THE IMPORTANCE OF FINANCIAL ACCOUNTING LITERACY ON THE GROWTH, DEVELOPMENT, SURVIVAL, PRODUCTION AND PERFORMANCE OF SMES
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial literacy remains an interesting issue in both developed and developing economies, and has elicited much interest in the recent past with the rapid change in the finance landscape. Atkinson and Messy (2005) defined financial literacy as the combination of consumers’/investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being. Financial literacy helps in empowering and educating investors so that they are knowledgeable about finance in a way that is relevant to their business and enables them to use this knowledge to evaluate products and make informed decisions. It is widely expected that greater financial knowledge would help overcome recent difficulties in advanced credit markets. Financial literacy prepares investors for tough financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance.
Financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improves the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. It also provides greater control of one’s financial future, more effective use of financial products and services, and reduced vulnerability to overzealous retailers or fraudulent schemes. Facing an educated lot, financial regulators are forced to improve the efficiency and quality of financial services. This is because financially literate investors create competitive pressures on financial institutions to offer more appropriately priced and transparent services, by comparing options, asking the right questions, and negotiating more effectively. Investors on their part are able to evaluate and compare financial products, such as bank accounts, saving products, credit and loan options, payment instruments, investments and insurance coverage, so as to make optimal decisions (Miller, Godfrey, Levesque and Stark, 2009).
Lack of business and management skills can magnify financial barriers for SMEs. Low levels of financial literacy can prevent SMEs from adequately assessing and understanding different financing options, and from navigating complex loan application procedures. Similarly, the fact that SMEs’ accounting and financial statements are often not transparent makes them risky borrowers and thus less attractive to lenders. 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 positive impact on SME development. Furthermore, strengthening the horizontal linkages with other SMEs and vertical linkages with larger firms would improve SMEs’ market access. (HogarthandHilgert, 2002).
1.2 Statement of the Problem
Quite a number of studies have been conducted in developed countries and have shown significant relationship between financial accounting literacy and the growth and survival of small and medium scale enterprise. However, there are a lot of diverse perceptions about financial accounting literacy and these are caused by several factors. A major concern is the ignorance of owners of SMEs on the importance of book keeping and the proper understanding of the entity concept, thereby causing their business to suffer, due to lack of information (financial in nature) to aid in forecast against future eventuality and expansion. This has necessitated this study to find out the impact of financial accounting literacy on the growth and survival of small and medium scale enterprise in Kwara state, Nigeria. This study will help small and medium scale owners and folks interested in going into similar venture to understand the impact of financial accounting literacy on the growth and survival of SMEs.
1.3 Research Questions
The following research questions will be pursued in the course of this work:
i. What is the impact of financial accounting literacy on the growth of small and medium scale enterprises?
ii. What is the impact of financial accounting literacy on the survival of small and medium scale enterprises?
1.4 Justification of the Study
Lusardi and Mitchell (2006) found that financial illiteracy is widespread and is particularly acute among specific groups of the population, such as women, the elderly, and those with low education. Agarwal, Driscoll, Gabaix and Laibson (2007) further show that financial mistakes are prevalent among the young and the elderly, who display the lowest level of financial knowledge and cognitive ability. Again a study by the OECD (2005) and the work by Lusardi and Mitchell (2007) which review the evidence on financial literacy across countries show that financial illiteracy is a common feature in European countries, Australia, and Japan. These findings were confirmed in the work of Christelis, Jappelli and Padula (2006), which used micro data from European countries to find that most respondents in Europe scored low on financial numeracy and literacy scales. This study will be very useful in that the previous studies carried out on financial literacy used Europe and other developed countries of the world as its case study, but this study will focus on Nigeria and most especially Kwara state to be specific as it will serve as a guide for SME owners in this part of the world to know the impact of financial accounting literacy on the growth and survival of their enterprise. This study will be very useful in that a lot of businesses in Kwara state today hit the rocks due to illiteracy on financial management matters.
1.5 Objectives of the Study
The main objective of this study will be to determine the importance of financial accounting literacy on the growth, development, survival, productivity and performance of SMEs in Kwara state. The specific objectives are to:
i. determine the impact of financial accounting literacy on the growth of small and medium scale enterprises.
ii. determine the impact of financial accounting literacy on the survival of small and medium scale enterprises.
1.6 Hypotheses of the Study
The hypotheses to be tested in this study are;
H01: There is no significant relationship between financial accounting literacy and the growth of SMEs in Kwara state.
H02: There is no significant relationship between financial accounting literacy and the survival of SMEs in Kwara state.
1.7 Scope of the Study
This study will focus on all SMEs in Kwara state. However, only three local government areas (Ilorin South, Ilorin North and Ilorin East local government areas) will be selected for this study using simple random sampling technique.
1.8 Plan of the Study
This study will contain five CHAPTERs. CHAPTERone will serve as the introduction which will include background to the study, the statement of the problem, objectives of the study and research questions. CHAPTER two will deal with the literature review which will contain the conceptual framework, theoretical background and empirical evidence. The third CHAPTER will focus on the report of research methodology, research design, method of data analysis, method of data collection, sampling technique and population of the study. Presentation, analysis and interpretation of data will be covered in CHAPTER four, while CHAPTER five which will be the last CHAPTER will contain summary, conclusion and recommendation.
