DETERMINANTS OF BOOK-KEEPING PRACTICES OF SELECTED SMALL AND MEDIUM ENTERPRISES

CHAPTER ONE

INTRODUCITION

1.1 Background to the Study

Small and Medium Enterprises (hence forth, SMEs) have significant role in the economic development of emerging economies Nigeria inclusive. With just a little investment, they are important contributors to the achievement of general business growth and employment in the economy. According to Kadiri (2012), SMEs in both the formal and informal sector of Nigeria employ over 60% of the labour force. More so, 70% to 80% of the daily basic necessities in the country which are not high-tech products but basic materials produced with little or no mechanization, also come from SMEs (Peterise (2003) as cited in Kadiri (2012)).

SMEs started to gain recognition in Nigeria in the early 1970s after the oil boom (Osotimehim and Jegede, 2012). This recognition started from small agricultural holdings but now extended into different kinds of services such as food processing and restaurant business, retail and wholesale of phones and computer software, metal and furniture assembling, sachet water business, soap and room freshener, tailoring and fashion designing, printing press, making of blocks, among others.

The capacity, experience and organizational abilities of SMEs as entrepreneurs are central to the success of their businesses. The interest on SMEs entrepreneurial capacity has acquired its intensive level almost everywhere in the world. In the developed economies SMEs are viewed as a revitalizing socioeconomic agent, a way of coping with unemployment problems, a potential catalyst and incubator for technological progress, product and market innovation. In most of the developing countries also, SMEs act as catalysts of economic activity in general, and business performance in particular through their roles of job creation and social adjustment.

Performance of a business, that is, how well or poorly a business is doing vis-à-vis owner-manager objectives is crucial to its success. One important way good business performance is reported, is through effective and efficient record keeping. When a business is not performing well, certain danger signals such as systematic capital erosion through, say, personal drawings and/or poor profitability, will exhibit themselves and are only detectable if there are up-to-date financial records. Most business owners that do not have adequate or standard Book-Keeping system would not be able to track the signals for these warnings and may tend to optimistically believe that things are getting better in the business flow.

Book-keeping is of central importance to any business, be it large or small. Entrepreneurial qualities are evidently established in organized businesses largely through their ability to organize their financial records. Adequate book-keeping practices are in maintaining accurate set of accounting books delineating assets, liabilities and income structures. This is necessary for every business if it is to take any vital business decisions and be able to ascertain how much profit the business is making.

The double entry system of record keeping is the standard way to record financial transactions in business. Every entry involves both debit and credit transaction, which is the basic rule for any accounting practise. That is, for every debit entry there must be a corresponding credit entry and vice visa. It involves the use of journals and ledgers to keep track of profit and loss and balance sheet items. The organized large scale enterprises seem to have accepted this practice.

The system of double entry compared to single entry is more complicated to apply and maintained but allows for more flexibility and standardization. It helps to minimise errors and identify problems like fraud within the organisation. It appears that most SMEs have not generally imbibed this form of record keeping culture as the standard practice. Most of the SMEs that develop the attitude of record keeping choose the single entry system which is easier to keep, however, very limiting for information, auditing and accuracy checking purposes.

Performance is considered to be the major goal of business enterprises whose tracking may be difficult if there is no sound book-keeping. Poor business performance has long remained unsolved especially for the most part of developing countries like Nigeria where SMEs take up the large part of the economy. It is also among the developing countries with the highest number of this type of businesses that perform poorly and close up before the end of the first five years in business largely attributable to ignorance of keeping books of accounts (IMF, 1999) and lack of sound financial culture (Sejjaaka, 1996 and Wabwire, 1996). Problem of monitoring economic growth is increased in an economy like Nigeria where financial records are not available concerning this growth sector of the economy. Furthermore, financial reporting is not commonly practiced in SMEs raising the question on the relevance and reliability of the financial information from this important sector of the economy.

DETERMINANTS OF BOOK-KEEPING PRACTICES OF SELECTED SMALL AND MEDIUM ENTERPRISES