THE IMPACT OF FINANCIAL PLANNING ON THE PROFITABILITY AND EFFICIENCY OF SMALL SCALE FIRMS
ABSTRACT
The Nigeria Economy has a lot of turbulence in the 1980’s. The period witnessed unemployment, inflation, dwindling oil revenue; the need has risen for the government to take serious steps to change the direction of the economy through policies which are aimed at restructuring and making better use of available resources. However, this study was conducted to examine the impact of financial planning in the profitability and efficiency of small scale industries in Orumba North Local Government Area of Anambra State. The results of the study showed that financial planning has to be interpreted and used. After an analysis of data, the study came out with findings of financial planning propels the level of performance of small scale firms. It was found that small scale firms in Orumba North Local government was identified to be absence of proper financial records, illiteracy, bad attitude to change and high inflation and interest rate. In other to exploit the optional benefits of this study, the researcher offered the following recommendations for the improvement of financial planning in small scale firms in Orumba north local government area of Anambra state. Considering the fact most small scale firms lack necessary managerial know-how, experienced and qualified staff should be employed on fulltime basis to design a good accounting system, draw up maintenance plans for such records and help relate them to profitable operations. Good records should be kept. While a business owned is not expected to be an accountant, he should at least be able to keep memorandum of records to assist the accountant in preparing his financial records or reports. Small scale industrialists should be enlightened through the use of seminars and government enlightment policies.
CHAPTER ONE
1.1 INTRODUCTION
The Nigeria economy has witnessed a lot of turbulence in the 1980s. The period witnessed unemployment, dwindling oil revenue. The need has arisen for the government to take serious steps to change the direction of the economy through the use of policies, which are aimed at restructuring and making better use of available resources. Among these policies, one should aim at increasing the awareness, as regards the positive impact which emphasis on small scale industries could have on the economy. For the purpose of this research, a small scale industry because of ambiguity in the definition, can toe defined as a continuum starting from the informal sole propertorship and extending to an upper limit defined by the law of the country concerned. In Nigeria for example, various agencies have different classifications – Nigeria Bank for Commerce and Industry, Federal Ministry of Industries etc.
One of the earliest definitions of small scale industry was established in 1952 by the United Economic Commission for Asia and the far East (ECAFE). The commission defined a “Small Scale Industry” as operated 50 workers if no motive power was used, or 20 workers if motive power was used. In Nigeria, the small scale division of the Federal Ministry of Trade Industries and cooperative defined a ‘small scale industry’ as any manufacturing, processing or service industry with investment not exceeding N150,000 in machinery and equipment only. The central Bank of Nigeria insist that any business whose whole turnover is less than N500,000 is a small scale industry or business.
World Bank defines a ‘small scale industry as one having capital base of N10 million repayment of ½ – 3 years MR B.E Osaze, a finance analyst sees ‘small scale industry’ as one which is owned, managed and controlled by one or two persons, is family influenced in decision making, has undifferentiated organizational structure, has a relatively small share of the market and employs less than so people. In Nigeria, majority of the business organization or industry fall under the small scale category. Thus the survival of the economy can be said to depend to a large extent on the organizations.
The small scale industry is growing all the time.
Accordingly, government effort should be directed at providing assistance to already existing small scale industries and to individuals willing to embark on such small scale industries. This project is base on the impact of financial planning on the profitability and efficiency of the small scale industries with particular reference to those in Orumba North Local Government Area of Anambra State. Before I proceed, it is therefore necessary to give a historical back ground of Orumba North Local Government Area.
1.2 HISTORICAL BACKGROUND OF ORUMBA NORTH LOCAL GOVERNMENT AREA OF ANAMBRA STATE
Orumba North local government Area was originated from Awka district, which started with colonial Administration sometime in 1960. Awka district was then considered two large and it was converted into two as Njikoka and Aguata district council. Aguata was made up of 45 towns and Orumba was in Aguata district. And during the end of civil war, the district was named ‘Division’. By 1989, Aguata was splited into Aguata local government area and Orumba local government area. The Orumba local government was again splited into Oruba North and South, so the North local government was originated and came into existence in 1991 as one of the local government created by formal Head of state president Obasanjo Regime. At inception, the Headquarters was situated at Umunze, but later transferred to Ajalli for political reasons
Geographical Location
Orumba North Local government Area was bounded on the south by Ideato Local Government Area of Imo state in the North Anaocha local government of Anambra East by Awka south of Anambra and some part of Oriji River local government in Enugu state. The local government have people heavily up to a population size of over 80,000 and it is made up of 16 towns which include – Awgbu, Okepeze, Amaetiti, Nanka, Oko, Amaokpala, Ndiowu, Ndikelionwu, Omogbo, Ndokolo, Ndiojkpalake, Ndiokaplaze, Ufuma, Awa Ndiokwuenu and Ajalli.
Culture
The roles played by their masquerades during the “Nmanwu” festival in the state still lingers human memories. The Okocha masquerade, the Ogbonma, the Agaba and Ugobedie cultural dance all from Awgbu featured prominently in cultural festival of the state. The habitants of Orumba North local government are prominent farmers. Those who are traders and others who ventured in other professions keep small farm in front of there houses to demonstrate that they are not afraid of hoes, so they have love for agriculture. They are also known for craft making. The Awgbu wine and pot made out of clay soil is one of the evidence that abound. The Local government also have number of areas of centre of tourism. In terms of politics, the people of Orumba North local Government are politically conscious and practice the tenet of participatory democracy. Orumba local government is therefore the centre of administrative, culture and commerce of the Anambra state.
1.3 OBJECTIVE OF THE STUDY
Financial planning involves the selection from among alternatives of a firm’s objectives, places, procedures and programmes in the area of finance. It also involves finding answers to questions such as:
(i) What is the capital requirement of the firm?
(ii) What are the different sources of fund, and how should such fund be raised from each source?
(iii) How would the Funds raised be used effectively?
Financial planning is very important in all human endeavours. It involves the movement of resources especially resources that are liquid in nature. Hence, financial planning can be seen from the individual view points and that of the corporate personality. The objective of this research study therefore is to determine if plans, especially financial plans are properly made by small scale firms and if so, to ascertain the level of significance such plans have on the overall operations of the firm. The level of significance of such financial plans will thus enable us to examine the effectiveness of these plans as they relate to small scale firms.
1.4 STATEMENT OF THE PROBLEM
Small scale industries are faced with numerous problems which effect the efficiency of their operations. These problems could rage from – unavailability of reliable accounting information on which to base their managerial decision to manage ignorance of these factors, knowledge of which could have otherwise enhanced the operations of the business, especially as regards to planning of financial transactions both in the present and in the near future. – Also, most entrepreneurs do not have training experience in financial management and are reluctant in seeking expert advice and assistance. This often leads to business growth and development restriction and business failure. As a result of these factors, they are not able to project or even give an estimate in successive future periods.
These constraints make it impossible for small scale entrepreneurs to take advantage of available investments (both long and short term investments) and alternative sources of capital which could improve the entire scope of the business. Basically the problem is that most small scale businesses do not draw financial plans as regards to their activities. This research will therefore attempt to ascertain to what extent financial planning is effective when properly utilized.
1.5 RESEARCH HYPOTHESES
1. Ho: There is no relationship between professional financial advice and the small scale firm’s activities.
2. Ho: There is no relationship between equity capital and the small scale firms financing.
3. Ho: There is no relationship between availability of capital and the profitability of small scale business.
1.6 SIGNIFICANCE OF THE STUDY
As mentioned earlier, small scale business entrepreneurs (managers) generally lack managerial knowledge. Thus, this research will to some extent enlighten and broaden their business perspective as to the importance and significance of making financial plans and implementing such plans on a continual basis. This work will also aid small scale entrepreneurs to weigh the effects of planning on their businesses. Also it is significant to note that this study rests on the presupposition that the finding and recommendations will help prospective investors and managers know the relevance of financial planning and to forthwith involve financial management, planning as an important aspect of the financial management function of the organization accounting system.
1.7 SCOPE AND LIMITATION OF THE STUDY
The scope of the study will cover four small scale businesses located within Orumba North local Government of Anambra state. The types of businesses would involve saw milling, block moulding, trading, and business centres. The scope is restricted to short term financial plans whose horizon is rarely longer than the next 12 months. But for the purpose of this research, we could extend the horizon to range between 12 months to 5 years. Short term financial planning would relate to cash flow analysis which takes into consideration sales forecast and estimated recurrent expenses and purchases.
1.8 LIMITATION OF THE RESEARCH
Every research work is undeniable subject to some limitations. During the course of this particular research work, limitations that would be encountered are time, cost of the research, of these small scale firms, literacy of management and lack of cooperation on the part of management and finally, the unavailability and inaccessibility of proper records.
1.9 DEFINITION OF RELEVANT TERMS
During the course of this work, basic terms would be of continuous use. Therefore it is necessary to define some of this key terms. Financial planning: for the purpose of defining the subject matter “financial planning”, it is necessary to define the term “finance” and “planning” finance is the life blood of business It is required to bring a business into existence (its promotion and incorporation) to keep it alive and growing. The need for finance in business is such stronger today than ever before, and its importance too great. Since finance is the life blood of any business, its management is of great importance for survival and growth of a business enterprise.
The financial manager plans, directs and controls the utilization of funds in such a way as to ensures maximum efficiency of operations and a fair return on investment. Inshort, the finance plays a crucial role in the operation of a business firm and it assumes still greater significance in the case of large organizations. “Planning” is the beginning of the management process. It is the process of determining what to do during a given period in an organization, how to set about doing it, organizing responsibilities and authority and determining what to be achieve during that time frame. “Planning” according to Lang and Gillespire (1981:5) is the process of setting goals and identifying actions to achieve goals. This process would involve the formulation of objectives and strategies to the implemented to meet these objectives. It is process of shaping future events. It is careful plotting of goals in relation to available resources and expected returns. It involves the determination of where an organization is heading to and how it intends to arrive there. A successful entrepreneur uses planning to bridge the gap between today and tomorrow. The known and the unknown planning involve decision about:
a. what to do in the future.
b. how to do it
c. when to do it.
Under the present economic, technological, social and political environment, planning has become requisite for the survival of organizations. Thus the purposes of planning in an organization are:
i. To decide objectives for the organization.
ii. Identifying alternative ways of achieving them and
iii. Selecting from among these alternatives for both the organization as a whole and also for individual departments, sections and groups.
Generally, planning will involve the process of using facts about the past and present to project future actions. Having defined planning and finance “Financial planning” as defined by Lang and Gillespire (1981:7) is the process of concentrating on how to manage income and expenditure both in the short-run and long-run so that specific goals will be met. Financial planning is an integral part of overall management of the organization. Another definition is given by Breaqley and Myers (1994:679). They defined “financial planning” as the process in which smart financial managers consider the overall effect of financing an investment decision.
Generally, financial planning can be referred to as the process of using past and present facts to project future financial matters. It involves long and short term financing towards the allocation of resources, looking at the source of income and expenditure and establishing a sound and reliable financial base for the organization. It is important to note at this point the tangible product of the financial planning process i.e the financial plan which describes the firm’s financial strategy and project its future consequences by means of balance sheet, income statement and statement of sources and application of funds.
PROFITABILITY: it means success in producing a result. Profitability is used to formulate target in planning and therefore to provide a yard stick of performance to judge actual performance. Profitability as used in the title of this research work means the extent to which financial planning has been successfully implemented in the small scale industry to produce the desired profit.
EFFICIENCY: This means producing a satisfactory result without wasting of time or resources. It is therefore necessary to note that an organizational goals and objectives can be achieved but not efficiently. This means that the time spent in the achievement of the goals and objectives is more than the required time and there is also a waste of resources. This will result to high cost of the organizations product (output). Efficiently as used in the title of this research work means the extent to which financial planning has been successfully implemented in the small scale industries or firms to achieve the desired result which is the organization goals and objectives without wastage of time and resources.
1.10 SUMMARY
The emphasis which the federal Government of Nigeria is laying on small scale industries as an important tool for economic development is one to which a great deal of resources (financial and other wise) has been directed towards to ensure its successful implementation. This being the case, the survival of such small scale industries is being given priority to ensure that the economy gains from these investment resources. Accordingly, the mechanism for the survival of such small scale industries would involve ways of ensuring that resources entrusted to those small scale industries are effective utilized to achieve the objectives set by the government for the individual entrepreneur and the Nigeria economy at large. The provision of labour and establishment of individual business does not necessarily require formal education, and the restructuring of the Nigeria economy to provide a sound base for investors willing to invest their funds in the economy. Hence, financial planning as an activity when included in the operation of these small scale industries would ensure that some, if not all these goals are achieved whether as primary objectives or as secondary objectives.