FINANCIAL ACCOUNTING LITERACY AND FINANCIAL PERFORMANCE OF SME’S IN NIGERIA

FINANCIAL ACCOUNTING LITERACY AND FINANCIAL
PERFORMANCE OF SME’S IN NIGERIA

1.1 BACKGROUND TO THE STUDY

Small and medium scale enterprises (SMEs) are generally regarded as the engine of
economic growth in developing economies (Agwu and Emeti, 2013) and developed
nations (Alese, 2017). Specifically, Alese (2017) argues that this argument stems
from the realization that almost all countries that have focused on SMEs sector have
ended up in the significant reduction in poverty level and its attendant enhancement
in the quality and standard of living, reduction in crime rate, increase in per capita
income as well as rapid growth in national output among other salutary effects.
However, despite the deluge of studies on the SME sector in Nigeria, few studies
have critically investigated effect of financial accounting literacy on the performance
of SME since the skills needed to set up a business is not same as those needed to
run a business (Edward, 2012).
Financial literacy (or lack thereof) has played a key role in the success and failure of
our nation’s public companies for the past century. The Blue Ribbon Committee’s
definition was not specific with respect to technical knowledge. Coates et
al., (2007) developed criteria for financial (accounting) literacy based on the
mandatory disclosure of Critical Accounting Policies and Estimates section of an
annual report. Their criteria focused on an understanding of the following items:
business model, recognition and measurement of Generally Accepted Accounting
Principles (GAAP) and International Financial Reporting Standards (IFRS), whether
management’s judgments and estimates are consistent with the business model and
implications of management choices for potential manipulation of financial
reporting. Such criteria are consistent with Hills and Weil (2004) proposed
knowledge of financial information necessary for the audit committee to
satisfactorily discharge its responsibilities. According to Weil’s definition of
financial literacy which includes the concept of accounting literacy: Financial
literacy is the ability to understand the important accounting judgments management
makes, why management makes them, and how management can use those
judgments to manipulate financial statements. It is noteworthy that a major reason
for small business failure is poor or careless financial management (Hall and Young
1993).
According to Metcalf and Titard (1976), financial performance refers to the act of
performing financial activity. In broader sense, financial performance refers to the
degree to which financial objectives being or has been accomplished. It is the process
of measuring the results of a firm’s policies and operations in monetary terms. It is
used to measure firm’s overall financial health over a given period of time and can
also be used to compare similar firms across the same industry or to compare
industries or sectors in aggregation.

1.2 STATEMENT OF PROBLEM

Small and medium scale enterprises play a very important role both for economic
agents and for ensuring sustained growth for the economy. Therefore, the focus on
SME’s is reasonable and expected. However, the following issues have been
identified and form important motivations for the study; Firstly, there is a very high
rate of mortality for SME’s in Nigeria (Ariyo, 2005). There is an incidence of poor
accounting standards within the SMEs. Simple records of financial transactions are
not kept and this creates loopholes for 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 SME’s. These short comings might be the cause of SME failure.

1.3 AIM AND OBJECTIVES OF STUDY

The objective of this conceptual paper is to review the financial literacy and financial
performance of SME’s in Nigeria.
The specific objectives of the study include:
1. To ascertain the financial literacy of SME business owners in Nigeria.
2. To ascertain the financial performance of SME’s in Nigeria.
3. To evaluate the effect on economic development.

1.4 RESEARCH QUESTIONS

The following research questions are drawn to address the objectives of the study.
1. To what extent does financial literacy impacts financial performance?
2. Can financial literacy effect financial performance?
3. How can financial literacy and financial performance impact the economic
development?

1.5 RESEARCH HYPOTHESIS

The following hypothesis is proposed for the study:
Ho: Financial literacy has no significant impact on the performance of small and
medium scale enterprises in Nigeria.
Hi: Financial literacy has significant impact on the performance of small and
medium scale enterprises in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The essence of this study is to provide clear a clear picture of the role of financial
literacy and its effect on financial performance of SME’s in Nigeria.
The research work when complete would be very useful to the following:

•  Business and Companies: the study will create awareness among managers of
  SME’s on the important roles financial literacy plays in checkmating financial
  performance in business.
•  Economy: this study will critically investigate the effect of financial accounting
  literacy on the performance of SME since the skills needed to set up a business
  is not same as those needed to run a business which would go a long way to
  to ensure economic growth and sustainability.

Generally, through documentation, the study will prove to be of importance to the
most sectors of the economy, small-scale businesses, religious leaders, scholars of
every discipline, and the general public.
The research work would also contribute to the existing literature on this topic, and
will serve as a guide to other researchers, that want to carry out similar research on
it.

1.7 SCOPE OF THE STUDY

In the light of broad coverage, conceptually the researcher focuses on financial
accounting literacy and financial performance of SMEs.
The geographical scope of coverage in Nigeria.

1.8 LIMITATION OF THE STUDY

In the course of this research work, the researcher encountered some limitations.
Some limitations envisaged in this research work were:
• Uncooperative attitude of the staff in the organization: This is a major
limitation which increases the time spent in completing the research work.
• Monetary constraints: These factors serve as a deficiency for the research work
and the result of low financial capability, it was not enough to give the desired
results.
Since no man can claim a monopoly of knowledge, this study is not an exption, and
we acknowledge that this study is limited by a myriad of variables

1.9 OPERATIONAL DEFINITION OF TERMS

• Financial Literacy: Financial literacy is the ability to understand the
  important accounting judgments management makes, why management
  makes them, and how management can use those judgments to manipulate
  financial statements.
•  Financial Performance: financial performance refers to the degree to which
  financial objectives being or has been accomplished. It is the process of
  measuring the results of a firm’s policies and operations in monetary terms.
•  SME: Small and medium-sized enterprises (SMEs) are non-subsidiary,
  independent firms which employ fewer than a given number of employees
  

1.10 ORGANIZATION OF THE STUDIES

This Research will cover the investigation of Financial Accounting Literacy and
Financial Performance of SMEs in Nigeria.
Chapter One will cover the background to the study, the statement of the problem
the aim and objectives of the study, the research questions and hypothesis, the
significance and scope of this study, the limitation and operational definition of
terms used in this study.
Chapter two of this study will cover the literature review of the financial literacy
and financial performance of SMEs in Nigeria.
Chapter three will cover the materials and the research methodology on which this
research shall be built on.
Chapter four will present the results and discussion and analysis of this research
findings.
Chapter five of this research will summarize and conclude on the chapter one, two,
three and four, seen from both conflict and consensus perspectives of the
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