Accounting Project Topics

Financial Accounting Literacy and Performance of SMEs in Nigeria

Financial Accounting Literacy and Performance of SMEs in Nigeria

Financial Accounting Literacy and Performance of SMEs in Nigeria

CHAPTER ONE

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.

CHAPTER TWO

LITERATURE REVIEW AND COCEPTUAL FRAMEWORK

Theoretical Framework

This study is anchored on the dual-process theory which is considered most relevant to the work.

 Dual –Process Theory

The dual-process theory was propounded by Lusardi and Mitchell (2011). This theory posits that financial decisions can be driven by both intuitive and cognitive processes which mean that financial literacy may not always yield optimal financial decisions. The Dual Process Financial literacy theory argues that the behavior of people with a high level of financial literacy might depend on the prevalence of the two thinking styles: intuition (system 1) and cognition (system 2)(Lusardi and Mitchell, 2011; Glaser and Walther, 2013). Intuition is the ability to acquire knowledge without inference or the use of reason. Intuition provides views, understandings, judgments, or beliefs that cannot be empirically verified or rationally justified. Taylor (1981) as cited by Chan and Park (2013) asserts that individuals who rely on intuition prefer to use mental short cuts as they make decisions which tend to be largely influenced by their emotions. Glaser and Walther (2013) point out that the positive effect of financial literacy on reasonable investment decisions is diminished by a high prevalence of intuition. Therefore, increased use of intuition results to sub optimal investment decisions.

Cognition on the other hand is the process by which the sensory input is transformed, reduced, elaborated, stored, recovered and used. Cognition is the mental processing that includes the comprehending, calculating, reasoning, problem solving and decision making (Chan and Park 2013). High cognition individuals enjoy thinking, are analytical and are better at retaining information and more likely to search out new information.

Relevance of the theory to the work

The dual process theory is considered relevant to this study because it shows that individuals who are high on cognition will seek out for information and are more likely to be influenced by a relevant message. This means that their decision making skills can be boosted by financial literacy training using simple easy to understand methodologies. Moreover, use of intuition may be reduced by provision of relevant information to support decision-making through financial education since individuals tend to rely on intuition where relevant information is lacking. However optimal results may not be achieved where individuals trust their intuitions in decision making.

Conceptual Framework Concept of financial literacy

Financial literacy is the education and understanding of various financial areas. This concept focuses on the ability to manage personal finance matters in an efficient manner, and it includes the knowledge of making appropriate decisions about personal finance such as investing, insurance, real estate, paying for college, budgeting, retirement and tax planning (Fatoki, 2014). Financial literacy also involves the proficiency of financial principles and concepts such as financial planning, compound interest, managing debt, profitable savings techniques and the time value of money. The lack of financial literacy or financial illiteracy may lead to making poor financial choices that can have negative consequences on the financial wellbeing of an individual. Consequently, the federal government created the Financial Literacy and Education Commission, which provides resources for people who want to learn more about financial literacy (Ageyi, 2014).

 

CHAPTER THREE

RESEARCH METHODOLOGY

Research Design

A research design is the scheme, outline or plan that is used to generate answers to various research problems (Noum, 2007). This study used descriptive design. Descriptive research design determines and reports the way things (Mugenda&Mugenda, 2003). The design was appropriate as it enabled understanding of the exact nature of the two variables of the study; financial literacy and performance of SMEs in Kwara state. Moreover it enabled the researcher to be able to describe the characteristics of these variables.

Population

A population is a larger collection of all the subjects from which a sample is drawn (Peil, 1995). Mugenda and Mugenda (2003) states that a target population entails the specific population that the researcher intends to carry the study; it shows an entire group of individuals or events having common observable characteristics that conform to a given specification.

The study target population consisted of owners SMEs operating within Kwara state, Nigeria . For data collection purposes, the target population was according to divisions in the area. Data available from Nigeria City Council indicate a total 825 SMEs were operating in Kwara state in year 2014 ( Government of Nigeria, 2014).

CHAPTER FOUR

DATA ANALYSIS, RESULTS AND INTERPRETATIONS

Response Rate

The researcher administered the questionnaires through interviews where the respondents were explained the importance for the study and the use and required information. This ensured a high response rate of 83%. The 83% response rate was achieved due to the researchers’ determination to get all SMEs to respond. Further, most of the sampled firms’ management were not very busy since data collection was done during the business off peak. A response rate of 50% is considered adequate, 60% good and above 70% rated very good (Mugenda&Mugenda, 2003).

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

Summary of the Findings

The study sought to investigate the effect of financial literacy on financial performance of SMEs in Kwara state, Nigeria. Specifically, the study investigated the effect of financial literacy level, capital invested, age and the size of the firms on the financial performance of SMEs. A population size of 100 SMEs from Kwara state, Nigeria was used. The primary data was obtained through administering of questionnaires.

The findings established that financial literacy score, amount of capital invested and size of the SMEs all have a positive effect on the financial performance of SMEs based on their positive Pearson’s coefficients; however only financial literacy and size of the firm have significant effect on financial performance. This implies that these two variables impact significantly on the financial performance. The other variable which is the amount of capital invested would not have a significant effect on financial performance due to its high p-value. Therefore, though all the variables have a positive effect on the financial performance, they differ in their level of significance.

The study also sought to establish the relationship that existed between the dependent and independent variables. As such a multiple regression analysis was carried out to identify the relationship between the dependent variable which is financial performance and independent variables which are financial literacy, capital invested and size of the firm showed a positive relationship between the dependent and independent variables. The results of the regression revealed an R of 0.9482 indicating that there is a strong relationship between financial literacy, capital invested and size of the SMEs. The coefficient of determination of 0.8922 implied that financial literacy, capital invested and size of the firm explain up to 89.22% of changes in financial performance. This implied that all the independent variables combined had positive influence on the financial performance of the SMEs.

The analysis of variance results indicated that the model developed was significant at 95% and 99% confidence level. This meant that the effect of independent variables on the model has significant effect on the dependent variables. From the analytical model developed, financial literacy score has a coefficient of 0.0358, size of the firms has a coefficient of 0.0613, and age of the firm has a coefficient of 0.0434 whereas the amount of capital invested has a coefficient of -0.0373.

The negative coefficient of the amount of capital invested implies that it had a negative relationship on the financial performance. While the positive coefficients of financial literacy score and size of the firm implies that they have a positive relation on the financial performance of the SMEs. The predictive model developed by the study isROC = 0.4414+ 0.0358X1+ 0.0373X2 + 0.0613X3 + 0.0434X4 Where; ROC is the Return on Capital as a measure of financial performance, X1 is the financial literacy score, X2 is the log amount of capital invested in the SMEs, X3 is the size of the firm as measured by log of assets, X4 is the log of the age of the firm.

Conclusion

This study sought to determine the importance of financial literacy on the development and performance of SMEs in Kwara state, Nigeria. Based on the study findings, the study concludes that financial literacy is positively related to financial returns of the SMEs in Kwara states. The findings are consistent with the empirical studies reviewed. For example Mwambia (2014) who established that financial literacy enabled the Miraa farmers in Meru to increase their financial performance to a great extent. Bernheim and Garrett (2003) also found that lack of financial literacy and capability was particularly serious consequences for those on low incomes, for whom costly mistakes can have grave consequences going beyond depressed financial returns.

The study concludes that there is a strong positive relationship between financial literacy, capital invested and size of the SMEs on the financial performance of SMEs. Therefore, high levels of financial literacy, capital invested and size of land implies higher financial returns for the SMEs. Increase in financial literacy, size of the SMEs and capital invested will increase financial returns by 89%.

The study also concludes that financial literacy, age of the SMEs and size of the firm have positive relation with the financial performance while the amount of capital invested is concluded to have a negative relation. Therefore, a firm that has been in operation for long will be more profitable than that just established.

Recommendations

The study is a justification of the fact that a SME owners with good financial literacy knowledge have sufficient capital to invest to carry out their businesses will have more financial returns. This can go a long way in eradicating poverty that has continued to the face the Kwara state area despite the endeavors the  dwellers have to start firms. Based on this knowledge, the study has a number of recommendations.

First, Nigeria  government should invest in instilling financial literacy knowledge to SMEs owners. This can be done through holding of workshops and educating the entrepreneurs on how to increase their financial returns from their SMEs as well as how to manage the money they make from SMEs.

Secondly, the  government should come up with a financing program where entrepreneurs can be extended cheap credit especially in the s region. This will provide them with the capital required to be invested and ensure that they maximize their financial returns from their SMEs.

Finally, the study recommends the SME owners should be encouraged to expand their farms to large scale so as to benefit from economies of scale. This will enhance the financial performance to a great extent. The SMEs owners should ensure that they not only gain the financial literacy skills but also use them to the maximum.

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