Financial Reporting as a Necessity for Small and Medium Scale Enterprise in Lagos State

Financial Reporting as a Necessity for Small and Medium Scale Enterprise in Lagos State

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Abstract onFinancial Reporting as a Necessity for Small and Medium Scale Enterprise in Lagos State

This study sought to investigate financial reporting as a necessity for Small and Medium Scale Enterprise in Lagos State, Nigeria. Descriptive survey design was employed. The sample size was 200 SMEs, selected using stratified random sampling. Data were collected using a questionnaire and an observation list. Data collected using questionnaire were analyzed using Statistical Package for the Social Scientists (SPSS).  The followings were the objectives of the study: to study prevalence of the use of financial reporting among SMEs in Lagos State, to determine the importance of the use of financial reporting among SMEs in Lagos State and to establish the factors affecting the SMEs in Lagos State on the use of financial reporting.

Chapter One of Financial Reporting as a Necessity for Small and Medium Scale Enterprise in Lagos State

INTRODUCTION

Background to the Study

The impact of Small and Medium-scale Enterprises (SMEs) on the process of industrialization and sustainable economic growth in any country cannot be underestimated (Ogujiuba, Ohuche and Adenuga, 2004; Aremu and Adeyemi, 2011; Terungwa, 2012). Since the 1960s to date, (SMEs) are being given due recognitions especially in the developed nations for playing very important roles towards ensuring rapid economic growth, development and stability in the country Gunu, 2004; Onugu, 2005; Aremu, 2010). They make-up the largest proportion of business all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely contributing to the Gross Domestic Products (GDP) of many countries.

SMEs sub-sector came into the mainframe of policy formulation in Nigeria owing to its obvious vital contributions. Like in the developed countries, SMEs have enabled entrepreneurship activities through which employments have been generated and poverty reduction and sustainable livelihood achieved (Ogujiuba et al, 2004). It makes up about 97% of businesses in Nigeria and provide on average 50% of Nigeria’s employment, and its industrial output (Ariyo, 2005; Taiwo, Ayodeji and Yusuf, 2012). SMEs have the ability to start small and grow quickly and as well survive through rapid response adjustment in good and bad economic times (Mitchell and Raid,2000; Nandan,2010). Government and development experts have come to the realization that SMEs possess the needed catalyst to develop the economy.

In spite of the efforts of government, to promote and encourage SMEs in Nigeria is still limited due to financial challenges (Ohachosim, 2012). It can be logically correct to conclude from the above that the financial challenges of SMEs in Nigeria today, have taken the dimension of inaccessibility of funds (Aremu and Adeyemi, 2011). Obstacles of SMEs access to funds in Nigeria have not been surmounted because of SMEs inability to generate and use quality accounting information (Richard, McMahon and Holmes, 1991). In the face of poor accounting or non-existence accounting information, good funds management is inhibited. Suppose the fund management is inadequate, it will be difficult for the new business to attract additional funds for increased working capital, expansion or diversification. It is based on this reasoning that very crucial and onerous tasks are set before the accountant who is equipped with the skills and theories of business to produce accounting information. It is exigent that financial challenges of SMEs be given passionate attention by business professionals especially the accountant. SMEs financial challenges really entail extensive and constant efforts on the part of the accountant to assist owner-managers to access adequate finances at affordable costs: “As a business owner, a good accountant is needed in the business in order to bring the best out of the business.

Poor record keeping, inefficient use of accounting information to support their financial decision-making and the low quality and reliability of financial data are part of the main problems in financial management concerns of SMEs. While proper accounting is a useful system for making sound economic decisions and a key to SME’s success, the misuse, untimely, poor record keeping, and inaccuracy of accounting information also causes SMEs to inaccurately assess their financial situation, and make poor financial decisions. In the worst case, SMEs might face with the failure and perhaps bankruptcy in the end. Basically, the primary concern in SME financial reporting generally relates to preparation and use of general purpose financial reports such as the statement of financial position, income statement, and the cash-flow statement.

There is considerable historical evidence that, owner managers of SMEs in Nigeria hardly make use of adequate financial reports, whether historical or future oriented, in financial management of their businesses. Specifically, it is realistic to anticipate that the financial reporting practices found in SMEs in Nigeria may not accord with mandated, recommended or preferred practices in some or all of a number of specific respects; firstly, not all financial statements may be prepared in terms of statement of financial position, income statement and cash-flow statements as well as both historical and future-oriented reports should be prepared. Secondly, financial statements may not be prepared with sufficient detail with regards to generally accepted accounting principles and the specific requirements of applicable accounting standards. Thirdly, it may that financial statements are not prepared regularly or frequently. Lastly, there may inappropriate use of financial statements with regards to routine analysis and interpreted using accepted techniques like inspection of key figures, trend analysis, inter-firm comparisons and variance analysis. What the above suggested issues means is that financial reporting practices in SMEs is seriously falling in standard among various external financial reporting imperatives that exist for them. It is on this basis that this study seeks to investigate financial reporting as a necessity for Small and Medium Scale Enterprise in Lagos State, Nigeria.

Statement of the Problem

Small and medium scale enterprises play a very significant role in ensuring sustainable and economic development in Nigeria. Therefore, the focus on SME’s is reasonable and expected. Moreover, the following issues have been highlighted and form fundamental motivations for the study; firstly, there is a very high rate of mortality for SME’s in Nigeria (Ariyo, 2005). There is a prevalence of poor accounting standards within the SMEs. Simple records of financial transactions are not kept and this creates rooms for high rate of fraud. Improper records of business transactions certainly limit accessibility to institutional credit. As stated earlier, a major reason for small business failure is poor or careless financial management (Hall and Young 1993). Poor record keeping, inefficient use of accounting information to support their financial decision-making and the low quality and reliability of financial data are part of the main problems in financial management concerns of SMEs. These challenges might be the cause of SME failure.

Research Questions

This research will be carried out to answer the following research questions:

i)            What is the prevalence of the use of financial reporting among SMEs in Lagos State?

ii)          What are the importance of the use of financial reporting among SMEs in Lagos State?

iii)        What are the factors affecting the SMEs in Lagos State on the use of financial reporting?

Objectives of the Study

The broad objective of this study is to investigate financial reporting as a necessity for Small and Medium Scale Enterprise in Lagos State, Nigeria. The specific objectives include:

i)            To study prevalence of the use of financial reporting among SMEs in Lagos State.

ii)          To determine the importance of the use of financial reporting among SMEs in Lagos State.

iii)        To establish the factors affecting the SMEs in Lagos State on the use of financial reporting.

Research Hypothesis

Ho₁: There is no significant impact of financial reporting on SME business growth. 

Significance of the Study

Findings from the study will be of immeasurable importance to the Nigerian government all and aspiring entrepreneurs in Nigeria. It will serve as a manual that will guide them on how to go about using entrepreneurship and financial reporting to economically develop the country and raise their standard of living. It will as well help to bridge the gap that might have existed in the entrepreneurial activities.

Scope of the Study

This study will be carried out among selected entrepreneurs in Lagos State, Nigeria. Information collected from these workers shall be subjected to further analysis and the results got from it shall be final.

Limitation of the study

This research investigated financial reporting as a necessity for Small and Medium Scale Enterprise in Lagos State, Nigeria. Economic growth and financial reporting are not exceptions to the usual problems associated with research in Nigeria. The researcher was faced with the problem of finance as the researcher did not have enough funds to get the required stationery for the work. Also, the timeframe for the work to be carried out was too short.

Definitions of Terms

The following terms were used in the course of this study:

Economy Growth: This is when the real per capital income of a country increases over time.

Entrepreneur: This is a person who starts or organizes a business that has a financial risk.

Financial reporting: the external financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity) the notes to the financial statements, press releases and conference calls regarding quarterly earnings and related information.

SMEs: Small and Medium Scale Enterprises

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