Abstract

This study aimed at assessing effect of Computerized Accounting System on the Financial Performance of Small and Medium Size Enterprise in Buea, Cameroon. It identified sage accounting, quick books and peach tree as the independent variables. Financial performance, whose measure has been based on profit margin, Return on Asset and Equity were used as the dependent variable of study. The descriptive survey method was used wherein 40 SMEs in Buea where surveyed.

Although the number of SMEss surveyed was not large, the survey was distributed across all the SMEs in Buea to ensure representativeness. Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using descriptive and regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25.

The hypothesis was tested through a correlation test, and it revealed that there is a strong positive relationship between the variables whereby 64.8% of financial performance of SMEs could be attributed to computerized accounting system.

The study concluded thus that computerized accounting soft wares (sage accounting, quick books and peach tree) have a significant impact on SMEs financial performance. Therefore, the study recommends that Sage sari, QuickBooks and peach tree to beginners who have little computer and accounting knowledge, to businesses who seek accurate, complete and simple to understand financial statements and that SMEs should adopt the method of computerized accounting as well as trying to know which method is best in their institution and also send some staffs for training so that they can be able to know how the software operate.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Organizations nowadays are looking forward to have a competitive advantage against the threats present in globalization. Due to the high competency requirements, most organization aim to generate the kind of performance that can bring more profit. In order to do that, the employees are required to perform well and improve their performance (Osman, 2013).

To comply with this, the organization needs to align organizational performance with new innovation technologies, which would be shown by organizational output of financial variables (sales growth, goal achievement, good services, productivity) (Chand and Katou, 2015; ) and non-financial variables (management quality, long-term orientation, continuous improvement, workforce quality) (De Waal and Frijns, 2011; Dimba, 2010) and also other outcomes as commitment, quality and flexibility (Guest,2013). Once a business entity has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals (Kaplan and Norton, 2015).

The innovation of information and communication technology (ICT) has drastically revolutionized the application of financial management and accounting practices. ICT has become instrumental for providing a competitive edge for corporations, financial institutions, manufacturing industries and specifically in the accounting profession. In particular, ICT has been a major factor of efficient and reliable accounting system and hence improved organizational performance (Taiwo & Edwin, 2016).

In regard on the subject of accounting, it is an integral part of any business whether large or a small entity. It has major role in measuring the financial performance of a company activities during a course of a stipulated time. For this reason, accounting plays a very important role in the management and success or failure of contemporary business-institutions.

Therefore, it is convenient to set a computerized accounting system to record, analyze and interpret financial or accounting information to management. This is due to fact that computerized accounting system ensures speed, accuracy and reliability of financial information compared to other traditional manual systems of accounting (Shiraj, 2015; Ware, 2015).

The American Accounting Association defines Accounting as the “process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information”.

Accounting is also “the art of identifying, recording, classifying , summarizing  and communicating through financial statements transactions which creates assets, liabilities,  equities, revenues and expenses to its users .Accounting is necessary for every business operation be it a nonprofit making or a profit making organization.

Accounting initially originated from the book keeping system which was developed by Luca Paccioli in the 1440’s and as time had it, it was manually done and recorded on rocks and later to the usage of legers and computers as time evolved. The manual system of accounting is a bookkeeping system in which records were done by hand. It was very satisfactory to use as it was less expensive to acquire or set up, the correcting entries could easily be done, and there is lesser risk of corrupted data. The manual system of accounting existed for over a long period of time and may possibly exist today especially in small businesses as there is lesser paper works to be done. As time gradually evolved, the usage of manual system became obsolete and was replaced by the Computerized Accounting system (CAS).

This switch from the manual to computerized system is due to the shortcomings which the manual systems possess such as; possibility of error (human error) since work is done by hand and it could even go undetected for quite some time. It was time consuming due to the fact that various accounts needs to be reconciled where the need be. The manual system was also easily susceptible to damages such as natural (floods) or manmade (fire) disasters. The manual system was as well stressful especially in cases of large day-to-day transactions.

In Cameroon many SMEs have adopted the use of computers in many sections of their activities such as recording of daily collections, recording of customer’s savings (account details), preparation and presentation of their yearend financial reports etc. Therefore the researcher focuses on investigating the Effect of computerized accounting on the performance of SMEs.

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generates revenues. It can also be used as a general measure of a firms overall financial health over a given period of time as well as for 4 comparative purposes across sectors or industries. There are many ways through which financial performance can be measured, either taken singly or in aggregation. Line items such as revenue operations, operating income or cash flows from operations can be used. One might also dig deeper into the financial statements to seek out for growth rates in revenues, profits or declining debts. Small and medium sized enterprises (SMEs) play a critical role in our economy through generation of employment, contribution to growth of the Gross Domestic production (GDP), innovations and stimulation of other economic activities (Gamage, 2000). Therefore it is important for developing countries to accelerate the growth of SMEs in order to gain sustainable development. In the context of SMEs, accounting information is important to help firms‟ manage their short – term problems in critical areas such as costing, expenditure and cash flow by providing information to support planning, monitoring and decision making (Mitchelle et al, 2000, Son et al, 2006). Thus, financial reporting system is necessary to ensure that the SMEs‟ economic resources are used effectively and efficiently in pursuit of its goals. In addition, there is need in SMEs for skills in financial analysis which will allow financial statements to be read and understood, whether they contain historical or forecast information (McMahon, 1995). A number of studies suggest that large and small firms pursue different strategies. That while large firms model assume maximization of wealth as the main objective of shareholders, SMEs places value on autonomy, survival, stability or financial growth. Scase and Goffee, (1980); Hussey and Hussey, (1994) and Carsberg, et al. (1985) found that an external auditor required by SMEs usually prepares the statutory accounts and provides management advice. Nayak and Greenfield (1994) found that micro – business 5 owners are not keeping sufficient records to aid them in their decision making. Pugh et al. (1969) and Chapman (1997) suggest that the level of sophistication of accounting systems is correlated with the size, the age of the firm and level of uncertainty as there is no effective capital market for SMEs. Banks are the general source of finance for SMEs (Chittenden, et al., 1980; Javis et al., 1996). This implies that SMEs monitor their cash position closely in order to maintain good relationship with banks as their lenders. Drury and Tayles (1995) found that the same rules and procedures established for external reporting (financial accounting) are likely to be applied to internal reporting. For performance measurement and evaluation, most companies base their measurement on different functions and product groups, to somewhat lesser extent on client groups and sales region (Haldma and Laats, 2000). Net profit, rather than controllable profit, is widely used to evaluate the performance of divisional managers (Drury and Tayles, 1995),since it could be apparently measured in monetary value and, sometimes, it is not possible to allocate and designate which cost are controllable or uncontrollable for particular managers. In summary, Accounting Systems play a critical role in the success of a business firm, as they provide information necessary in supporting the firm to achieve the expected goals. It has been emphasized that CAS produces useful information which serve as a basis for the management strategic decision making and in exercise control of firm’s activities in order to achieve their goals (Naranjo, 2004).

Computerized Accounting Systems in commercial organizations would help to integrate, simplify and streamline all the business processes and transactions cost effectively and efficiently (Indira 2008). It is for this reason that Institutions find it very essential to possess a sound and good computerized accounting system hence, in Cameroon today, many SMEs have adopted and implemented the use of Computers in most sectors of their business activities such as recording of day-to-day transactions, recording of customer’s savings, preparation and presentation of year-end financial reports such as Statement of Comprehensive Income(Profit and Loss statements),Statement of Financial Position(Balance sheet),Cash Flow Statements and Notes for the purpose of improving on record keeping, proper maintenance of data, mitigate the difference in cash balances and loss in accounting records or information. In this light, the researcher seeks to examine the effect of Computerized Accounting System on the financial Performance of SMEs.

Previously used traditional, paper-based systems were in practice by SMEs due to their limited capacity. And in fact, in underdeveloped areas like Karachi, no system is present to record transaction and it is all based on operations and working. But adoption of software-based accounting system positively impacts on various internal control systems which directly impacts on yielding of sustained profits. Much research has been done on the similar topic of the impact of Computerized Accounting Systems (CAS) on the profit margins and overall performance of Small Medium Enterprises (SMEs).

The main areas of these studies are Accounting Information System and Organizational Performance. (Ganyam & Ivungu, 2019), Adoption of computerized accounting systems by SMEs (Windrum & Berranger, 2002), electronic accounting system and business environment (Khudir, 2016), impact of electronic Accounting Systems on Financial Performance (Soudani, 2013) and electronic commerce and organizational performance (Jahanshahi et al., 2012).

Despite of having widespread knowledge about the significance of accounting systems still the research on the impact of Computerized Accounting System on the performance of SMEs has been limited. Jahanshahi et al. (2012) have argued that there is a need of identifying the mediating variable to find the impact of adoption of computerized accounting systems on the profit margins of SMEs. So, the purpose of this research is to find out the relationship between computerized accounting systems and financial performance of SMEs in Buea.

1.2 Statement of the Problem

Over sixty percent of businesses are estimated to fail each year in Cameroon, they are overwhelmed by the distinct threats they face that affect their performance, and in turn their continuance.

Past statistics argue that three out of five businesses fail within few months of operation (Cameroon National Bureau of Statistics, 2007). The failure is also due to the lack of performance standard this is the reason why they do not hire trained personnel or train their staff on the required skills to work with the newly accounting systems.

The use of computerized accounting system by business started in the 1950s after World War 2 but it gained grounds in Cameroon around 2000 and since then it has been rapidly evolving (Laurel, 2013). Computerized accounting packages are mostly used by commercial, manufacturing and tertiary businesses in Cameroon.

The computerized accounting software’s mostly used in Cameroon are sage sari, Peachtree, excel, Tompro, Zero accounting just to name a  few.

Due to the lack of knowledge about the electronic accounting systems, SMEs are facing difficulty regarding accounting management which is overall affecting their profitability and organizational performance (Zakaria et al., 2011.)

As Kharuddin et al. (2010) have discussed that many businesses are failing because of the traditional accounting practices in the businesses. SMEs are struggling to maintain their profits but most of the SMEs are unaware of the fact that the performance can be better managed by adopting computerized accounting system within the businesses (Chhabra & Pattanyak, 2014). Due to technological advancements, the processes used to operate businesses have been changed (Hall, 2007).

Today’s business transactions need modern solutions and for that it has become necessary to implement such computerized accounting system to enhance organizational and financial performance (Guney, 2014).

As SMEs contributes to the economic growth and development therefore, it’s really important for them to adopt such systems which can help in improving the profitability otherwise the SMEs won’t be able to keep record of the transactions which will affect them to compete in this digital world (Hernandez, 2020).

The solution is to fill this gap between the traditional and electronic Accounting, and to understand the importance of adopting software based accounting system and implementing it for the profit maximization and to keep track of the transactions in a systematic way (Turner, 2020). few.

According to Ankomah et al., (2012), Pen and papers has been used in the past to identify business transaction, summarize and classy them, record them in the respective journals, post them to the ledger accounts, draw the trial balance, do the end of year adjustments and prepare the financial statements (comprehensive income statement, statement of financial position, cash flow statements, and statement of equity and notes of managers).

It achieved the goal for which it was used for but had so many disadvantages. Some of these disadvantages of manual accounting were, high possibility of numerous errors, time consuming, lack of security, lack of backups, space consuming, storage of hard could easily be damaged just to name a few (Bekele, 2017). Because of its numerous disadvantages there was a need to integrate technology into accounting in other to eradicate or reduce these demerits.

1.3 Research Questions

1.3.1 Main Research Question 

What is the effect of computerized accounting systems on the financial performance of SMEs in Buea?

1.3.2 Specific Research Questions 

1. What is the effect of sage accounting on the profitability of SMEs in Buea?
2. What is the effect of quick books on the profitability of SMEs in Buea?
3. What is the effect of peach tree accounting on the profitability of SMEs in Buea?

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