THE EFFECT OF FINANCIAL MANAGEMENT PRACTICES ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
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2021-06
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Abstract
The uncertainty of the business environment in Nigeria combined with poor knowledge of financial management often makes Small and Medium Scale Enterprises (SMEs) face serious challenges regarding productivity and financial performances, which is a threat to the survival of businesses. This study focused on the effect of Financial Management Practices (FMP) on the performance of SMEs in Nigeria. The main objective of the study was to gain a deeper understanding of how SMEs in Nigeria are affected by FMP such as working capital management, accounting information systems, financial reporting and analysis, investment decisions, and financial planning.
The study adopted positivism philosophy with a deductive approach, the collection of quantitative data was carried out with the questionnaire administered through the internet. 250 business owners, business partners, firm managers, financial managers, and other employees working in SMEs gave their consent to participate in this study by filling the closed-ended questionnaires drafted to answer the questions of this research. Five hypotheses were drawn from the literature reviewed and were tested with simple linear regression.
In this study, it was shown that working capital practices have a significant influence on the performance of SMEs in Nigeria, investment practices have a significant effect on the performance of SMEs in Nigeria, financial planning practices have a significant impact on the performance of SMEs in Nigeria, accounting information systems contribute to the performance of SMEs in Nigeria, and financial reporting has a significant impact on the performance of SMEs in Nigeria. The study recommends that FMP should be highly prioritized by SME managers during the formulation of the strategies of their businesses. This will enhance consistency, accountability, and transparency in their financial operations. And, before adopting any FMP, SMEs should carefully evaluate the structures of their companies. Since companies differ in capital structures, this will help firms to adopt the practices suited to their particular firm.
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The significance of SMEs in Nigeria is relatively high, this is not only as a result of their large share but also because in turbulent Nigeria economy, they have the resilience to the shocks (Kamau&Assumpta, 2015). As it is in most developing economies, Nigerian SMEs, even with the growth trends and positive outlook, are faced with various challenges. Part of the challenges is the low-utilization of new technologies, poor access to financial resources, lack of trained personnel, and insufficient managerial skills. For SMEs in Nigeria, the core problem area among the challenges is an insufficient financial management system (Kamau&Assumpta, 2015). In a business, the center of the overall management system is Financial Management (FM). The inefficiencies and ineffectiveness of financial conduct have impacts that are detrimental to the performance and longevity of SMEs (Meredith, 2006). Kamau and Assumpta, (2015) noted that the survival of SMEs is threatened by many problems but most of the problems are financial in nature. Aremu (2014) established that the common and critical cause of SME failures is insufficient FM. In addition, the uncertainty of the business environment combined with poor knowledge of FM often make SMEs face serious challenges regarding productivity and financial performances, which is a threat to the survival of businesses (Kamau&Assumpta, 2015).
FM is defined by Pandey (2004) as a discipline that concentrates on the financial decisions made by a firm with the use of some financial tools of analysis. On the other hand, Gitman (2011) defined FM as the concept of risk, money, and time and how each of the concepts are related. Financial Management Practices (FMP) in SMEs, according to Mazzarol, Reboud, and Clark
(2015), are different from the larger firms' FMP, this is because of the difficulty of SME to raise external finance through equity or debt, their challenges regarding working capital management, and the nature of SME cash flow cycle. It has been argued by other studies that most SMEs have inadequate accounting systems and FM which is different from the one large firms are using, and to manage those funds, SMEs do not have adequate skilled personnel (Tauringana, and Adjapong, 2013; Kilonzo&Ouma, 2015; Muneer 2017).
It has been established in other jurisdictions by previous studies that most SMEs are managed by their owners, where most of FM tasks are performed by the owner alone or with some staffs that are mostly unskilled, the growth and the performance of the SMEs are detrimentally affected by this scenario (OECD, 2010; Abanis 2013; Amoako, 2013; Uwonda, Okello, &Okello, 2013; Mazzarol et al. 2015).
For SMEs’ development and growth, FMP is a veritable tool. All over the world, SMEs are facing many challenges like consumers' negative attitude towards goods produced locally, inadequate market information, and inadequate finance, and so on. Nigerian SMEs are not immune to these problems. Therefore, for Nigerian SMEs to manage their enterprises successfully, viable FMP must be adopted, this will also reduce these challenges. Hence, this study is imperative as it aimed to examine the effect of FMP on the performance of SMEs in Nigeria for the SMEs to survive and continue to grow amidst the present economic reality.