Abstract

In many nations, including Cameroon, small and medium-sized businesses (SMEs) are essential to the prosperity of the country’s economy. Accounting procedures are crucial for the management and control of SMEs because they give business owners reliable information on which to base decisions, including forecasting sales and purchases and performing numerous other financial analyses.

The study aimed at assessing the influence of accounting practices on the financial performance of small and medium-size enterprises in Buea. The specific objectives were to identify the effect of bookkeeping practices, evaluate the effect of internal control practices, and lastly investigate the effect of cost control practices on the financial performance of small and medium-size enterprises in Buea. The study adopted a descriptive research design.

Data used was obtained through structured-questionnaires from a sample of 126 SMEs within the Buea municipality through a stratified random sampling technique. Descriptive statistics and the multiple linear regression analysis methods were used to estimate the parameters in SPSS (21.0). The results obtained revealed that bookkeeping practices, internal control and cost control practices exert a positive and significant effect on financial performance.

Conversely, bookkeeping and cost control practices were observed to be neglected by most SMEs in the running of their business. The survey findings provide valuable insights into Small and Medium-Sized Enterprises’ (SMEs) perceptions of accounting practices and their impact on financial performance. The study recommended that (SMEs) in Buea should emphasize and strengthen their bookkeeping practices to secure and facilitate accurate and timely financial record-keeping, establish a routine of conducting internal audits and assessments and finally invest in robust monitoring systems and data analytics tools to effectively track and monitor cost to improve performance.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Small and medium-sized enterprises (SMEs) play an important role in most economies, especially in developing nations. SMEs make up the vast majority of enterprises globally and contribute significantly to employment creation and global economic development. They account for around 90% of enterprises and more than 50% of jobs worldwide.

Formal SMEs account for up to 40% of national income (GDP) in emerging economies (World Bank, 2019). These jobs focus on economic sustainability in affluent nations and economic growth in underdeveloped countries. The SMEs contribute significantly to National Economies which include poverty reduction and economic development of the country (Nyabwanga & Ojera, 2012). With the rapid growth of SMEs even economies with central planning, like China, Russia, Slovenia, Vietnam, and many more, are currently fostering an atmosphere that is conducive to small company establishment and expansion (Zimmerer & Scarborough, 2008).

The classification of SMEs differs from one country to another and it is based on their role within the economy, policies and programs. These programs are designed by specific agencies and institutions which develop, regulate and empower the various SMEs (World Bank, 2013). In the United States of America, SMEs account for over half of the country’s Gross Domestic Product and employ over 50% of the labour force (Audretsch, 2010). In the USA small and medium size businesses are categorized by the Small Business Administration (SBA) based on factors such as industry, and number of employees. For instance, a manufacturing company with 500 workers or fewer is considered an SME. On the other hand, companies that mine nickel and copper ore can employ up to 1,500 people and yet qualify as SMEs. Similar to the EU, the US categorizes businesses with less than ten workers as tiny offices or home offices as SMEs.  Findings (Iwok, 1977) state that the average life of most SMEs in the USA is five years. In the enlarged European Union of 25 countries, about 23 million SMEs provide approximately 75 million jobs which represent about 99% of all enterprises and generate more than half of the European Union’s Gross Domestic Product (Gunter, 2005).

As compared to Africa, SMEs have emerged as key drivers of economic development. As the continent undergoes rapid transformation, these enterprises play a crucial role in fostering innovations, creating employment opportunities and contributing to the overall economic growth. In Kenya, Micro, small, and medium-sized enterprises (MSMEs) constitute the majority (98%) of all business entities. Both registered and unregistered and are the backbone of the nation’s economy. With only 20% of the 7.4 million MSMEs operating as licensed firms, the industry is still quite informal (Elizabeth, 2022). According to Musando (2013), over the past two decades, SMEs have become more prevalent in the global economy of Kenya. According to her, ineffective financial management may harm SMEs’ profitability and financial performance which would intensify their problems.

In South Africa, the newly established Ministry of Small Businesses and Entrepreneurship has emerged to be a testimony to the acknowledgement of the SME sector as a critical piece to the country’s economic puzzle and employment woes. Currently, the SME sector absorbs about 80% of the total South African labour force despite the numerous challenges they face (Department of Trade and Industry (DTI), 2014). In as much as this sector absorbs a majority of the labour force of the country, varying internal and external challenges promote the collapse of over 65% of new and established enterprises. Small businesses struggle to rise above the ‘baby business’ phase and eventually succumb to the economic shock within the first few months of establishment (Global Entrepreneurship Monitor, 2013).

Looking at Zimbabwe, SMEs are the focal point of economic development in the country as the contribute over 70% of economic activities, employing more than 60% and contributing over 50% of the country’s GDP(RBZ, 2016). Moreover, this sector is leading in employment creation, boosting individual wealth instigating entrepreneurship, augmenting the tax base and exploiting niche markets because of their adaptability to this market. Thus contributes to improving the standard of living and poverty alleviation. The government recognizes   SMEs as a key driver and a major player in transforming Zimbabwe’s economy by 2030(RBZ, 2013).

In Cameroon despite their fragility and high mortality rate, SMEs contribute to the creation of wealth and jobs. This however is not different in the case of the Buea South West region of Cameroon. It should be noted that the Cameroonian economic fabric is made up of 99.8% SMEs of which 79.32% are Very Small Enterprises (TPE), 19.43% of Small Enterprises (PE), and 1.25% of Medium Enterprises (ME) which are governed and regulated by a body called (MINPMEESA) Ministry of Small and Medium Size Enterprise, Social Economy and Handicrafts (MINPMEESA, 2021).

Based on the Cameroon law of 2010/001 SMEs are defined as micro enterprises or businesses that hire less than five employees with an annual pre-taxable turnover of 15 million FCFA. It defines small enterprises as businesses that employ between 6-20 employees with an annual pre-taxable turnover of 15-100 million FCFA and medium-sized enterprises as businesses that hire between 21-100 employees and have an annual pre-taxable turnover of 100million-1 billion FCFA (World Bank, 2013). Research by GICAM reveals that 30% of government taxes come from SMEs (Isoh et al., 2020).  Regardless of their great potential and numerous efforts by governments at different levels and other developmental agencies to create a vibrant SME sub-sector.

Studies have shown that About 60% of SMEs in developing countries fail within their first five years of operation (Boachie & Marfo, 2005) SMEs however are faced with numerous challenges relating to; inadequate finances, lack of entrepreneurial, lack of accounting and management skills, and failure to adapt in the rapidly changing market conditions (Maseko & Manyani, 2011). While the performance level of SMEs has traditionally been attributed to some organizational activities, such as manufacturing, administration, marketing, and so on (Fatoki, 2010); accounting practices may have a significant impact on their performance and growth (Padachi, 2012). Moreover, Accounting Practices are those formal techniques and mechanisms for gathering, organizing, and communicating financial information about an organization’s activities (Institute of Chartered Accountants of Nigeria (ICAN), 2009).

The use of accounting practices according to (Mkonyi, 2013) by SMEs is not well understood. It is not clear whether they use of accounting practices in the management of the business enterprises is carried out by all SMEs. However, accounting practices involve different procedures in the processes of accounting from a wider perspective. Thus accounting practices show the books, records, vouchers, files and related supporting data resulting from the application of the accounting process which involves the design of documents and transactions flow through an organization.

Accounting practices are a system of collecting, storing and processing financial and accounting data that are used by decision-makers, management or externally by other interested parties including investors, creditors and tax authorities (Manaye, 2016). Since many business transactions must be handled in precisely the same way to create consistently credible financial statements, accounting practice should ideally be extremely consistent (Saseela, 2020). That said, the main accounting best practices that are relevant to this study are; Book keeping, internal control and Cost control accounting practices.

Book keeping as a construct of accounting practices considered in this study entails maintaining proper records and books for recording complete details of transactions made during the business (Bookkeeping and Accounting, 2022). In other to properly implement bookkeeping, businesses need to first identify the basis of accounting they will follow, either the Cash Basis or Accrual Basis for accurate results. Proper bookkeeping gives businesses a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical for the business performance of SMEs.

Internal control as an accounting practice is of great importance to this study as it is out to minimize risk protect the continuity of the business and enhance performance. It is the process of providing reasonable assurance regarding the protection of assets, ensuring the accuracy of records, promoting operational efficiency and encouraging adherence to policies, rules and regulations. By attaining business objectives, internal control as an accounting practice contributes to the financial performance of SMEs.

Cost control as the last practice for this study most at times is given little or no attention in the running of businesses by some SMEs. Cost control involves monitoring expenses, identifying variances and taking corrective actions to keep costs in check. Some SMEs focus on the revenue realized from the business ignoring the expense generated in running that business. With this, cost control as a practice comes to identify and reduce business expenses to increase the profits and financial performance of SMEs.

The place of sound accounting practices in any business, irrespective of its scale, cannot be overemphasized. A vast majority of small-scale businesses cannot afford the complexity of a detailed accounting system even if they would have. Hence, the practices of basic accounting go a long way in improving their financial performance (Wood, 2021; Onaolapo et al., 2011).

Organizational performance has attracted a lot of interest in recent decades for its widespread relevance in most human activities. Performance is an opinion or perception of reality, which explains why it’s measured with different instruments and its definition is ambiguous. In most cases, notions such as; efficiency, earning, profitability, competitiveness and productivity are used to describe performance. According to (Didier, 2002), performance is achieved when the outcome matches the objectives of the task at hand. So performance is not just a mere outcome but it is achieved by the results reviewed after comparing the objectives and the outcome. Alasdair & Abdelrahim (2007) opined that the performance of SMEs is viewed from the satisfaction of the owner/manager concerning variables such as profit, turnover and business development. This also sheds light on both the qualitative and quantitative interest of managers/owners in two types of performance – financial and non-financial measures of performance.

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. It is also used as a general measure of a firm’s overall financial health over a given period (Will, 2023). Financial performance is the extent to which a company’s financial health over some time is measured. In other words, it is a financial action used to generate higher sales, profitability and worth for a business entity for its shareholders through managing its current and non-current assets, financing, equity, revenues and expenses (Farrukh, & Faizan 2016).

The performance of SMEs has been traditionally conceptualized in terms of financial measures, such as Return on Asset (ROA), Return on Equity (ROE) and Net Profit Margin. According to (Saeed et al., 2013) Return on Equity (ROE) has been established as a firm performance measure and certain factors have a significant influence on ROE. Additionally, results vary across a range of categories, including financial metrics (ROA, ROE, turnover, and PBT); metrics of goods and services output, such as the number of units produced, the number of clients served, the number of process errors, customer satisfaction indices, or employee satisfaction metrics (Guest, 2003).

There has been established a relationship between proper accounting practices and the profitability of SMEs due to inadequate accounting practices, the small-scale operators could not assess their performances effectively. Thus, to enhance the profitability of SMEs, there is a need for adequate accounting practices which will help the owners to keep track of the performance of these enterprises.

1.2 Statement of the Problem

The wide spread of Small and medium-sized enterprises has been identified among the key solutions to the problem of job creation in today’s economy (koech, 2020). However, despite the enormous potential of the SME sector and its immense contribution to sustainable economic development as well as its contribution to employment in Buea, its performance is still dismal. Due to inadequate management and an inadequate accounting framework, many SMEs fail before achieving their goals (Olatunji, 2019). The collapse of some establishments in Buea like Espoire Quincallairie, Hand to Hand Construction, Kuchina Restaurant, Big Mouth Restaurant and Twists Restaurant to name a few, brings the question of “what went wrong?”.

According to LA AFRIQUE TRIBUNE (DEC 2021), the Cameroon economy witnessed a high mortality rate of 72.24% among SMEs created between the year 2015 and 2020, not leaving out SMEs created within the Buea municipality as they also suffered this collapse. Following this sad observation however, 72.24% of these companies are non-existent in the file of the General Directorate of Taxes (DGI) in May 2016, i.e. a survival rate of only 27.7%, as indicated by a study. The mortality rate of these SMEs goes a long way in affecting establishments much more with a “disappearance” rate of 82.3% as well as construction (74.2%). According to the report, a good number of these companies would be set up during public procurement launches.

The results from research carried out on SMEs in Kissi revealed that bookkeeping practices in the region by SMEs were not adequate and had a serious negative impact on the financial performance of SMEs (Osongo, 2010).

A study by Katwei (2009) on the challenges faced by small-scale enterprises in accessing formal financing resulted in the fact that poor record-keeping was a significant contributor to the challenges of SME financial access. Information available on the comprehensiveness of financial practices adopted by SMEs is limited. Despite the efforts adopted and changes in policies made by the government to streamline and promote small-scale traders still failed. On the other hand, there is a need for SMEs to keep their records of accounts straight to determine their trend in performance about industry, time, level of investment and applied strategies in business operations.

Mukaila &Adeyemi (2011) think that one of the worst nightmares for professional accountants turns out to be auditing of small-scale enterprises due to the inadequacy of proper accounting practices such as bookkeeping, internal controls and cost control to name a few.

It is found that most small and medium-sized businesses rarely consider the practice of good accounting until required by regulatory bodies. As a result, the inefficiency and ineffectiveness of accounting systems have caused the untimely collapse of a slew of businesses. As a result of the foregoing, the researcher tries to address the issue of whether there is a link between accounting methods and the financial performance of SMEs in Buea.

1.3 Research Questions

1. To what extent do bookkeeping practices affect the financial performance of small and medium-sized enterprises in Buea?
2. To what extent do internal (preventive) control practices affect the financial performance of small and medium-sized enterprises in Buea?
3. To what extent do cost control practices affect the financial performance of small and medium-sized enterprises in Buea?

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