EFFECT OF RECORD KEEPING ON FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES (SMEs) (A CASE STUDY OF SUNYANI MUNICIPALITY GHANA)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Globally, SMEs has been acclaimed to play vital role in the economy of both developed and developing countries. Small and medium scale enterprises are gaining wide spread acceptance as viable drivers of economic growth. They have tremendous impact on employment generation.

About 70% of workforce in Ghana consists of SMEs (Rathnasiri, 2014). According to Agbemava, Ahiase, Sedzro, Adade, Bediako, Nyarko, & Kudo, (2016), majority of SMEs do not keep proper accounting records otherwise referred to as incomplete records. SME owners have failed to recognize the importance of well structured accounting system that would have enabled them keep accurate financial statement.

Lack of accurate financial statement jeopardizes the chances of credit facility from banks. Record keeping is vital to business management (Ademola, Samuel and Ifedolapo, 2012). Record keeping consist of identification, classification, summarization, storage, protection, communication, retention and disposal of records for preparation of financial statements.

Ademola et al. (2012) also noted that policies, systems, procedures, operations and personnel are important to keeping of records. An account is a record of financial inflows and outflows in relation to the respective asset, liability, income and expense (Williams, 2008).

The importance of availability of accurate financial information to owners and managers for measuring of performance cannot be over emphasized (Amoako, Marfo, Gyabaah, and Gyamfi, 2014). Users of Accounts include owners of business, government, creditors, potential investors, etc.

However, several of these enterprises demise without fulfilling expectations due to poor management arising from weak accounting structure (Olatunji, 2013). A sound accounting and internal control system in any business irrespective of its scale is crucial. Audits of small scale enterprises have proven to be worrisome for professional accountants because of the inadequacy of the internal controls.

Except for statutory demands, small and medium enterprises hardly give serious thoughts to the process of sound accounting yet the adequacy and ineffectiveness of accounting processes have been responsible for the ultimate collapse of a host of them (Mukaila and Adeyami, 2011). The uniqueness of small and medium enterprises calls for a careful consideration in the design of an accounting system (Olantunji, 2013).

Peacock (2012) argues that, failure by Small and Medium Enterprises (SMEs) to manage cash flows results in illiquidity and finally the demise of SMEs. He advocated for the engagement of a qualified accountant who can be instrumental in advising on strategic response to turbulent and competitive business environment.

There is need to support these small enterprises so that they can grow to maturity and meet their intended purposes. Accounting systems processes data and transactions to provide users with information they need to plan, control and operate their business.

In this definition, accounting information systems are considered as tools that help management in planning and controlling processes by providing the relevant and reliable information for decision making. Record keeping is about the maintenance of a history of one’s activities, as financial dealings, by entering data in ledgers or journals, putting documents into files.

The importance of financial record keeping can therefore not be overemphasized both in our contemporary lives and particularly in our businesses. From properly kept financial record a person can at any time ascertain: what property he possesses, what amount he owes and to whom, what profit he has made or what loss he has sustained for any given period and the manner in which the profit and loss has risen, and the amount of his capital or deficiency.

If no records are kept, it will be difficult to find accurate net profit which under such circumstances, tax authorities may overestimate the profits and thus a trader will suffer for not having kept the business records.

In the absence of proper business records, traders will find it difficult to submit the true position to the court in case he becomes insolvent. Record keeping helps the trader to make future business plans and policies.

Accounting system functions are not solely for purpose of producing financial reports rather the role goes beyond this traditional view and can also be used as a controlling mechanism such as budgeting. Full adoption of the system will essentially require attainment of all the benefits of the system.

Evidence from a number of studies reveals that SMEs financial accounting has remained the principle source of information for their managers. The problem of poor adoption of accounting systems can be attributed to the initial objective of adoption of information technology (IT) that was essentially to replace manual accounting process that has now hindered further usage and exploration on the system benefits (Mauldin & Ruchala, 1999).

Marriot and Marriot (2012) argue that financial awareness amongst SMEs varies considerably and the use of computers for the preparation of management information is not fully utilized to its potential.

This implies that Ghanaian SMEs are exposed to greater opportunities than ever for expansion and diversification. Notwithstanding, these opportunities, authors such as Marfo-Yiadom [2011]; Bowen [2009]; Oduro, Marfo, Gyabaah& Oduro [2014]; Amoako [2012]; Anokyewaa [2015];

Muchira [2012], posit that SMEs still continue to battle with issues such as basic record keeping (this may be due to lack of accounting knowledge and the cost of hiring professional accountants and lack of record keeping skills by owners or managers of SMEs.

Anokyewaa [2015] examines computerized record keeping among small and medium enterprises in Sunyani municipality. She reports that lack of keeping proper financial records is one of the most serious obstacles to the growth of small businesses.

This study is relevant in Ghanaian context considering the vital role SMEs play in the economic development. This phenomenon has led to the failure of most SMEs in Ghana.

1.2 STATEMENT OF PROBLEM

Accounting and record keeping frightens some business owners (Abdul-Rahaman & Adejare, 2014). Keeping record of income and expenditure helps an owner of business to keep proper track of financial transactions (AbdulRahaman & Adejare, 2014). Dawuda and Azeko, (2015) noted that poor record keeping or non-availability of financial records have consequences of mismanagement of resources and poor cash management.

These have led to the collapse of many SMEs. Application of accounting records seriously influences the achievement of a firm’s objectives (Oladejo, 2008). Some business owners in Ghana are still not aware of the importance and benefits of proper record keeping (Abayomi & Adegoke, (2016).

In Ghana, some SMEs are forced to prepare their financial records because they want to obtain tax clearance certificate, without which they cannot bid for government contracts. Also, some SMEs prepare their accounts because they want to obtain bank loans. Poor record keeping makes it difficult to distinguish between business transactions and personal transactions of SME owners (Van Aardt et al. 2008; Rankhamise, 2010).

Many business owners and managers use the assets of SMEs for their personal benefits. According to Aremu and Adeyemi (2011), studies have shown that it is difficult for SMEs to access loans from financial institutions because of lack of proper financial records as a requirement (Amoako, 2013).

Except for statutory requirements, SMEs rarely consider sound accounting system, yet the poor and ineffective record keeping has led to the collapse of some of the SMEs. Ibrahim, 2015; Germain, 2010; Igboke 2011 and Udoh & Jaja, 2011, supported the failure of SMEs to keep proper records are one of the reasons for their failure.

In another study Muhindo et al. (2014), found out that the major problem facing SMEs is lack of or inadequate accounting information systems which result into continuous low performance levels.

It is against this background that the researchers picked interest in carrying out a study about the effectiveness of record keeping and financial performance among small and medium scale enterprises in Sunyani Municipality Ghana.

1. 1. AIMS OF THE STUDY

The major purpose of this study is to examine the effect of record keeping on financial performance of small and medium scale enterprises. Other general objectives of the study are:

1. 1. To examine the extent to which accounting information is being used to measure financial performance of Small Medium Enterprises.

1. 1. To examine the attitude of small and medium scale enterprises owners towards record keeping in Sunyani Municipality, Ghana.

1. 1. To examine the effect of record keeping on financial performance of small and medium scale enterprise in Sunyani Municipality Ghana.

1. 1. To examine the financial records keeping practices of small and medium scale enterprise in Sunyani Municipality, Ghana

1. 1. To examine the relationship between records maintained by small and medium scale enterprise and their financial performance in Sunyani Municipality Ghana.

1. 1. To examine the problems associated with recordkeeping and financial performance in a small and medium scale enterprise.

1. 1. To examine the measures that could be adopted to ensure effective financial records keeping practices in small and medium scale enterprises

1.4 RESEARCH QUESTION

1. 1. What is extent to which accounting information is being used to measure financial performance of Small Medium Enterprises?

1. 1. What is the attitude of small and medium scale enterprises towards record keeping in Sunyani Municipality, Ghana?

1. 1. What are the effects of record keeping on financial performance of small and medium scale enterprise in Sunyani Municipality Ghana?

1. 1. What are the financial records keeping practices of small and medium scale enterprise in Sunyani Municipality, Ghana?

1. 1. What is the relationship between records maintained by small and medium scale enterprise and their financial performance in Sunyani Municipality Ghana?

1. 1. What are the problems associated with recordkeeping and financial performance in a small and medium scale enterprise?

1. 1. What are the measures that could be adopted to ensure effective financial records keeping practices in small and medium scale enterprises?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. 1.  There is no significant effect of record keeping on financial performance of small and medium scale enterprise in Sunyani Municipality Ghana.

1. 1. There is a significant effect of record keeping on financial performance of small and medium scale enterprise in Sunyani Municipality Ghana.

Hypothesis 2

H0: There is no significant relationship between records maintained by small and medium scale enterprise and their financial performance in Sunyani Municipality Ghana.

H1: There is a significant relationship between records maintained by small and medium scale enterprise and their financial performance in Sunyani Municipality Ghana.

1.6 SIGNIFICANCE OF THE STUDY

The finding of this research can assist in identifying the grey areas if any in the way SMEs keep their business records in order to offer relevant advice and aid in decision making. It also can create an opportunity for SMEs to appreciate the role played by accountants in a business entity.

The tax authority through this study can determine the extent of reliance of financial statements prepared from SMEs available records. Lenders can gain a general overview of the reliability of information made available from SMEs financial records.

The findings will be of great use to the academia, especially those who carried out further research on record keeping and financial performance in small business enterprises. It built on the existing body of literature and knowledge.

The study provided information related to record keeping improvement in the small business enterprises which brought good performance of small business enterprises.

The study will contribute to the existing wealth of knowledge on financial performance and thus stimulates further research in both record keeping and financial performance in small business enterprises. Finally this research will established if SMEs financial performance is in any way linked to record keeping.

1.7    SCOPE OF THE STUDY 

The study is based on effect of record keeping on financial performance, a case study of selected small and medium scale enterprises in Sunyani Municipality Ghana.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Financial performance: Is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period.

Record Keeping: Is a Systematic procedure, by which the records of an organization are created, captured, maintained, and disposed of. This system also ensures their preservation for evidential purposes, accurate and efficient updating, timely availability, and control of access to them only by authorized personnel.

Small and Medium Scale Enterprises: Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ less than a given number of employees. This number varies across countries.

The most frequent upper limit designating an SME is 250 employees, as in the European Union. However, some countries set the limit at 200 employees, while the United States considers SMEs to include firms with fewer than 500 employees.

Records management: According to Millar, Roper, Stewart (2012) is; the area of general administrative management concerned with achieving economy and efficiency in the creation, maintenance, use and disposal of the records of an organization throughout their entire life cycle and in making the information they contain available in support of the business of that organization.