CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND

Small and Medium-sized Enterprises (SMEs) play a major role in economic development through employment creation and income generation. SMEs are sometimes referred to as Micro, Small and Medium Enterprises (MSMEs). They cover non farm activities such as manufacturing, mining, commerce and services. There are different criteria for categorizing SMEs. Commonly used criteria are total number of employees, total investment and sales turnover (Burns & Dewhust 1996; Bushong 1995; Holmes et al. 2003).

In the context of Nigeria, SMEs are those enterprises engaging up to 29 employees, in most cases family members, with capital amounting up to N100,000. Majority of SMEs fall under the informal sector. SMEs are formalized undertakings engaging between 1 and 29 employees, with capital investment from N100, 000.

According to World Bank (2006); Nigeria is characterized by low capital formation, SMEs are the best option to address this problem. SMEs tend to be more effective in utilization of local resources using simple affordable technology. SMEs play a fundamental role in utilizing and adding value to local resources. In addition, development of SMEs facilitates distribution of economic activities within the economy

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and foster equitable income distribution. Other relevance of SMEs to the socio-economic development of Nigeria includes innovation, contribution to the growth of GDP, job creation and many others. Bookkeeping or financial recordkeeping therefore is an essential ingredient for the success or failure of SMEs in developing countries.

In spite of the significant gains from the growth of SMEs to the Nigerian economy, there are a number of challenges facing the sub-sector. Among many of these challenges in Nigeria is lack of access to finance and these has been largely due to lack of business records to enable them access credit from banks. It is estimated that 25 to 30% of SMEs under 5 years collapse every year (Ministry of Trade and Industry 2004).

To address the challenge of lack of access to finance among SMEs, they must address the problem of bookkeeping. In Nigeria, credit facilities to SMEs are in the form of loans or debt financing offered by banks, which provide growth capital for SMEs. However, there are numerous obstacles to these SMEs in accessing credit facilities hence, the difficulty of access to capital, high interest rates charges are partially the result of incomplete (or no) accounting records, and the inefficient use of accounting information. Poor record keeping and accounting information also made it difficult for financial institutions to evaluate potential risks and returns (World Bank 1978), making the banks unwilling to lend to SMEs. As a result, SMEs pay high interest rates or fall back on the middlemen or money lenders, whose loans are costly and often restrictive.

Modern bookkeeping when practiced would provide the necessary information that will critically affect major business decisions and also facilitates effective monitoring the financial development or failure of the business. For instance, the evaluation of financial

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consequences takes a big part in every decision that the owner will make. Without reliable financial information and accurate records, it will be intricate to project the impacts of a certain course or action. It must be noted that, profitability is revealed only with accurate records.

According to Stephen Thompson (2004), “proper bookkeeping business needs. He also indicated that, a basic bookkeeping report, when done correctly, should be able to answer these questions”.

1.  How much income are you generating every month, and how much will you be expecting in the future?

2.  How much cash is under your list of receivables and when will they turn to actual cash?

3.  Which of your product lines or services are bringing in the most amount of profit, break-even, end/or draining your resources?

4. How does the data compare with last year or the last quarter?

5. How does the data compare with projections?

6 How does all this information compare with the competition? Are you leading or falling behind?

It is thus, the objective of this study to analyses the significance of bookkeeping and its effects to the growth of SMEs in Nigeria.

1.1 STATEMENT OF THE PROBLEM

Even though SMEs are the base of the coun on their mode of recordkeeping in Nigeria. R