with enough insights into
the humble beginnings of present-day grand corporations. Evidences abound that
almost all the multi-national grant corporations we have today were once small
enterprises, growing as their industry grew. Even as the international level,
in the early stages of her industrialization, Japan’s economy was dominated by
traditional industries, and by a large number of small scale firms drawing
their strengths not from the abundance of capital but rather from the supply of
labor (Oyechukwu, 2011).
In concrete
terms, small scale enterprises constitute a greater percentage of all
registered businesses in Nigeria, and they have been in existence for quite a
long time.
PRE-INDEPENDENCE HISTORICAL DEVELOPMENT
Prior to
Nigerian independence, the business climate was almost totally dominated by the
colonial and other European multi-national companies like United African
Company (UAC), GB Dlirant, Unilever PLC, Leventis Stores etc Towards the tail
end of the 1990s, the Nigerian Industrial Development Bank (NIDB) was founded
to assist potential entrepreneurs to get involved in agricultural exploration
of natural resources, commence and industrial production.
However, few
Nigerians (mostly the semi-illiterates) benefitted from the generous government
attitude of this time. This was because during this time, Nigerians considered
the civil service to be more prestigious than business despite the creation of
the Colony Development Loans Board by the colonial administration.
§ 1970 - 1976
A major remarkable breakthrough in small scale business came
about through the indigenization Decree of 1972 and later the Nigerian
Enterprise Promotion Act of 1977. There were genuine attempts by the federal
government to make sure that Nigerians play an active role in the development
of the economy.
Later in its 1970 – 1974 National Developments Plan, the
federal government gave special attention to the development of small scale
industries particularly in rural areas. This was in recognition of the roles of
small scale businesses as the seedbeds and training grounds for
entrepreneurship.
§ 1980 – 1989
Within this decade, government policy measures placed
emphasis on the technological aspects of industrial development of small scale
industries in Nigeria. Various Nigerian governments within this decade embarked
in creative measures to direct efforts towards the maximum exploitation of
national resources and tuned to discourage capital intensive mode of production
in the light of abundant resources available. Some basic policies were
formulated and these policy measures as constructed placed a great emphasis on
the technological aspect of industrial development of small scale enterprises.
It is worthy of note that the introduction of the Structural
Adjustment Program (SAP) during the Babangida’s regime made matters worse for
employers of labor and created a veritable ground for self-employment.
§ 1990 -1999
During this period, both federal and state governments have
contributed to the growth of small scale enterprises in Nigeria especially in
the rural areas. Various fiscal and non-fiscal incentives have been established
for investors and entrepreneurs in the small scale sector of the economy. Of
special mentioning was the strategy adopted by the federal government towards
the training and motivation of unemployed graduates to be gainfully employed in
out-of –school entrepreneurship development programs. Thus on the presentation
of viable and feasible projects, approved loans are disbursed through
pre-selected commercial, banks assisted by National Directorate of Employment
(NDE).
The Peoples Bank of Nigeria (PBN) was also in the vanguard of
granting soft loans to unemployed youth artisans, and this was aimed by diverting
attention of youths from government salaried jobs, to that of gainful
self-employment. Thus, the Peoples Bank in collaboration with the National
Directorate of Employment were solely charged with the responsibility of
generating employment through their various programs for thousands of
unemployed Nigerians.
§ 2000 – DATE
During this period, government at all levels has become
increasingly interested in grooming young potential youths to be self-employed
and be successful entrepreneurs. To show its seriousness, the federal
government has through its educational agencies like the National Business and
Technical Educational Board (NBTEB), the Nigerian Universities Commissioned
(NUC) and the National Youth Service Corps (NYSC) gave a directive that entrepreneurship
development courses be incorporated into curriculum of secondary and tertiary
institutions as well as NYSC program.
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