CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Small and medium enterprise (SMEs) are considered backbone of economic growth in all countries (Rajesh, Surash and Deshmukh, 2008). Small and medium enterprises play an important role in Nigeria’s economic growth, as they constitute 97.2% of the companies in Nigeria (Ministry of Trade and Investment, 2011). It is unfortunate that SMEs performances have fallen short of expectations in Nigeria (Osotimehin, 2012). The country is still characterized with alarming unemployment rate of 19.7% in 2010 (CIA, 2010), as well as, high level of poverty for more than half of the population still live below the poverty line (Abu and Abdullah, 2010). This shows that Small and Medium- Scale Enterprises are not very effective in this part of the world. Most SMEs die shortly after their establishment and few that survive die following the ageing or physical incapacitation or death of their owners. The failure rate of small business stands around 50 percent in Africa (Adelakun, 2008; Ebiringa, 2011).
Huyghebaert and Gucht (2004) have noted that 50% of new entrepreneurial ventures disappear within the first five years after their establishment in USA and probably that of Nigeria is higher. It should be noted that most business failures result in heavy personal loss for the entrepreneur (Bannock, 1980; Watson, 2003). The country also count losses; the loss in taxation and the business contribution to gross domestic product (GDP) as well as employment, add up to very huge losses for the country as a whole. is limited especially by market constraints. In addition to the SMEs internal limitations such as limited capital, old and poorly maintained equipment, outdated technology, lack of management skills, lack of financing resources and inexperience in the utilization of financial management practices are currently the most serious issues. Financial management plays an important role and has a large area in every activity of SMEs. Obviously, a reasonable and logical financial management practice will assist SMEs increase profitability and therefore will aid them to pass the obstacles. Financial management often led business enterprises to serious problems. According to Kwame (2010), careless financial management practices are the main cause of failure for business enterprises in Nigeria. Regardless of whether an owner manager or hired manager, if the financial decisions are wrong, profitability of the company will be adversely affected.
Consequently, a business organization’s profitability could be damaged because of inefficient financial management practices. Business Enterprises’ have often failed due to the lack of knowledge of efficient financial management practices. Moreover, the uncertainty of the business environment causes business Enterprises to rely excessively on equity and maintain high liquidity and these financial characteristics affect profitability. Financial management in SMEs is noticed by many researchers. However, in many previous studies about financial management still have some limitations and more so little or no research work has been carried on financial management practices of SMEs especially in a developing country like Nigeria. It is said that, profitability is one of the most concerned goal of enterprise owners, therefore studying about relations between financial management and profitability in SMEs will have more belief in the effectiveness of financial management and to be more helpful in understanding the financial management of SMEs
1.2 Statement of the problem
Most previous researchers have concentrated on examining, investigating and describing the behavior of business enterprises in practicing financial management. Their findings are mainly related to exploring and describing the behavior of business Enterprises’ towards financial management practices. Also previous research studies came from the developed economic such as the United States of America. There seems to be a lack of evidence from less developed countries like Nigeria. Second, most previous researchers focus on investigating and describing financial management practices. There has been little research examining the effect of financial management practices on profitability (McMahon, et al, 1993).
This lack of empirical evidence from less developed economies like Nigeria and the lack of examination of the effect of financial management practices on profitability are major gaps that needs to be examined. Based on previous research findings and recognition of these gaps, a study of the effect of financial management practice on profitability should be developed and tested by using empirical data from less developed economies (Kieu, 2004). The case of Nigeria is very serious. Most Business Enterprises have not appointed financial managers to be in charge of financial management of the company. Usually, the owners or general managers with the assistance of the accountant control financial matters of the company. On the other hand, most owners or managers have no formal training in management skills, especially financial management Hence, the eect of financial management practices on the profitability of SMEs is still one of the major challenges
