1.

Introduction

Small and Medium Enterprises (SMEs) play an important role in any economy as

they are capable of generating employments, promoting the growth of Gross

Domestic Product (GDP), embarking on innovations and stimulating of other

economic activities. This sector is said to

be the backbone of all developed and developing nations. The development of

SME sector is of paramount important for any country irrespective of their level of

development, since this sector has great potential to generate maximum socio

economic benefits to the country with minimum level of investment.

Relatively labour intensive businesses coupled with regional dispersions of cottage

and small scale industrial enterprises enable to create substantial employment

opportunities. The SMEs have great potential to mobilize and divert financial

resources in the economy, which

would otherwise have been used for consumption purposes instead of investment

purposes in rural economies. The development of SMEs can be an aid to promote

balanced regional development. Further the SME sector provides value addition in

view of greater utilization of

indigenous resources of the country. Hence, SME sector would become an

important aspect for developing countries as they are generally burdened by

poverty and unemployment problems.

Further, it has been noted that the SME sector has become a crucial as well as a

major section of private sector in developing countries.

Concept of Small and Medium Scale Business

Prior to the introduction of the structural, adjustment programme in Nigeria, small

and medium scale industries were virtually neglected in all the development plans

of the country. However, since the advent of democratic government in 1999, there

have been significant changes in

attitude to small and medium scale industries and entrepreneurship among policy

makers and managers of Nigeria economy. (Ukaegbu, 2004), This change in

orientation, as rightly observed by Leon (2009) to an acknowledgment of the

continuous importance of the sector in terms of the number of such enterprises, job

creation and the promotion of its contribution to the Gross National Product

(GNP). Oyedijo (2008) opines that the definition of small and medium industries

should reflect the level of technology within the economy, the development needs

or objectives of the economy and such other facts that are dictated by the social

and cultural value of the economy. These considerations he asserts, suggest that

there is no universally accepted definition of small and medium scale industries,

the world over.

It is however important to realize that there is need for a standard definition of

small and medium scale industry within an economy. This need is paramount in

the context of providing a frame of reference for the various agencies responsible

for policy formulation and implementation in respect of small and medium scale

industries. Adidu & Olannye (2006), states that different countries have different

basis of defining small and medium scale enterprises, some on capital investment,

while others define it on the basis of management structure. There are many

definitions on small and medium scale enterprises (SMEs) as there are experts on

the subject. The Nigerian industrial policy describes SMEs as those whose total

investment is between N100, 000 and N2million exclusive of land but including

working capital.

There are however, some qualitative indicators that are common to most

definitions namely: size of capital, the number of employees, the annual turnover.

Adidu & Olannye (2006), summarize SMEs as those business whose capital

investment do not exceed #5 million (including land and

working capital) or whose turnover are not more than N25million annually. The

Small Business Administration SBA in the USA measures SME as one which

posses at least two of the following criteria.

Managers are also owners, Owners supply the capital, Area of operation mainly

local, and Small in size within the industry.

 It is therefore glaring that there is a universal cord that links all the above

definition and that SMEs are generally low in terms of number of persons

employed and the amount of investment and annual turnover. Thus, a review of

existing literature on the subject

suggests the following as the mostly used criteria for the definition of small and

medium scale industries:

No of employees

Sales volume: The size of sales volume in any business will determine where to

group it, i.e. whether to a very small, small or medium business.

Financial strength: This as well determines whether it is a very small, small or

medium business. The amount of fixed assets and current assets each business is

having helped to determine where to categorize them.

Relative size: The relative size of the business is determined by number of

people working in this business, that is, the number of employees helps in

determining whether it is a small, very small or medium business.

 Initial take-off capital: This means that the amount of shares used to start or

incorporate business will help in large way to determine where to categorize the

business.

Personal management style, Independent ownership, Name of business, and

Composition of ownership and types of industry (Bhatia, 2003).

Even if there are controversies on definitions, what is not contestable is the

contribution SMEs are making to the Nigerian economy.

Problems of Small Scale Enterprises In Nigeria

In spite of all the efforts and supports of governments and multilateral institutions

such as World Bank, SMEs have not been able to make the desire impact on the

Nigeria economy. This therefore, underscores the fact that there exist fundamental

issues confronting small scale enterprises that have not been adequately addressed.

It is evident that SMEs are bedeviled by financial, management and technical

problems.

The financial problem of these enterprises is multifaceted. It ranges from lack of

sufficient startup capital to inadequate working capital. These are in addition to

poor record keeping culture by these SMSEs.

Other problems that have constrained the role of SMSEs and make the realisation

of the benefits of their existence farfetched include:

1. Discrimination from banks which are somehow averse to the risk of lending

SMEs especially start-ups.

2. Lack of knowledge on how to package appropriate bankable business proposals.

3. Weak demand for products arising low and dwindling consumer purchasing

power and aggravated by preference for foreign products at the expense of locally

produced goods.

4. High incidence of multiplicity of regulating agencies, taxes and levies that result

in high cost of doing business and discourage entrepreneurship. This is due to the

absence of a harmonized tax regime which would enable business owners to build

in recognized and approved levies.

5. Wide spread corruption and harassment of SMEs by some government agencies

over unauthorized levies and charges.

6. Exorbitant interest rates charged by banks and other financial institutions on

loans granted to SMSEs. This is a big disincentive to seeking financial support

from these institutions and thereby stifling the growth of these SMEs.

7. Wide spread pilfering and outright stealing prevalent among most SMEs staff

constitutes a major financial challenge. Funds that could have grown the business,

end up in private pockets of staff.

Small Scale Businesses and the Nigerian Business Environment

In his review of the performance of small scale business, Asika (2004) states that,

the history of small scale businesses, in many countries, especially Nigeria is

replete with instances of firms which became extinct or stunted after an era of

relative affluence in which they had attained leadership positions in their respective

industries. Everyone who had at any point in time owned or managed a business

firm will agree that the vicissitudes in businesses environment are like powerful

currents, which can either blow a particular firm right to the top or sweep it

underneath completely.

The Nigerian business environment according to Ukaegbu (2004), is characterized

by its free enterprise though the economy witnessed depression some years ago

resulting in the destabilization of so many small scale businesses and other

organization alike. Presently, the

economy is being affected by the global economic meltdown, which is sweeping so

many economies of the world and businesses struggling to survive, depreciation of

the naira against the dollar, over dependence of the country on oil and

inconsistency in government policies are what has characterized the Nigerian

business environment.
Sources of Finance for Small Scale Enterprises

Leon, (2009) lists the following as various sources of finance for small scale

enterprise:

1. Personal savings: Personal savings is a major source of finance for SMEs. To a

large extend, one may say that it is the most assured source of finance. Most start-

ups are usually planned; therefore, we may safely assume that the prospective

owner will provide the initial capital. Such capital comes from savings kept for

various eventualities and unforeseen mishaps that may require money.

2. Borrowing from friends and relations: Apart from sourcing finance from

personal savings, many businesses are set up or financed by money borrowed from

friends or relations. In some cases, the finance is provided either as a gift or soft

loan to be repaid at mutually agreed terms. One major problem associated with this

source however, is that it is not easy to get because friends and relations may not

trust the sincerity of the borrower to repay the loan.

3. Borrowing from commercial and microfinance banks: One major function of

commercial banks is to lend money to customers be it individuals or corporate

organisations. Part of the purpose of such loans is to enable the customers

undertake capital projects that ordinarily their savings cannot finance. Usually the

loans are repayable within a specified period of time and at an agreed rate of
interest per annum. In addition, most banks normally require collateral securities

before any loan is granted.

4. Lease financing: Lease financing is a type of financing that is available to small

and large business organisations. Basically, a lease is a contract whereby one party

(the leasee) hires equipment from another party (the leasor) in a way that the leasee

uses the equipment without purchasing it. But in return the leasee pays the leasor

agreed periodic fees called lease rentals. At the end of the lease period, the leasee

may have the option to purchase the equipment. Typical equipment financed

through lease agreements are oil tankers, luxurious buses, tractors etc.

5. Borrowing from the Bank of Industry (BOI) and other government institutions:

The Bank of Industry Limited is Nigeria’s oldest and industrial financing

institution. It was reconstituted in year 2001 out of the defunct Nigerian Industrial

Development Bank Limited which was incorporated in 1964. The mandate of BOI

is to provide financial assistance for the establishment of large, medium and small

scale enterprises as well as expansion, diversification and modernization of ailing

ones. Presently, huge sum of funds are been channeled through this bank for small

scale enterprises.

Prospect of Funding for Small Scale Enterprises in Nigeria

According to Okereocha (2014), the future of small and medium scale enterprises

sector looks promising. Of late, local and foreign financial institutions, government

agencies state governments and well meaning individuals have been focusing

attention on the sector.

The World Bank has in a bid to help close the funding gap for small and medium

scale enterprises, approved $500m (N21.7b) lifeline for the sector in Nigeria. This

is coming on the heels of similar intervention by the central bank of Nigeria, which

has launched N220b small and medium scale enterprises (SMEs) fund. If these

enterprises could take advantage of these efforts and also key into several capacity

building programmes of some states, then, the sector will no doubt fulfill its role of

creating jobs and ensuring inclusive economic growth and development. While the

Central Bank of Nigeria and the World Bank are showing the way in the area of

access to finance, some state governments and public agencies have concluded

partnership arrangement that promises to put the sector on the path of sustainable

growth. Already, the Small and Medium Enterprises Development Agency of

Nigeria (SMEDAN) in conjunction with United Nations Development Programme

(UNDP) have conclude plan to train women entrepreneurs with the hope of

leveraging the CBN N220b SMSEs fund.

Bank of Industry and some state governments have also stepped up the tempo of

their support programmes for small scale enterprises. For instance, the bank in
partnership with Kaduna state government recently signed an MOU to provide N1b

matching fund for small scale enterprises in the state. This has further fuelled the

hope of a revitalized small and medium scale sector capable of generating

employment and creating wealth thereby reducing the high rate of unemployment

and crime in the state.

Concept of Financial Management

Meredith (1986) defined the financial management as one of several functional

areas of management but it is the central to success of any small business. This

definition emphasizes the central role and position of financial management in

relation to the other specific areas of business management.

McMahon et al. (1993) defines financial management based on mobilizing and

using sources of funds:

Financial management is concerned with raising the funds needed to finance the

enterprise’s assets and activities, the allocation of these scare funds between

competing uses, and with ensuring that the funds are used effectively and

efficiently in achieving the enterprise’s goal.

McMahon et al. (1993), modern financial management involves planning,

controlling and decision making responsibilities embracing:

Various types and sources of finance an enterprise may employ, how these may

be accessed, and how to choose among them.

Alternative ways in which finance raised may be used in an enterprise and how to

select those that are likely to prove most profitable.

Different means of ensuring that finance entrusted to specific activities to realize

the returns that were anticipated on its allocation to them.

However, Meredith (1986) asserts that financial management is concerned with all

areas of management, which involves finance not only the sources, and uses of

finance in the enterprises but also the financial implications of investment,

production, marketing or personal decisions and the total performance of the

enterprise. Further he argued financial management is concerned with what is

going to happen in the future. Its purpose is to look for ways to maximize the

effectiveness of financial resources.

Financial management practices

Financial management practices in SME sector have long attracted the attention of

researchers. Depending on different objectives, researchers emphasize different

aspects of financial management practices. (McMahon, Holmes, Hutchinson, &

Forsaith, 1993) and (McMahon, Financial reporting to financiers by Australian

manufacturing SMEs, 1999) summarized their review of financial management

practices in Australia, UK and USA. In their review the context of financial

management practices include the following areas.

1. Accounting information systems – the nature and purpose of financial records,

book keeping, cost accounting, and use of computers in financial record keeping

and financial management.

2. Financial reporting and analysis – the nature, frequency and purpose of financial

reporting, auditing, analysis and interpretation of financial performance.

3. Working Capital Management – non-financial and financial considerations in

asset acquisition, quantitative techniques for capital project evaluation, investment

rate determination and handling risk in an uncertainty in this context.

4. Financial structure management – financial leverage or gearing, accounting to

lenders, knowledge of sources and uses of finance, non-financial and financial

considerations in financial structure decisions and non- financial and financial

considerations in profit distribution decisions.

5. Financial planning and control – financial objectives and targets, cost-volume

profit analysis, pricing, financial budgeting and control and management

responsibility centers.
6. Financial advice – internal and external sources and types of financial advice

and use of public accounting services.

7. Financial management expertise - informal and formal education, training and

experience in financial management, relevant qualifications and overall financial

management expertise.

Conclusion

Small and medium scale enterprises have been fully recognised by governments

and development experts as the engine of economic growth and a major factor in

promoting private sector development. The development of the SMSEs sector

therefore represents an essential element in the growth strategy of most economies

and Nigeria is not an exception.

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