The role of accounting practices on the profitability of SMEs in Kumba municipality: The case of NFC Bank Buea

Abstract

This study sought to examine the role of accounting practices on the profitability of SMEs in the Kumba municipality.

The main research objective was to examine the role of accounting practices on profitability, why other research objectives include the types of accounting practices adopted by SMEs, challenges faced in adopting accounting practices among SMEs and to make a recommendation, the independent variable was accounting practices while the dependent variable was profitability, the study adopted descriptive research design with a total sample size of 30 SMEs in the Kumba municipality, a purposive sample was used for the study.

Primary data was collected for the study using a 30 questionnaire as a method of data collection. Also, data were analyzed using SPSS version 21 software, data was equally presented in tables and chart. The result of the finding revealed accounting practice assist businesses in tax declaration as well as help businesses in tracking account receivables and payables.

The study also recommended that The union of SMEs in the Kumba municipality should develop a law for all the SMEs to acquire computer software to improve the accuracy of their record-keeping and financial reporting. This study further concludes that accounting practices were having a significant positivity effect on the profitability of SMEs.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background to the Study

Cameroon sanguinity to achieve her optimum goal of reaching vision 2035 of becoming an emerging nation is the limit. With this, small and medium-sized enterprises are key in reaching that destination since it contributes to the economy as well as allows a path to the decline of unemployment.  Small and medium-sized entities (SMEs) play important roles in the economic growth of a nation.

In most developing countries the private sector is mainly represented by small and medium enterprises (SME), this is also the case in Cameroon. Thus, in Cameroon SMEs could play a critical role in stimulating and alleviating poverty.

It is widely acknowledged that SMEs are an effective instrument for employment creation, income generation and economic growth, even in developed countries such as the United States and in Europe, SMEs significantly and highly contribute to the GDP (Kinfack, D. & Akinbo, O. A.2011)

Since the 1960s to date, SMEs have been given due recognition especially in the developed nations for playing very important roles towards fostering accelerated economic growth, development, and stability within several economies. They make up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely contributing to the gross domestic products (GDPs) of many countries (OECD 2000).

Over the last few decades, the contributions of the SMEs sector to the development of the largest economies in the world have beamed the searchlight on the uniqueness of the SMEs; and this has succeeded in overruling previously held views that SMEs were only “miniature versions” of larger companies (Al-Shaikh 1998).

According to Saravanan et al (2008), SMEs comprise over 90 per cent of African business operations and contribute to over 50 per cent of African employment and GDP. The SMEs sector has shown positive signs in South Africa, Mauritius and North Africa.  As such the Small Business Act was introduced in 1996 (Nieman, 2001).

Clusters of SMEs are little developed in Africa and are concentrated mainly in South Africa, Kenya Nigeria, Tanzania and Zimbabwe. In South Africa, SMEs constitute 22 per cent of gross domestic product (GDP) in the year 2003. SMEs constitute 95 per cent of formal manufacturing activity in Nigeria.

Senegal and Kenya have provided a conducive environment for SMEs. SMEs in Uganda constitute 90 per cent of the private sector, with 80 per cent being located in urban areas and, are largely involved in trade, agro-processing, and small manufacturing (Hatega, 2007), SMEs contribute approximately 75 per cent of the gross domestic product (GDP) and employ approximately 2.5 million people.

Congo has 2,100 firms in the formal and 10 000 in the informal sector, around 80 per cent of firms in Congo have fewer than five workers. A 1997 survey in Benin showed that of the 666 SMEs counted, half were in commerce and the rest were mostly in construction or were pharmacies and restaurants. Only 17 per cent were in manufacturing.

SMEs in Senegal contribute about 20 per cent of national value-added. In Morocco, 93 per cent of all industrial firms are SMEs and account for 38 per cent of production, 33 per cent of the investment, 30 per cent of exports and 46 per cent of all jobs.

The private sector which in the past in Cameroon was not so important is now being recognized as an engine to economic growth in the country. In most developing countries the private sector is mainly represented by small and medium enterprises (SME), this is also the case in Cameroon.

Thus, in Cameroon SMEs could play a critical role in stimulating and alleviating poverty. It is widely acknowledged that SMEs are an effective instrument for employment creation, income generation and economic growth, even in developed countries such as the United States and in Europe, SMEs significantly and highly contribute to the GDP.

When Cameroon attained independence in 1960, the country-focused its development strategy on promoting large enterprises. The government initiated amongst others, an investment code with the aim of attracting foreign investment which the young state needed so much for the realization of its development objectives. Hence, for a decade, large and unprofitable foreign and local businesses that existed in the country were not always driven by efficiency.

1.2 Statement of the Problem

Notwithstanding the fact that financial reporting is of supreme importance as the life-wire of every business, it’s unfortunately reserved under the carpet by small scale business owners and those that are kept are wholly inadequate and are for the purpose of yearly taxation returns, which in most cases, is the income statement but disregarding or infrequently using some financial reports as; balance sheet, cash flow statement, fund statement, production report, variance report etc.

However, the limited use of financial and management accounting reports could be attributed to SMEs‟ inability to employ professional managers with functional specialization in the field of finance due to their limited financial resources.

Little is known about the use of accounting practices in SMEs, the importance of financial record keeping among SMEs and the challenges SMEs face in the preparation of accounting records. Earlier studies have suggested that record-keeping is at the heart of any external interaction with the SMEs be it access to finance or eligibility for assistance.

That is, creditworthiness and growth potentials are all embedded in the bookkeeping records of enterprises. It is theoretically plausible to expect some positive effects of proper record keeping and enterprise performances such as profitability and growth.

In most cases, SMEs do not follow or apply accounting practices because they lack the knowledge or do not know how important it is to business growth. Many business people end up losing track of their daily transactions and cannot account for their expenses and profits at the end of the reporting period.

The implementation of financial accounting practices such as proper bookkeeping and preparation of financial statements affects the growth of SMEs positively. But this is not the case for SMEs in Kumba municipality, as they neglect putting in to practice such, and end up not succeeding in making their businesses grow.

1.3 Research Questions

What is the role of accounting practices on the profitability of SMEs in Kumba municipality?

1.3.1 Specific Research Question

1. What are some of the accounting practices adopted by SMEs in Kumba municipality?
2. What are some of the challenges faced in adopting accounting practices among SMEs in Kumba municipality?
3. How can accounting practices be improved by SMEs in Kumba municipality?

1.4 Objectives of the Study

The main objective of this study was to examine the role of accounting practices among SMEs in Kumba municipality.

1.4.1 Specific Research Question

1. To identify the types of accounting practices adopted by SMEs in Kumba municipality.
2. Evaluate the challenges of adopting accounting practices among SMEs in Kumba municipality
3. To make recommendations on how accounting practices can be improved by SMEs in Kumba municipality.