THE IMPACT OF FINANCIAL LITERACY ON THE PROFITABILITY OF SMALL SCALE ENTERPRISES IN CALABAR MUNICIPALITY
CHAPITRE ONE
INTRODUCTION
1.1 The Study’s Background
Small scale businesses, like little drops of water that form a mighty ocean, have been the bedrock of industrialization in developing countries around the world since their inception. Globally, small scale enterprises have made enormous contributions to raising people’s living standards by creating jobs, relieving society of social embarrassment, stimulating indigenous entrepreneurship, and utilizing scarce resources.
Currently, efforts are being made to reduce poverty rates in developing countries as part of the Millennium Development Goals (MDGs). An effort is also being made to reduce people’s reliance on the government and so-called “white collar jobs.” These are attained through the expansion and development of small-scale businesses (Eneh, 2007). Furthermore, small-scale businesses play critical roles in every nation’s economic growth and development.
They are a veritable vehicle for achieving national macroeconomic objectives such as job creation at a low investment cost and apprenticeship training enhancement. Financial literacy, as the name suggests, takes center stage in the quest for overall organizational success (Bernheim, 2014). It also helps to some extent with a business goal of financial profit. Thus, for centuries, financial literacy (or lack thereof) has played a critical role in the success and failure of our nation’s business.
Companies and businesses have thus been charged with maintaining adequate and proper books of accounts in order to ensure the reliability of their financial statements. This will help them improve their profitability in the long run. Furthermore, profit can be viewed as the lifeblood of a business, so the accounting bases, concepts, and principles used should capture and report all relevant information to ensure accuracy in its measurement (Nelson and Onias, 2011).
Enikanselu and Oyende (2009) also stated that no business can function effectively unless it is financially literate and maintains some form of accounting records. As a result, appropriate financial literacy is essential for the successful management of any business, large or small.
As a result, it is critical that financial literacy be promoted among small businesses in order for them to be able to provide complete and relevant financial information needed to improve on their decisions and increase their profitability. As a result, the purpose of this research is to investigate financial literacy and its impact on the profitability of small businesses.
1.2 Problem identification
Since the current civilian administration took office in 1999, it has implemented policy measures, schemes, and support schemes to develop and improve the small scale enterprise sub-sector. In today’s Nigeria, small scale enterprises have not performed admirably and have not played the expected significant role, despite being regarded as a bulwark for job creation and technological development.
The first issue is the lack of financial literacy in small businesses, as evidenced by their inability to keep complete accounting records. As a result, SSEs operating in the state are unable to capture an adequate share of the business profit.
This is because, during the process of calculating profit, financial data is compiled in such a way that informed judgment and business decisions can be made. These financial data cannot be compiled in the absence of adequate financial literacy.
This issue has eventually impacted the profitability of small businesses. SSEs’ lack of awareness of financial risk and opportunity, reckless spending, use of business funds for personal transactions, limited access to bank credit facilities, and insurance policies are additional factors. Being financially literate can help with these and other issues.
The researcher now believes that these inherent problems can be attributed to small scale enterprises in Cross River State’s neglect of financial literacy.
1.3 The study’s objectives
The primary goal of this research is to clearly promote financial literacy as a tool for improving the profitability of small scale enterprises in the Cross River State municipality of Calabar. The following are the study’s specific objectives:
To investigate the extent to which small scale enterprises in Calabar Municipality practice financial literacy.
To ascertain the extent to which accounting records improve the profitability of small businesses.
To identify the issues that are impeding the use of accounting records by small businesses.
1.4 Research concerns
The study generated the following research questions, which will guide the researcher in his or her quest to solve these research problems:
To what extent do small businesses in Calabar Municipality practice financial literacy?
To what extent do accounting records improve the profitability of small businesses?
What are the issues that prevent small businesses from using accounting records?
1.5 Hypothesis of research
To lay a solid foundation for the research, the following hypotheses were proposed, with the hope that by the time adequate answers were provided, the study would have covered all necessary ground. To accomplish this, the study intends to test the two (2) operational hypotheses outlined in null form below:
1. Ho: Small-scale businesses have a low level of financial literacy adoption.
2. Ho: The use of accounting records has no significant impact on the profitability of small businesses.
1.6 The study’s scope and limitations
With a large proportion of businesses in the state falling into the small scale enterprises sub-sector, it is critical to clearly define the scope and area of the study. The study is thus limited to small scale enterprises operating in Cross River State’s Calabar Municipality, but the findings can be applied to the entire small scale enterprise sector.
Calabar Municipality was chosen due to its peaceful nature and tranquil surroundings, as it is a necessary panacea for the survival of the business as well as this study. As a result, all of the information required for this study will be gathered from this region of the state.
The study’s limitations
A study of this magnitude could not have gone off without a hitch. Among the constraints was the scarcity of relevant empirical literature on finance literacy in small businesses.
Although empirical information on the problems of small scale enterprises is abundant in the literature, work on their financial literature is still scarce, which was a significant limitation of the study. Despite this difficulty, this study still represents a true picture of everything obtained from small scale businesses in the Calabar municipality metropolis.
1.7 Importance of the research
Given the vital role and contribution that small scale businesses play in both developed and developing countries, and in light of the Central Bank of Nigeria’s ongoing reforms for a sustainable financial literacy framework for the country’s small and medium scale enterprises, the importance of this study cannot be overstated.
The importance of this study lies in its attempt to document a factor that is truly critical to the profitability of small scale enterprises but has not been appreciated, recognized, or factored into the various incentive schemes and policy measures being put in place for SSEs in the state and the nation at large. This critical factor is financial literacy among SSEs, which is a necessary condition for their success and profitability.
Furthermore, this research will equip small business owners by encouraging them to prioritize the keeping of proper accounting records in their business objectives. This will provide adequate information about the profitability of the business.
This study will also raise awareness about the critical need to improve the financial literacy of SSE owners, as well as their accounting practices. This will assist in formalizing their business operations in a way that suits their small nature. Furthermore, aside from contributing to the “knowledge bank” of small scale enterprises,
the results of the study will stimulate more research into this area, as research literature work in this field is still limited. Finally, it will be a requirement for the award of a Bachelor of Science (B.Sc.) in Accounting.
1.8 Research Organization
This research is divided into five (5) chapters. These chapters are organized in a logical order to facilitate careful investigation and easy achievement of the goals. The first chapter provides an overview of the study’s context and the problem(s) that prompted the research.
This results in an outline of the objectives, significance of the study, research questions, and operational hypothesis within the sample scope of small scale enterprises in Cross River State’s Calabar Municipality.
The second chapter provides a review of relevant works as they relate to the study. Theories concerning the dependent and independent variables were also discussed. It also looks at the theoretical framework of financial literacy and small businesses.
The third chapter discusses data collection methods in relation to the research design, population, and sample, with an emphasis on model specification, estimation, validation, and reliability of research instruments.
The fourth chapter presents and analyzes the data as well as the findings concerning the extent to which small scale enterprises adopt financial literacy and, conversely, the use of accounting records by SSEs and its impact on profitability. Chapter five summarizes the study’s major findings, suggests a tentative policy thrust, and suggests areas for further research.
1.9 Term operational definition
The terms financial literacy and accounting literacy are interchangeable. It is also important to note that the empirical literatures available lack a consensus definition of financial literacy and small scale enterprises. As a result, for the purposes of this research, the following definitions are provided as being unique to the study:
1. Small Scale Enterprises: A small scale enterprise is one that employs no more than five people and has an annual revenue of less than five hundred thousand Naira (N500, 000)
2. Financial Literacy: Financial literacy is the ability to understand fundamental accounting and finance concepts as well as their application, as well as the ability to apply such knowledge and skills to effectively manage financial resources for a lifetime of financial well-being.
3. Profitability: Profitability is a company’s ability to generate revenue that exceeds the costs of producing that revenue.
1.10 Historical context of small-scale businesses
Economic history is replete with insights into the humble beginnings of today’s megacorporations. There is ample evidence that almost all multinational giant corporations were once small industries that grew as their industry grew.
Even at the international level, traditional industries and a large number of small scale firms dominated Japan’s economy in the early stages of her industrialization, drawing their strength not from an abundance of capital but rather from her supply of labor (Ogechukwu, 2011).
Small scale enterprises account for a higher proportion of all registered businesses in Nigeria, and they have been around for a long time (Tijani-Alawe, 2014).
Historical Development Prior to Independence
Prior to Nigeria’s independence, the business environment was almost entirely dominated by colonial and other European multinational corporations such as United African Company (UAC), GB Olivant, Unilever Plc, Leventis Stores, and others.
The Nigerian Industrial Development Bank (NIDB) was established near the end of the 1950s to assist potential entrepreneurs in agricultural exploration of natural resources, commerce, and industrial production. However, a few Nigerians, mostly semi-illiterates, benefited from the government’s generous attitude at the time.
This was because, despite the colonial administration’s establishment of the Colony Development Loans Board, Nigerians considered the civil service to be more prestigious than business at the time.
1970 – 1976
The Indigenization Decree of 1972, and later the Nigerian Enterprise Promotion Act of 1977, resulted in a significant and remarkable breakthrough in small scale business. The federal government made genuine efforts to ensure that Nigerians play an active role in economic development.
Later, in its 1970-1974 National Development Plan, the federal government emphasized the development of small-scale industries, particularly in rural areas. This was in recognition of the importance of small businesses as incubators and training grounds for entrepreneurs.
From 1980 to 1989
During this decade, government policy measures in Nigeria focused on the technological aspects of industrial development of small scale industries. Throughout this decade, various Nigerian governments took innovative steps to redirect efforts toward the maximum exploitation of natural resources, while also attempting to discourage capital-intensive modes of production in light of abundant resources.
Some fundamental policies were developed, and these policy measures, as conceived, placed a strong emphasis on the technological aspects of small-scale enterprise industrial development. It is worth noting that the implementation of the Structural Adjustment Programme (SAP) during the Babangida regime made things worse for labor employers and created a veritable breeding ground for self-employment.
From 1999 to 1990
During this time, both the federal and state governments contributed to the growth of small-scale businesses in Nigeria, particularly in rural areas. Various fiscal and non-fiscal incentives for investors and entrepreneurs in the small scale sector of the economy have been established.
The federal government’s strategy for training and motivating unemployed graduates to find gainful employment in out-of-school entrepreneurship development programs deserves special mention. Thus, on the basis of the presentation of viable and feasible projects, approved loans are disbursed through pre-selected commercial banks with the assistance of the National Directorate of Employment (NDE).
The Peoples Bank of Nigeria (PBN) was also at the forefront of granting soft loans to unemployed youths and artisans, with the goal of diverting youths’ attention away from government salaried jobs and toward gainful self-employment. Thus, the Peoples Bank, in collaboration with the National Directorate of Employment, was solely tasked with creating jobs for thousands of unemployed Nigerians through their various programs.
The year 2000
During this time, the government has become increasingly interested in grooming young potential youths to be self-employed and successful entrepreneurs at all levels.
To demonstrate its seriousness, the federal government has directed that entrepreneurship development courses be incorporated into the curriculum of secondary and tertiary institutions, as well as the NYSC program, through its educational agencies such as the National Business and Technical Education Board (NABTEB), the Nigerian Universities Commission (NUC), and the National Youth Service Corps (NYSC).
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