Examination On The Management Of Working Capital: A Case Study Of Nigeria Bag Manufacturing Company

This study sought to the challenges of International Financial Reporting Standard (IFRS) adoption and implementation by small and medium scale enterprises in Nigeria. The international accounting standard board (IASB), in its objectives and preamble, suppose that the beneficial effects from IFRS adoption include transparency, accounting quality and reduced cost of capital. Based on these assumptions, this study applied timeliness, simplicity/ understandability, quality, transparency and comparability to find out whether the adoption of IFRS has relevance to small scale enterprises in Nigeria. The study employed multiple regression analysis and the findings showed that there is a positive significant relationship between the variable timely preparation of financial statement and the adoption of IFRS. The study concluded that the adoption of IFRS is a big move for the firms, accounting regulatory body and the government in Nigeria because the benefits are more than the demerits as discussed earlier in this report. However, the study recommended that the government should introduce some incentives to motivate the SMEs or introduce compulsory adoption of these standards to ensure that all SMEs adhere to the adoption

Introduction

1.1 Background to the Study

Small and medium scale enterprises are the engine that drives most economies of the world. Their importance to the economy of Nigeria cannot be overlooked. SMEs activities-both international and local have contributed immensely to the gross domestic product in the economy as they participate in manufacturing, importation, exportation, employment etc. According to Gono (2013), SMEs contribute to output and employment creation and they are also a nursery for the larger firms of the future. The most successful developing country over the last 50 years, Taiwan is built on a dynamic SME sector. Small and medium enterprises (SMEs) have played a significant role in Taiwan‟s economic development in expanding exports and providing jobs.

The need to harmonize accounting reporting standards for organizations operating around the world has prompted the Central bank of Nigeria to set January 2014 as deadline for adoption of the International Financial Reporting Standard (IFRS) for small and medium scale enterprises in Nigeria. This mandate has posed a lot of questions on the awareness, readiness and financial ability of SME operators to comply with the new accounting reporting standards. This new era where globalization is fast becoming real, it is imperative to investigate the effect the IFRS adoption possess on small and medium scale enterprises as they have a key role to play in international trade in Nigeria. According to OECD (2012), the level of which globalization affect SMEs is a function of their engagement in exporting activities. This is particularly the case of SMEs in Nigeria, as Nigeria is a major exporter of agricultural produce.

The introduction of IFRS in Nigeria and the current state of globalization simply means that SMEs cannot continue with local standards for financial reporting purposes. For SMEs involved in international trade with subsidiaries and franchises in other countries to be more successful internationally, it must comply with the IFRS guidelines. As a result of the harmonization of accounting reporting standards, the adoption of the IFRS has been widely accepted by various countries of the world. However, the full IFRS promulgated by the IASB has been found to be irrelevant due to the disclosure requirements, which are extensive for SMEs. For this reason, the IASB promulgated a simplified version of the IFRS applicable to SMEs-the IFRS for SMEs. As a result of broad discussion of SMEs and common standards for SMEs worldwide, the International Accounting Standard Board (IASB) introduced an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs) on July 9, 2009 (International Accounting Standards Board, 2010). The introduction of IFRS specifically for SMEs was necessitated by many challenges faced by these entities in adopting full IFRSs in financial reporting, the main of which was the excessive disclosure requirements, based on a cost-benefit analysis for SMEs (Nazri, 2010).

1.2 Statement of the Problem

In Nigeria, the greatest challenge facing small and medium scale enterprises is access to finance. SMEs as the engine of the economy have the full potentials to turn the economy around for the better, but their greatest challenge still remains underfinance.

With the introduction of IFRS, SMEs in Nigeria are mandated to adopt the new reporting standard from January 2014. The awareness, acceptance and implementation of the new IFRS guidelines for SMEs are challenges for many African countries (Fortuin, 2011). Many businesses still do not understand what options are available and how IFRS for SMEs interplay to their benefit (Fortuin, 2011). This is an indication of the lack of awareness of the benefits accrued through the use of IFRS for SMEs which may in turn inhibit SMEs from adopting them. The results of the survey by Deloitte in 2009 revealed that 43% of SME respondents were not aware of the IASB"s standard IFRS for SMEs.

Poor financial management and book-keeping are two major barriers confronting SMEs when it comes to accessing funds from financial institutions and government agencies. A study conducted by Gono (2013) revealed that most SMEs fail due to poor financial management and reporting. So it is important for SMEs to follow the current trend of financial reporting and enjoy the full benefits that are associated.

1.3 Objectives of the Study

The main aim of the study is to investigate the challenges facing the adoption and implementation of the IFRS amongst small scale enterprise owners in Ikeja, Nigeria.

Specific objectives of the study are:

To determine the level of awareness of IFRS guidelines amongst SME operators in Ikeja.

To examine the extent to which IFRS is adopted by small and medium scale enterprises in Ikeja, Lagos state.

To ascertain the challenges of implementation of the IFRS guidelines for SMEs by Small and Medium Scale Enterprises in Ikeja, Lagos state.

1.4 Research Questions

The study will find answers to the following questions:

What is the level of awareness of IFRS guidelines amongst SME operators in Nigeria?

What IFRS guidelines have been adopted by SMEs?

What challenges do Small and Medium Scale enterprises face in implementing the IFRS guidelines?

1.5 Research Hypothesis

In order to set a good base for carrying out the research, the following hypotheses were posed, believing that by the time adequate answers have been provided, the study would have covered necessary grounds. To achieve this, the study seeks to test the following two (2) operational hypotheses outlined in null form:

Ho: The level of adoption of IFRS Guidelines by small scale enterprises is low.

Ho: The implementation of the IFRS does not significantly influence the profitability of small scale enterprises.

1.6 Scope and Limitations of the Study

With a large percentage of businesses in the state falling within the small scale enterprises sub-sector, the need to clearly define the scope and area of the study becomes imperative.

The study is therefore confined to the small scale enterprises operating in Ikeja Local Government area of Lagos State, and yet it is easy to use the result of this research to gain insight into the entire small scale enterprises.

A study of this nature could not have been carried out without any hitch. Notable among the constraints was the paucity of relevant empirical literature in the adoption of IFRS among small scale enterprises. Empirical information on problems of small scale enterprises are abundant in literature but work done on their financial literature is still scanty and that was a serious limitation to the study.

1.7 Significance Of The Study

Given the vital role and contribution which small scale businesses in developed and developing countries make, and considering the ongoing reforms by the Central Bank of Nigeria for a sustainable financial literacy framework for small and medium scale enterprises in the country, the significance of this study cannot be over emphasized.

The significance of this study therefore lies in the attempt to document the factor that is truly responsible for hindering the adoption of IFRS amongst small scale enterprises but which have not been appreciated, recognized or factored into the various incentives schemes and policy measures being put up for SSEs in the state and the nation at large.

In addition, this research will equip owners of small scale enterprises by encouraging them to give the keeping of proper accounting records a greater priority in the objectives of their business. With this, adequate information about the profitability of the business will be accurately known.

Furthermore, apart from the result of the study contributing to the "knowledge bank" of small scale enterprises, it will stimulate more researches into this area since from research literature work in this field is still minimal.

Lastly, it will be my pre-requisite for the award of Bachelor of Science (B.Sc.) Degree in Accounting.

1.8 Organization of the Study

This study is presented in five (5) chapters. These chapters are organized in a sequential manner that will aid careful investigation and easy achievement of the objectives.

Chapter one is a preview of the background of the study and the problem(s) that necessitated the research. This leads to the outline of the objectives, significant of the study, research questions and operational hypothesis within the sample scope of small scale enterprises in Lagos, Nigeria.

Chapter two presents the review of relevant works as it relates to the study. Also, theories about the dependent and independent variables were discussed. It also examines the theoretical framework of the adoption of IFRS and small scale enterprises.

Chapter three reveals the methods of data collection in relation to the research design, population and sample with emphasis on the model specification, estimation, validation and reliability of research instrument.

Chapter four presents and analyses the data and also the findings, dealing with the extent to which small scale enterprises adopt IFRS and its underlining challenges.

Chapter five summarizes major findings from the study, recommends tentative policy thrust and also states suggested areas of further research.

1.9 Operational Definition of Terms

Small Scale Enterprises:

Small scale enterprises can be defined as a business with employment level of not more than 5 persons and with an annual turn over of less than Five Hundred Thousand Naira (N500, 000).

Financial Literacy:

Financial literacy is the ability to understand basic accounting and finance concepts as well as its application, the ability to use such knowledge and skills to manage financial resources effectively for a lifetime of financial well being.

IFRS:

International Financial Reporting Standard

Summary of Findings, Recommendation and Conclusion.

5.0 Summary of Findings

From the questionnaire distributed, it can be concluded that: I

The majority of the respondents fall within 31-40 years of age. The bulk of the respondents were male. The majority of the respondents were single. Many of the respondents were experienced workers because of the year they have put in service. Most of the respondents were graduates of various disciplines while others were diploma holders as well as professionals. The bulk of the respondent, were senior staff whose responses can be relied upon. Majority of the respondents 88%) agreed that the length of working capital cycle affect the level of investment in working capital. 92% which represent majority of the respondents agreed this the level of investment in working capital depend on the nature of the company.

Majority of respondents (72%) believes that there is a minimum level beyond which investment in working capital most not fall. Majority of the respondents which agreed that excessive working capital can increase production cost Majority of respondents which represent 60% believed that when manager are over ambition and seek rapid growth without fully appreciation the financial implications of such growth. The respondents which are majority agreed (80%) are aware of the efforts of proper and adequate stock control system in financial planning. 100% of the respondents believed that working capital is necessary for the smooth running of a business operation. 84% of the respondents are of the opinion that working capital requirement of a business is dependent on the volume on level 0 business in operation.

It is quite obvious from the fore going that no matter how profitable a business venture is, a neglect of liquidity consideration will be in the long term result in a bomb shell i.e. Technical legal insolvency. Therefore managing organization with liquidity and profitability objectives in mind would clearly require an effective management of working capital.

5.1 Recommendation

It is quite obvious from the going that no matter how profitable a business venture is, neglect of liquidity consideration will be in the long term result in a tomb shell i.e. Technical/ Legal insolvency. Therefore managing an organization with liquidity and profitability objectives in mind would

A pertinent consideration in the management of working capital is the determination of the amount of working capital and how it should be financial which however depends on the capacity of the business in terms of operational levels being established.

But in all cases a business organization should manager its working capital efficiently, in such a way as to avoid the ills of over capitalization and under capitalization.

In spite of the various probable deductions made about working capital management being an important decision linking investment decision, long term finances and short term finances.

It is thus humble to conclude that, while it is desirable that investment t in working capital be kept as low as possible, reducing it to be absolute theorical minimum

5.2 Conclusion

In spite of the various probable deductions made about working capital management being an important decision liking investment decision, long term finances and short term finances.

It is thus humble to conclude that, while it is desirable that investment in working capital be kept as how possible, reducing it to be absolute theoretical minimum may not be in the best interest of most business organization, and increase in lead to loss of sales and increase in overall costs.

This working capital management entails a compromise that is a "mid41e of the road approach where a balance has to be struck between liquidity and profitability".

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