Impact of Financial Management System on Organizational Accountability; A Study of Selected Firms in Nigeria

Impact of Financial Management System on Organizational Accountability; A Study of Selected Firms in Nigeria

Chapter One

OBJECTIVES OF THE STUDY

Starting and operating a small business includes a possibility of success as well as failure. Because of their small size, a simple management mistake is likely to lead to sure death of a small enterprise hence no opportunity to learn from its past mistakes. This may be attributed to lack of planning, improper financing and poor management has been cited as the main causes of failure of small enterprises.

It is against this realization that the current study aims to investigate the impact of financial management systems on accountability of firms.

The specific objectives of this study include:

Determine effect of working capital management systems on the accountability of firms in Nigeria.
Determine the extent of financial management systems employed by the firms and their effect on growth.
Examine how financial planning practices influence on the accountability of firms
Determine the influence of accounting information systems on the accountability of firms in Nigeria.
Scrutinize the effect of financial reporting and analysis practices on the accountability of firms in Nigeria.
Establish the relationship between financial management systems and business performance of firms.

CHAPTER TWO

LITERATURE REVIEW

Theoretical Review

The study finds three theories to be of importance in explaining the concept of financial management systems in organizations. This includes, Pecking Order Theory, Contingency Theory and Modern Portfolio Theory.

Prospect Theory

Kahneman and Tversky, (1979) developed the Prospect Theory. The theory holds that decisions pertaining to financial matters of organizations are always between alternatives that involve risks. This is due to the alternatives having no certain outcomes. This model theory is descriptive in that it tries to describe real-life choices rather than optimal decisions. The theory therefore speculates that before the owner makes any financial decision, he/she has to consider majorly the risks involved.

Based on this theory, the decisions made by owners should be done with some level of expertise, and this requires financial management systems. The practices will enable the owners in firms to be able to manage their finances effectively. Hence the theory’s

implication is that through understanding the financial management systems, they may able to minimize any risks occurred thus improved performance.

The Contingency Theory

Pike (1986) developed the Contingency Theory aimed at explaining various financial management concepts. The theory holds that there are various contextual factors that determine how an organization operates such as technology and the external environment (Henri, 2006). As described by Chenhall, (2003), these factors will affect the organization’s structure, which will then influence the design of the financial system. Efficiency in operations will only be attained by having a balance between the corporate setting and how the financial system operates.

The theory concentrates mainly on three aspects of the corporate context that are assumed to have an association to operation, design of aspects in the financial system. This entails the ordinary investment outcomes history, professional competency degree and capital budgeting control policy. While the contextual factors describe why accounting systems vary based on the particular organization, the theory makes the assumption that organizations do not have similar accounting systems and thus attain different financial performances. This may be explained by the different contextual factors surrounding firms. Therefore resource allocation to financial management systems should be made while giving consideration to these factors (Pike, 1986).

The theory’s proposition to the study is that there are certain financial management systems that may work well with certain firms but not with others. This is due to the difference in the corporate settings and external factors. This thus implies that there are no standard financial management systems to be applied by the firms. Therefore, appropriate financial management systems should be chosen after evaluating the particular business setting to ensure it’s appropriate in achieving its intended purpose. A positive influence on the firms’ financial performance will only be attained when a balance is met between the corporate setting and the financial system operations.

Modern Portfolio Theory

The Modern Portfolio Theory of financial management choice was proposed by Harry Markowitz. It was developed between 1950’s through the early 1970’s and is seen as an essential advance in the mathematical modeling of finance. The theory helps in understanding how financial management systems in organizations are undertaken, particularly the financial risk management decisions. The theory quantifies the difference between the overall risk of the portfolio and the risk of portfolio assets taken individually (Amenc and Le Sourd, 2003).

The theory states that a portfolio will only be considered to be efficient when the available assets give either high returns or low risks of exposure. Estimating the risk levels and return levels is essential in order to reduce the occurrence of negative returns. This enables choosing different assets in order to mitigate the risk of loss (Brealey and Myers, 2003). The expected returns may be accessed by measuring the expected output over the utilized resources while taking into consideration the risks being exposed (Markowitz, 1952).

The implication of the theory to the study is that organizations, Firms included, should not only invest widely in different types of financial instruments, but also access the various risks involved. This implies that financial risk management is very critical in ensuring that there is diversification in case any financial management system fails. The theory thus acts as a guideline in enhancing reliability in the financial management systems in Firms in order to ensure positive influence on the financial performance.

Determinants of Financial Performance of firms

The financial performance of firms has proven to be a very delicate matter in most organizations. This is attributed to the fact that despite numerous strategies being formulated by the owners and managements, most SMEs still remain to underperform. This shows that the performance is a multidimensional entity influenced by various factors, which include;

Financial Management systems

Financial Management systems entail how an organization manages its financial resources so as to ensure proper coordination and maximum returns (Nazir and Afza, 2009). The measures of financial management systems in Firms include; working capital management, cash budget management systems and risk management systems. Working capital refers to the capital required in the every-day operations of the business and thus acts as the driver to the organization’s growth (Harris, 2005). This includes; inventory management, cash management, account payables management and account receivables management. This is to ensure that there is sufficient cash flow to cater for both the current and the future operational expenses (Fekete, et al., 2010).

Cash budgeting on the other hand constitutes the process of committing funds or capitals for a considerable length of time for specified purposes within the firm’s strategic position (Fabozzi, 2009). However, despite the cash budgeting awareness, most SMEs tend to rely mostly on their informed intuition rather than the set budget plans (Pandey, 2012). Risk management on the other hand entails identifying and analyzing the potential threats that the organization may be faced with (Saah, 2015). This ranges from internal risks to the external risks that are likely to diminish the financial returns of a particular organization.

Size of firms

The size of firms may be gauge in various conditions such as amount of capital invested, the employees available, the size occupied by the firm, the technology used in the operations and its market coverage (Pandey, 2005). The particular size of a SME affects its competitive advantage and how it conducts its operations. The large organizations are advantageous in that they may be able to acquire better resources and enjoy economies of scales. Therefore, they will be able to have advanced equipment, more employees and resources. The organization will also have a greater chance of getting additional capital from the financial institutions as they are able to offer security (Dean et al., 2000). The smaller firms on the contrary, will have limited access to capital, and fewer resources hence limited activity. This makes most small firms yearn to expand their boundaries in order to perform even better.

CHAPTER THREE

RESEARCH METHODOLOGY

Research Design

The research design outlines the plan or scheme that a particular study adopted in order to accomplish the various studies’ objectives. This study employed descriptive research design in obtaining information about the effect of financial management systems on the financial performance of 10 small and medium enterprises in Illorin, Nigeria. Descriptive research design enables one to obtain information concerning a current phenomenon exactly the way it is with minimal interference from the researcher and where possible draw valid conclusions (Creswell, 2008). Hence, descriptive was chosen because it provided a means to contextually interpret and understand the financial management systems put in place by 10 Firms in Illorin, Nigeria and their impact on financial performance. The descriptive research design enabled the collection of quantitative and qualitative data pertaining to the study through in- depth study of the various constructs of financial management systems and the relationship between the variables.

Population of the Study and Sample.

The population for this research comprised of all the 10 Firms in Illorin, Kwara state, Nigeria, midsized companies’ survey for the year 2016 as per appendix II. This population was chosen due to the information about these companies being readily known and the firms having well put out financial management systems. Particularly, the managers or their equivalents at these firms were targeted. This is attributed to the fact that they are directly involved with the financial management systems at their respective organizations and thus the most conversant with the study’s ic. Due to the population being well defined, small and manageable, a census approach was employed to cover the entire population of 10 Firms in Illorin, Nigeria. This was adopted to enable equal representation of all the 10 SMEs without any information being left out for complete generalization of the study’s findings. This is in line with Paton, (2002) assertion that the sample size determined by the exact specifications of the study, such as what exactly is being enquired. Table 3.1 shows the stratum of distribution of these companies that were targeted based on the industry that they belong to.

CHAPTER FOUR

DATA ANALYSIS, RESULTS AND DISCUSSION

Response Rate

The study’s target population was the total 10 Firms in Illorin, Nigeria. As such, a total of 100 questionnaires were issued out of which 92 were duly filled and returned. This translates to a response rate of 92% as per Table 4.1. According to Mugenda and Mugenda’s (2008) assertion, the response rate is considered very good and adequate to enable accomplishment of the study’s objectives.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

Summary of Findings

The study sought to determine the effect of financial management systems have on the financial performance of 10 small and medium enterprises in Illorin, Nigeria. The study employed the descriptive research design in conducting the study. The population for this research comprised of all the 10 Firms in Illorin, Nigeria, with the respondents being the managerial employees or owners. The data was tabulated, classified and summarized by descriptive measures such as frequency distribution, percentages, inferential statistics and mean and standard deviations. Multiple regression and Correlation analysis were used in determining the relationship that existed among the study’s variables.

The study also sought to determine the relationship between the study’s variable which was achieved through correlation analysis. Cash budget management had a Pearson Correlation of 0.5730, Risk Management had a Pearson Correlation of 0.1839, Working Capital Management had a Pearson Correlation of 0.6970 and size of the firm had a Pearson Correlation of 0.3348. This means that all the variables had a positive effect on the firms’ performance. This means that an increase in these variables will cause an increase in the organization’s returns which is supported by the available theories such as Contingency

Theory and Pecking Order Theory that explain how the financial management systems may be integrated in firms to ensure maximum gains.

The effect of the variables combined had a strong relationship with SMEs’ performance as shown by a coefficient of correlation of 0.9213. The coefficient of determination obtained of 0.835 implies that the model obtained accounts for up to 83.58% of the changes in performance of firms. The regression model was also significant at 95% confidence level in explaining the relationship that exists between the study variables implying that the model was reliable. This concurs with the study conducted by Rauf, (2016) on financial management systems in Small and Medium Sized Enterprises in Sri Lanka.

Cash Budget management had a coefficient of 0.086, Risk Management systems a coefficient of 0.197, Working Capital Management coefficient of 0.163 and Size of the firm a coefficient of 0.069. All the variables had a significant effect as they had a p-value less than

0.05. This shows an increase in these variables will result in significant increase in the financial performance of the firms. This is similar to Vohra and Dhillon (2014) who investigated the financial management systems on small firm in India and found out positive consequence of financial management systems on firms’ performance which mediate via financial planning capabilities.

The predictive model thus developed was; Y=43.76+ 0.086X₁+ 0.197X₂+ 0.163X₃+ 0.069X_4. Where: Y= Financial Performance, X₁= Cash budget management systems, X₂= Risk Management systems, X₃= Working Capital Management systems and X₄= Size of the firms. Whereby, all the variables have a positive effect on Firm’s accountability.

Saah, (2015) also established the same positive on their study on the accountability of firms in the Tamale Metropolitan area of Ghana.

Conclusion

The study concludes that the firms have all put in place financial management systems to oversee their financial transactions. However, the adoption extent was concluded to vary with the particular organization due to the differences in the financial structures. Cash budgeting management systems had above average of adoption, which may be due to their utilization in undertaking most financial operations. Cash budget management was further established to have a significant positive effect on the organizations’ financial performance. The positive relationship is due to Proper budgeting acting as a tool to boost the organizations’ financial performance through providing a guideline on how the activities are conducted. The study thus concludes that the cash budget management systems enable planning, borrowing and efficient control of the organization’s expenditures.

While the most adopted risk management systems were Loss reduction/prevention and risk avoidance, whereas the least was risk transfer. The study concludes that through risk management systems, the organizations are able to identify and mitigate potential risks. On the other hand, on working capital management, the most adopted was sufficient cash flow to meet daily needs and the least was receivables management system being fully automated. The study concludes that through working capital management, there is proper management of the entity’s current assets and current liabilities to ensure that the entity has the required liquidity.

The study further concludes that size does play a role in how the firms performed. The positive influence is due to; increased economies of scale, reduced cost of production and increased ability to access additional financed from financial institutions. The study thus concludes that organizations with a larger size are more likely to perform better than the smaller ones.

This has seen most organization invest much in acquiring assets which will enable them to expand their operating scales. The same phenomenon was established by Rathnasiri, (2015) who conducted a study on Firms in Sri Lankan.

Based on the study findings, the study further concludes that there exists a strong positive relationship between the variables with a coefficient of correlation of 0.9213. The predictor variables which are the various financial management systems are concluded to have a positive and significant effect on the firms’ financial performance. Hence, adding and integrating financial management systems are concluded to highly improve how the firms will perform overall.

The studies conducted internationally have also found similar positive relationship that exists between financial management systems and the financial performance of firms. Abanis et al, (2013) conducted a study in Western Uganda aimed at determining the financial performance of firm and found out a positive effect existed. Saah, (2015) on the other hand conducted a study on how Firms in Tamale region conducted their financial management operations and established accounting, reporting and investing had a positive impact on the financial performance. Similarly, Mazzarol, et al, (2015) conducted a study on the financial management systems of Firms in Australia and Singapore regions and established organizations that had well organized financial management systems had improved performance.

Limitations of the Study

The study was faced by certain limitations which hindered the effectiveness of data collection. To begin with, the study was collecting sensitive information on the financial management systems of 10 Firms in Illorin, Nigeria. This is because most organizations avoid disclosing information pertaining to their finances due to security reasons.

Hence, the respondents were reluctant in providing information as required. However, the researcher covered this by assuring them that the data collected would be solely used for academic purposes.

The study was also limited to three financial management systems in the firms. This includes the financial risk management systems, cash budget management systems and working capital management which may not be a comprehensive list of the financial management systems used. Practices such as credit management and profit retention were not covered by the study which may deter full determination of the influence which financial management systems have on financial performance.

Additionally, the study limited itself to the listed 10 Firms in Illorin, Nigeria thus excluding other SMEs from the study. As such, this may not be an actual representation of the situation that exists in the other SMEs. This is due to the differences in structure and organizational operations. Hence, the other SMEs may have completely different financial management systems other than these firms.

The available time to carry out this study also posed a limitation as more time would have been paramount in a taking other factors relevant to the study into consideration. Despite this, the researcher ensured comprehensive and well planned data collections, so the findings obtained are accurate and justified.

Recommendations of the study

This section provides various recommendations and suggestions for further studies.

Managerial Recommendations

Based on the study’s findings, the study makes various recommendations. To begin with, the study established that financial management systems have a significantly positive effect on the financial performance of firms. The study thus recommends that the managers in firms should highly prioritize financial management systems during the formulation of the organization strategies. This will enhance transparency, accountability and consistency in their financial operations. However, the study recommends that the managements should carefully evaluate their companies’ structures before adopting the financial management systems. This will ensure that the practices adopted are well suited for that particular firm as companies differ in capital structures.

Policy Recommendation

The study also recommends that regulatory bodies should formulate appropriate policies and regulations which will facilitate the implementation of financial management systems in firms. This will enhance efficiency and effectiveness in managing SMEs as well as foster consistency in the implementation of financial management systems.

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