ASSESSMENT OF BOOKKEEPING PRACTICES AND ITS RELEVANCE TO SMES
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ASSESSMENT OF BOOKKEEPING PRACTICES AND ITS RELEVANCE TO SMES
Chapter one
INTRODUCTION
1.0 BACKGROUND
Small and medium-sized enterprises (SMEs) contribute significantly to economic development by creating jobs and generating cash. SMEs are also known as Micro, Small, and Medium Enterprises (MSMEs).
They include non-farming businesses like manufacturing, mining, commerce, and services. There are various criteria for categorising SMEs. Total number of employees, total investment, and sales turnover are some of the most commonly utilised metrics.
In Nigeria, SMEs are defined as businesses that employ up to 29 people, most of whom are family members, and have a capital of up to N100,000. The majority of small and medium-sized businesses are classified as informal. Small and medium-sized enterprises (SMEs) are formalised businesses with 1 to 29 workers and a capital investment of N100,000.
According to the World Bank (2006), Nigeria has low capital formation, and SMEs are the greatest choice for addressing this problem. SMEs use simple, low-cost technology to make better use of local resources. Small and medium-sized enterprises have a critical role in using and enhancing local resources.
Furthermore, the creation of SMEs helps the dispersion of economic activities throughout the economy and promotes equitable income distribution.
Other important contributions of SMEs to Nigeria’s socioeconomic development include innovation, GDP growth, employment creation, and many others. Bookkeeping, or financial recordkeeping, is thus a critical component for the success or failure of SMEs in developing nations.
Despite the enormous benefits that the rise of SMEs has brought to the Nigerian economy, the sub-sector faces several obstacles. Many of Nigeria’s issues include a lack of access to financing, which has been partly caused by a lack of company documents that allow them to obtain credit from banks. It is estimated that 25 to 30% of SMEs under 5 years old fail each year.
To address the problems of SMEs’ lack of access to credit, they must first address the issue of bookkeeping. In Nigeria, credit facilities for SMEs are provided by banks in the form of loans or debt financing, which give SMEs with expansion capital.
However, small SMEs face several barriers in getting financing facilities. As a result, the difficulties in obtaining capital, as well as the high interest rates, are due in part to insufficient (or no) accounting records and inefficient use of accounting information.
Poor record keeping and accounting information also made it difficult for financial institutions to assess possible risks and rewards (World Bank 1978), therefore banks were hesitant to lend to SMEs.
As a result, SMEs pay high interest rates or rely on intermediaries or money lenders, whose loans are expensive and often restrictive.
Modern bookkeeping, when practiced, would give the required information that would have a significant impact on crucial company choices, as well as permit effective monitoring of the business’s financial development or failure.
For example, the examination of financial ramifications plays a significant role in every action that the owner makes. Without trustworthy financial information and clear records
projecting the consequences of a certain course of action will be difficult. It should be emphasised that profitability is only disclosed through correct records.
According to Stephen Thompson (2004), “good bookkeeping is essential for business. He also stated that a basic bookkeeping report, if completed correctly, should be able to answer these issues.
What is your monthly income, and what can you expect in the future?
How much cash is on your list of receivables, and when will it become actual cash?
Which of your product lines or services generates the most profit, breaks even, or drains your resources?
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