Abstract

This study aimed at assessing “The Effect of Financial Statements on the Growth of Small and Medium Size Enterprises in Buea”. The study has as specific objectives to evaluate the effect of income statement on the growth of SMEs in Buea, to assess the effect of balance sheet on the growth of SMEs in Buea and to examine effect of cash flow statements on the growth of SMEs in Buea. The descriptive survey method was used wherein 40 SMEs in Buea where surveyed. Although the number of SMEs 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 analysed 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 (r= 0.735) whereby 64.8% of growth of SMEs could be attributed to financial statements.

Base on the specific objectives, the findings revealed that there exist a significant positive relationship between Income Statement, Balance Sheet and Cash flow Statement and the growth of SMEs in Buea.

The study therefore recommends that for SMEs to have a fair cash flow statement all the cash inflows should be recorded and all the cash outflows should also be recorded and checks should be done every day to make sure that they have a clue of every transaction.

CHAPTER ONE

INTRODUCTION 

1.1 Background of the Study 

Globally, small and medium size enterprises play crucial roles in the support of both develop and developing economies. The dynamic role of small and medium size enterprise in developing countries cannot be over emphasized. These enterprises have been recognized conduit through which rapid industrialization and other developmental goals of these countries can be achieved.

It is now generally accepted that small and medium size enterprises play an important role in enhancing economic growth and development in several developing and developed countries. United Nation Commission on Trade and Development (UNCTD) (2004) Stated that SMEs were sustaining up to 60% of the emerging economies growth output ant the SMEs also employed a projected 22% of the adult population in developing countries.

SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. Since the prospects of getting white-collar jobs have become harder and harder, many people educated and non-educated are reverting to being self employed by starting small businesses by themselves.  Small and medium size enterprises have an active role in post crisis era and are able to create jobs so that they can function as a safety value for labor problem.

During the past few decades the accounting literature has looked more closely into whether smaller nonpublic companies should be held accountable according to the same financial reporting standard as large and/or public companies (Evans & di Pietra et al., 2005; Javis 1996). This issue has engaged practitioners and researchers as well as standard setting institutions and has led to that several jurisdictions have developed or is in the process of developing differential reporting financials systems for SMEs.

According to Atrill & Mclaney (2015), financial statements show a summary explaining or providing a picture of the financial position/busi¬ness performance and or activities of a business during a certain period. Gen¬erally Accepted Accounting Principles (GAAP) requires a company to prepare a full set of financial state¬ments that conform to regulatory guidelines and should be accurate. A full set of financial reports include statements of retained earnings, cash flows and the statement of a financial position (balance sheet).

A good financial statement should document information such that it is easy to read and understandable. Presenting a financial statement clearly and professionally helps companies interpret results and thus plan for a more profitable future. Growth in a business refers to a company expanding its business using its own resources and assets. This growth also depends on the financial statement of the organization.

Similarly, a financial statement is a summarized report (Benedict & Elliott, 2011) that indicates coop¬eration’s operating data during a period or its economic standing at a giving period. Financial statement preparations in a company are usually done by internal accountants, who are directly influenced by the management of the company. Companies make certain decisions based on information from financial statements. Thus, a fraudulent or an erroneous financial statement implies a risk possibility which can cause wrong investment decisions, financial decisions, managerial decisions making in an organization.

Financial statements of companies are prepared either using generally accepted accounting principles (GAAP), defined by the law on account¬ing and the law on financial statements, or using international financial reporting standards (IFRS) and international accounting standards (IAS), issued by the international accounting standards board.

These standards are not enforceable together; therefore, companies choose one of them for reporting purposes. Investment decisions can be explained as the determination made by directors or management body as to when and how much capital can be spent on investment opportunities. The decision often follows research on financial statements financial statements contain all the necessary information required to make financial decisions either investing or lending.

Effective decision making in micro finances necessitates the obtainability of financial information and then its deployment in decision making (Gibson, 1992). Financial statements benefit owners, managers and investors in many ways for instance, the stakeholders can make use of financial information to gain a better understanding about financial aspects, risk profile and investment avenues of their firm (Van Auken, 2013).

Though the owners and stakeholders can make better decisions by utilizing financial statements, but small firm owners often are not well equipped in efficient use of financial statements. Therefore, even reliable and timely prepared financial statements are not enough, when owners do not have the ability to use and interpret them accurately (Vanauken, 2005). The utilization of financial statements is very much related to and helpful of any firm’s planned goals, as if decisions made without considering their financial influence it can cause a jumbled company emphasis and monetary suffering (Horngren, Datar, Foster, Rajan, & Ittner, 2009).

The significance of financial decisions is evident from the higher failure rate among small firms because of their weak financial management (van Praag, 2003). Owners of micro finances often do not have robust finance expertise and thus they may not completely comprehend the influence of their decisions on the firm. Financial literacy of owners for the growth of firms seems really crucial (Adomako, Danso, & Damoah, 2015).

Bad decisions threaten the firms sustainability, performance and leaves the wide spread operational problems (Timmons & Spinelli, 2004). As an alternative, firms should deploy financial statement facts to assess the effects of their decision (Breen, Sciulli, & Calvert, 2004) gain financial information and cope with their businesses well (Shields, 2010). The efficient use and effective interpretation of financial statements is necessary as leading cause of failure and financial distress is only the poor financial management of business (Coleman 2002; Carter & Van Auken, 2005; Headd 2003; Wiklund & Shepherd, 2005). In addition, owners may influence in a way while interpreting the financial statements by their perceptions about firm’s financial situation and potential.

Accurate and valid assessment is mandatory to achieve financial goals along with reliable and timely information. Entrepreneurs because of their optimistic thinking-perhapes overly so- about their business financial condition which can cause way out analysis, incorrect estimations, wrong assessment and probability of failure (Smith, 2011; Landier & Thesmar, 2009). However, by external assistance, better and appropriate use of financial statements could help owners in developing right perceptions and accordingly more accurate and well informed decisions (Breen et al., 2004).

Financial statements (income statement and balance sheet) apart from stating the financial position of an organization, provides other information such as the value-added, changes in equity if any, and cash flows of the enterprise within a defined period of time to which it relates to the growth of SMEs (Iyoha and Faboyede, 2011). This information is useful to a wide range of users like the managers, stakeholders, government, and investors who use it to make informed economic decisions. The quality of financial statements is indispensable to the need of users who requires them for investment and other decision-making purposes. Financial statements can only be regarded as useful if it represents the economic substance of an organization in terms of relevance, reliability, comparability and aids interpretation simplicity (Penman, 1984).

Efficient financial management practices are essential for SMEs to reach growth stage of the firm as it has a major effect on performance, (Yogendrarajah, et al., 2017). According to (Karunanda & Jayamaha, 2011), expressed that poor record keeping, inefficient use of accounting information to support their financial decision making and the low quality and reliability of financial data are part of the main problems in financial management concerns of SMEs. They found that SMEs who are complying with financial management practices are performing well than the SMEs, who are not complying with financial management practices. Although the SMEs role in the economy is substantial, many of them are plaque by management problems.

These management problems include financial management, human resource management, marketing management, operations management, strategic management, etc. Financial management is a process of planning, organizing, monitoring and controlling money to achieve organizational goal efficiently and effectively. It is a basic function needed to be practiced in every organization for their success. The finance manager of any firm has the responsibility of carefully selecting the best investment alternatives in order to achieve reasonable and stable returns. The finance manager has to concentrate on safety, liquidity and profitability while investing capital. This is also to be done with the aim of wealth maximization, (Singh, 2007).

The significance of financial decisions is evident from the higher failure rate among small firms because of their weak financial management (van Praag, 2003). Owners of SMEs often do not have robust finance expertise and thus they may not completely comprehend the influence of their decisions on the firm. Financial literacy of owners for the growth of firms seems really crucial (Adomako, Danso, & Damoah, 2015). Bad decisions threaten the firms sustainability and leaves the wide spread operational problems (Timmons & Spinelli, 2004).

As an alternative, firms should deploy financial statement facts to assess the effects of their performance (Breen, Sciulli, & Calvert, 2004), gain financial information and cope with their businesses well (Shields, 2010). The efficient use and effective interpretation of financial statements is necessary as leading cause of failure and financial distress is only the poor financial management of business (Coleman 2002; Carter & Van Auken, 2005; Headd 2003; Wiklund & Shepherd, 2005).

A primary purpose of preparing financial statement is to make available accurate information to owners and managers of SMEs for use in measuring financial performance. Thus, the significance of financial performance measurement to any business, big or small, is very imperative (Amoako et al, 2014).

Haryani (2012) postulates that as profit maximization is most often the main concern of business entities, the accounting bases, concepts and principles adopted have to capture and report all the relevant accounting information to ensure consistency in its measurement. Owing to dire consequence that improper accounting practices can have on SMEs producing incomplete financial statements, it is imperative that the accounting practices of SMEs supply holistic and pertinent financial information needed to improve economic decisions made by entrepreneurs (Amidu and Abor, 2005).

Information gathered from the owners of Small and medium size enterprises in Buea Municipality revealed that majority of SMEs prepare financial statements annually yet most of them have difficulty in accessing finance from financial institutions and also difficulty measuring their financial performance based of the accounting records kept due to inadequacy of the accounting records to help prepare sound financial statements representing the true state of financial standing of the enterprises.

Based on the results of previous studies are many factors that cause the slow growth of SMEs, such as ranging from lack of capital, low level of education of entrepreneurs, lack of understanding and lack of reliability of the information technology characteristics of financial statements (Pratama, 2011).

Associated with the existence of the financial statements must be recognized that SMEs generally does not have sufficient knowledge, they even have the perception that the financial statements are too complicated and unimportant (EkaDeswira, 2012). SMEs prefer using instinct and experience to making decisions. This study therefore seeks to investigate the effect of financial statements on the growth of SMEs in Buea.

1.2 Statement of the Problem

Despite the contributions played by SMEs in less developing nations like Cameroon, there still faced some couple of challenges. According to National Institute of Statistics of 2016, the problem of poor book keeping systems and lack of financial information are categorized as one of the difficulties encountered by SMEs in Cameroon with a score of 30.7%, behind taxation policies (53.5%) and administrative formalities (34.2%). As a result, researches carried out have shown that several SMEs do not celebrate their 5th birthday.

Most of them close their door due to the problem of financing and since the environment is also very competitive. The inability for them to reach their fifth birthday can be explained by the fact that they are limping when it comes to finance. This is compounded by inadequate loan size caused by cumbersome loan application procedures, high interest rate, poor book keeping systems, lack of financial information, fear of business failure, short durations of loans, little or no guarantee from the government and the tendency of group collateral requirements have hampered SMEs growth and performance.

Again, this is evidenced by the large number of SMEs spread throughout the country but, with very little to show in terms of sustained growth and diversity in the economy industrial output. Moreover, most SMEs work on small margins of cash flow, such that when they are faced with financial difficulties, they have neither the necessary resources nor the borrowing power like the bigger companies to sustain their operations (Kayanula & Quartey, 2000). This problem generally occurs in SMEs due to lack of financial management practices.

Cash outflows seem to outweigh cash inflows, access to credit facilities and loans are limited. The result is normally the SMEs operating on losses other than the profits they think and that eventually collapse the business. The growth response of this sector has been limited by countless problems comprising the unavailability of comprehensive financial statements. The development of the concept of incomplete records emerged from the background that vast majority SMEs do not keep proper accounting records. To most of them a simple cashbook to record receipts and payments may be enough. As the business grows and the need for finance acquisition is envisioned, a realization is reached that the need for additional accounting information is required to facilitate the growth and sustainability of these enterprises.

The problem of incomplete records, when it comes to preparing period-end financial statements, is that they do not show the actual performance of the business, as to whether it is progressing or retrogressing. As a prerequisite to profitability, sound business practices must be adopted to ensure the business ability to survive in the rapidly changing environment.

Small business owners have failed to recognize the importance of putting in place a well-structured system as a means of helping them to provide accurate financial statement through which credit facilities could be obtained from banks and increasing their capital base. Adequate and proper records therefore are important feature of any business unit, as it helps in preparing up to day financial statements that are used in prudent business decision making.

Dawuda and Azeko (2015) observed that poor records keeping or non-availability of financial records lead to mismanagement of resources and poor cash management and this do have negative effect on the growth of SMEs leading to the collapse of some of them. According to Van Aardt et al. (2008) and Rankhumise (2010) poor records keeping makes it difficult to differentiate between business transactions and personal transactions. It is the responsibility of business owners and managers to avoid using assets of the business for personal use at the expense of the business.

Otley (2012) argues that financial statement is an important part of the fabric of organizational life and the need to be evaluated in their wider managerial, organizational and environmental context. Therefore the effectiveness of financial report not only depends on the purposes of such systems but also depends on contingency factors of each organization. Financial statements are said to be effective when the information provided by them serves widely the requirements of the users. Effective financial statement should systematically provide information which has a potential effective on investment decision making by the prospective investors. The perception of investors about a company’s ability affects the market prices of the company’s security relative to others in the industry. Financial statement can only be useful if they are well understood published financial statement is the information source that is most directly related to the items of interest to both existing and potential investors.

A primary purpose of preparing financial statement is to make available accurate information to owners and managers of SMEs for use in measuring financial performance. Thus, the significance of financial performance measurement to any business, big or small, is very imperative (Amoako et al, 2014). Haryani (2012) postulates that as profit maximization is most often the main concern of business entities, the accounting bases, concepts and principles adopted have to capture and report all the relevant accounting information to ensure consistency in its measurement.

Owing to dire consequence that improper accounting practices can have on SMEs producing incomplete financial statements, it is imperative that the accounting practices of SMEs supply holistic and pertinent financial information needed to improve economic decisions made by entrepreneurs (Amidu and Abor, 2005). It is for this reason that this study seeks to investigate the effect of financial statements on the growth of SMEs in Buea by providing answers to the following research questions:

1.3 Research Questions

1.3.1 Main Research Questions

What is the effect of financial statements on the growth of SMEs in Buea?

1.3.2 Specific Research Questions

1. What is the effect of income statements on the growth of SMEs in Buea?
2. What is the effect of the balance sheet on the growth of SMEs in Buea?
3. What is the effect of cash flow statements on the growth of SMEs in Buea?

Check out: Accounting Project Topics with Materials