The focus of this research is on the impact of financial literacy on the profitability of some small scale enterprises in Calabar Municipality, Cross River State. An enquiry into their level of adoption of financial literacy was also studied. A review of related literatures was carried out to examine the extent of work done in the field. A carefully structured questionnaire was used to collected data on the level of adoption of financial literacy and also a financial literacy test. Stratified random sampling was adopted to divide the small scale enterprises into ten (10) strata, thereafter random sampling technique was employed. A sample of one hundred and fifty (150) respondents was used to carry out the study, which encompasses the different strata. One way analysis of variance (ANOVA) and Dependent T-test at 5% level of significance was used in the analysis of the research data. The result shows that the level of adoption of financial literacy by small scale enterprises in Calabar Municipality is low and that utilization of accounting records significantly influences their profitability. Thus, conclusion, recommendations and suggestions for further studies were proffered.
TABLE OF CONTENTS
TABLE OF CONTENTS
LIST OF TABLES
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research questions
1.5 Research hypothesis
1.6 Significance of the study
1.7. Scope and limitation of the study
1.8. Operational definition of terms
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.1 Theoretical framework
2.2 Conceptual Theories about variables (dependent and independent)
2.3 Concept and definition of financial literacy
2.4. Importance of financial literacy
2.6 Financial literacy basics for prospective Small-business owners
2.7 Nature of small scale enterprises
2.8. Concept of profitability
2.8 Roles of small scale enterprises in the development of Nigeria
2.9 Problems and challenges facing small scale enterprises.
2.10. Theoretical Framework
2.11. Empirical Framework
3.1 Research design
3.2 Method of data collection and data sources
3.2.1. Statement of variables
3.3. Population of the study
3.4 Instrument of Data collection
3.5. Sampling size, procedure and sampling technique
3.7 Reliability and validation of data instrument
3.9 Model specification
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Data presentation
4.2 Data analysis and interpretation
4.3 Test of hypothesis
4.4 Discussion of findings
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of findings
5.4 Suggestion for further studies
1.1 BACKGROUND OF THE STUDY
Like little drops of water that forms a mighty ocean, the littleness of small scale businesses from the cradle has been the bedrock of industrialization in developing countries of the world. Globally, small scale enterprises have contributed enormously in improving the standard of living of the people by providing jobs to relieve the society of social embarrassment, stimulating indigenous entrepreneurship and utilizing scarce resources.
Presently, as part of the Millennium Development Goals (MDGs), effort is being made to reduce poverty rate in developing countries. Effort is also being made to reduce the reliance of people on government and so-called ‘white collar jobs’. These are achieved through the growth and development of small scale enterprises (Eneh, 2007). Furthermore, small scale enterprises play important roles in the economic growth and development of every nation. They are a veritable vehicle for the achievement of national macro-economic objectives in terms of employment generation at low investment cost and enhancement of apprenticeship training.
Financial literacy as the name implies occupies a centre-stage in the quest to achieve an overall degree of success in an organization, (Bernheim, 2008). It also enhances to a reasonable degree, a business goal of financial profit. Thus, financial literacy (or lake thereof) has played a key role in the success and failure of our nations business for the past centuries. Companies and businesses have therefore been charged with ensuring that adequate and proper books of accounts are kept so as to ensure reliability of their financial statements. This will in the long run help improve their level of profitability.
Furthermore, profit can analogously be viewed as the life-blood of a business and hence the accounting bases, concepts and principles adopted ought to capture and report all the relevant information to ensure reliability it measurement( Nelson and Onias 2011).
Also Enikanselu and Oyende (2009) made it clear that no business can run effectively without being financially literate and also having one form of accounting records or the other. It can therefore be deduced that appropriate financial literacy is important for a successful management of any business, whether big or small.
Consequently, suffice is to say that it is crucial that financial literacy be encouraged among small scale enterprises so as to enable them be able to supply complete and relevant financial information needed to improve on decisions made by them, and to also enhance their profitability. This research study therefore examines financial literacy and its impact on profitability of small scale enterprises.
The performance and growth of Small and Medium Sized Enterprises (SMEs) have throughout the nations, been of great concern to, among others, development economists, entrepreneurs, governments, venture capital firms, financial institutions and non-governmental organizations (Eniola & Entebang, 2014). The success or failure of small and medium enterprises (SMEs) is contingent on their financial viability, and one of the most common problems facing such firms is their ability to secure sufficient cash flow and working capital to remain profitable. It was noted as one of the top problems facing SMEs as long ago as the Bolton Report in the early 1970s (Bolton, 1971). This has been a recurring theme in the small business literature since that time (Kennedy, Tennent, and Gibson, 2006). This was highlighted in the 2014 Sensis Business Index report where the most important prime concerns of Australian SME owner-managers were a lack of sales and cash flow, bad debts and profitability (Sensis, 2014).
Indeed, the MSE sector provides employment for substantially more people than does the formal sector. It is estimated that there are 7.5 million SMEs in Kenya, providing employment and income generation opportunities to low income sectors of the economy (CMA, 2010). The sector’s contribution to the Gross Domestic Product (GDP) has also grown from 13.8 per cent in 1993 to about 40 per cent in 2008 and the sector continues to grown to date. The latest Economic Survey (2012) indicates that the informal sector which comprises of the SMEs has contributed 80.8 per cent of total employment created (KNBS, 2012). The potential associated with the SME sector has been positively adopted by the government and other development partners in economic development, increasing wealth creation and fight against poverty and in employment creation.
Financial literacy has been shown to be essential in improving transparency, efficiency, accuracy and account Financial literacy provides is knowledge and understanding of financial concepts and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range. Financial literacy, in the brightness of the new business reality, is the capability to adequately oversee financial resources over the life cycle and connect with effectively with financial products and services. Financial literacy is about discernment and makes effective decisions on utilization of financial management (Gavigan, 2010). This is an area that requires knowledge, skill, attitude and experience with goals to deal with the survival of the firm; profit maximization; sales maximization; capturing a particular market share; minimizing staff turnovers and internal conflicts; and maximizing wealth (Jacobs, 2001). It can be among the essential strategic tools to more organize allotments of financial resources and to a considerable financial strength.
In a business, decision-making needs to be rational and be a premised on available information. This implies that it is imperative that manager of business and individual should have a reasonable degree of knowledge related to the available information to make good decisions. Remund (2010) opined that financial literacy is the degree to which one understands important financial concepts and possesses the capacity and confidence to handle personal funds of appropriate, brief period decision-making and solid long-term financial forethought.
Capacity building of SMEs in terms of preparing financial statements and business plans, as well as improving their financial literacy and management training, is shown to have a positive impact on SME development. Furthermore, strengthening the horizontal linkages with other SMEs and vertical linkages with larger firms would improve SMEs’ market access (Hogarth et al. 2002). Effective implementations of financial literacy skills lead to improvement in business performance due to improved ability to track business events from the record system (Siekei, et al. 2013). Most new business owners are daunted by the mere idea of bookkeeping and accounting.
1.2. STATEMENT OF PROBLEM
It is generally accepted that SMEs are becoming increasingly important in terms of employment, wealth creation, and the development of innovation. However many SME‟s encounter problems during their lifetime and as a result, many firms perform dismally and fail to grow. In addition, it is generally known and accepted that there is a high mortality rate of SMEs within the first two years. Given this high failure rate, it becomes vital to research the factors required to enable the SMEs to survive and indeed progress to the growth phase of the organizational life cycle (Kamunge et al., 2014).
This calls for financial literacy intervention to train the SMEs on how to use the available means of accessing financial services to improve their enterprises and also reduce the cost of doing business. Financial training is one of the factors that impact positively on the growth of SMEs because entrepreneurs adequate financial literacy are better placed to adapt their enterprises to constantly changing business environments (King & McGrath, 2002).
Internally, most SMEs lack training and management skills to enable to manage funds effectively. These SMEs also lack creditworthiness and management capacity, so they have trouble securing funds for their business activities such as procuring raw materials and products, and investing in plant and equipment. From the external perspective, SMEs are regarded as insecure and costly businesses to deal with because they lack required collateral and have the capacity to absorb only small amount of funds from financial institutions. So they are rationed out in their access to credit because of high intermediation costs, including the cost of monitoring and enforcement of loan contracts.
Externally, SMEs lack the necessary collateral and have the capacity to absorb the only small amount of funds from financial institutions. This prevents the enterprises from accessing adequate credit because of high intermediation costs, including the cost of monitoring and enforcement of loan contracts. Several initiatives have been advanced by the state and non-state sectors to broaden access to affordable credit, and financial management to enable SMEs to manage finances efficiently. However, it is not clear whether financial literacy initiatives have translated to better financial management, enterprise performance, improved access to loan capital, and loan repayment of SME borrowers (CMA, 2010; Wanjohi, 2011).
According to Ketley et al. (2012) and CBN (2012), Nigerian lack financial literacy, and more than 46.3% did not have access to financial services and lag behind some developing and developed countries. This has been a concern intense challenge faced by the SME firm in the country with the recognition that lack of financial literacy was one of the factors contributing to ill-informed financial decisions and that these decisions could, in turn, had a tremendous negative spill-overs (OECD, 2013). A series of tangible trends underpin the rising global interest in financial literacy as a key life skill. Thus, this study set to review the influence of financial literacy on the of SMEs firm performance in Nigeria.
However, reviews of the literature on the effect of financial literacy on SME profitability are yet to be conducted. Most of the studies are on firm characteristics and performance.
Most of these studies have only been done in large firms. It is against this backdrop that this research study intends to assess the role of financial literacy on profitability of small and medium enterprise in Calabar. `��X��Z
To go back to to the previous page click here: