1.1 Introduction
Financial accounting literacy is the ability to understand, interpret, and apply accounting principles in making sound business and financial decisions. According to Adeniyi (2012), financial accounting literacy refers to the competence and skill required to record, analyze, and interpret financial information for effective management and decision-making. It involves not only the knowledge of basic accounting concepts but also the ability to utilize such information to monitor performance, plan strategically, and ensure business sustainability. In the context of Small and Medium Enterprises (SMEs), financial accounting literacy is essential for business owners and managers to maintain proper financial records, assess profitability, control costs, and enhance operational efficiency (Adeniyi, 2012).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
Financial accounting literacy has emerged as a crucial determinant of the success and sustainability of Small and Medium Enterprises (SMEs) across both developed and developing economies. It encompasses the ability to understand, interpret, and apply accounting principles and financial information for effective business management. According to Adeniyi (2012), financial accounting literacy refers to the knowledge and skills necessary to record, analyze, and report financial transactions accurately, thereby supporting sound decision-making and efficient resource allocation. Proper financial literacy enables entrepreneurs to plan effectively, control expenses, assess profitability, and make informed strategic decisions that foster business growth and sustainability.
Small and Medium Enterprises are widely acknowledged as the engine of economic growth, industrial development, and employment generation in Nigeria. Ogujiuba (2014) asserted that SMEs contribute significantly to the Gross Domestic Product (GDP) and serve as a foundation for industrial expansion, innovation, and poverty reduction. Similarly, Afolabi (2013) reported that SMEs are vital in driving socio-economic transformation, especially in developing economies where they promote self-reliance and equitable distribution of income. In Kwara State, SMEs are key contributors to local development through employment creation, income generation, and the provision of essential goods and services. Despite these contributions, many SMEs struggle to survive and expand due to poor financial management practices and inadequate accounting literacy.
Oladejo (2010) stated that a lack of financial accounting literacy among SME operators is a major factor limiting their growth and competitiveness. Many entrepreneurs in Nigeria are unable to maintain accurate records of their business transactions, making it difficult to assess financial performance or comply with tax and regulatory requirements. Ezeagba (2017) affirmed that the absence of standardized accounting systems in small enterprises results in poor financial reporting, reduced access to credit facilities, and weak decision-making processes. Consequently, many SMEs face liquidity problems, financial mismanagement, and eventual business failure.
On the other hand, SMEs that possess adequate financial accounting literacy demonstrate better financial control, efficient resource utilization, and improved business performance. Owolabi and Jayeoba (2019) contended that financially literate entrepreneurs are better positioned to analyze cash flows, prepare financial statements, and interpret financial data accurately. This capacity enables them to make strategic decisions, attract investors, and enhance productivity. Furthermore, Lawal and Ijaiya (2021) reported that SMEs with a strong grasp of accounting principles experience higher profitability, sustainable growth, and greater adaptability to market changes.
The significance of financial accounting literacy is not limited to business management but also extends to national economic development. Adequate financial literacy contributes to transparency, accountability, and long-term sustainability within the SME sector. Yet, several studies indicate that many small business owners in Nigeria, including those in Kwara State, have limited exposure to formal accounting education and training. This study is set against the backdrop of the pressing need to understand how financial accounting literacy influences the growth, development, survival, productivity, and performance of SMEs in Kwara State, Nigeria.
1.3 Statement of Problems
Investigation revealed that there is lack of standardized accounting practices among small business owners poses a serious threat to financial reporting credibility and business sustainability. Many SMEs fail to differentiate between personal and business finances, leading to poor accountability and difficulties in assessing true financial performance. Consequently, the growth potential and contribution of SMEs to the socio-economic development of Kwara State remain underutilized.
Furthermore, SMEs that possess a high level of financial accounting literacy are better positioned to make informed business decisions, ensure transparency, and enhance productivity. Proper financial record management enables them to assess profitability, identify growth opportunities, and mitigate financial risks. However, there remains a wide gap between the level of financial accounting literacy and the performance outcomes of most SMEs in Kwara State. It is against this backdrop that this study seeks to examine the importance of financial accounting literacy on the growth, development, survival, productivity, and performance of SMEs in Kwara State.
1.4 Aim and Objectives of Study
The aim of this study is to examine the importance of financial accounting literacy on the overall performance and sustainability of SMEs in Kwara State.
The specific objectives of this study are to:
- Examine the relationship between financial accounting literacy and the growth of SMEs in Kwara State.
- Assess the influence of financial accounting literacy on the development and survival of SMEs.
- Evaluate the effect of financial accounting literacy on the productivity and profitability of SMEs.
- Determine how financial accounting literacy affects decision-making and resource management among SME operators.
- Identify challenges faced by SMEs in implementing proper financial accounting practices.
- Suggest possible measures to improve financial accounting literacy among SME owners in Kwara State.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What is the relationship between financial accounting literacy and the growth of SMEs in Kwara State?
- How does financial accounting literacy influence the development and survival of SMEs in Kwara State?
- What effect does financial accounting literacy have on the productivity and profitability of SMEs?
- In what ways does financial accounting literacy impact decision-making and resource management among SME operators?
- What are the challenges faced by SMEs in adopting proper financial accounting practices?
- What strategies can be used to improve financial accounting literacy among SME owners in Kwara State?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
- H0: There is no significant relationship between financial accounting literacy and the growth, development, survival, productivity, and performance of SMEs in Kwara State.
- H1: There is a significant relationship between financial accounting literacy and the growth, development, survival, productivity, and performance of SMEs in Kwara State.
1.7 Significance of Study
It is believed that at the completion of the study, the findings will assist business owners in realizing the importance of accurate record-keeping and financial analysis. The study will also guide policymakers in designing financial education programs tailored for SME operators.
Furthermore, this research will benefit financial institutions by helping them recognize the gaps in financial literacy among entrepreneurs and develop support systems that will improve credit access and financial reporting.
Lastly, the study will serve as a reference for researchers and students who wish to expand their knowledge of financial literacy and SME development.
1.8 Scope of Study
The scope of this study is focused on the importance of financial accounting literacy on the growth development survival productivity and performance of SMEs. The research will cover selected SMEs across various sectors such as trade, manufacturing, services, and agriculture within Kwara State.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Financial Accounting Literacy: Refers to the knowledge and understanding of accounting principles and financial management practices necessary for recording, analyzing, and interpreting financial transactions for business success (Adeniyi, 2012).
Small and Medium Enterprises (SMEs): These are business entities that operate on a small or medium scale with limited capital investment and workforce, often serving as drivers of economic growth and employment generation (Afolabi, 2013).
Growth: The process through which an enterprise expands its operations, increases revenue, and enhances its market presence over time (Ogujiuba, 2014).
Development: Refers to the progressive improvement in business capacity, innovation, and competitiveness that results from proper management and financial planning.
Survival: The ability of an enterprise to sustain its operations and withstand financial or economic challenges over time through sound decision-making and management practices.
Productivity: The measure of efficiency with which a business converts resources such as labor and capital into goods or services that generate profit.
Performance: Refers to the overall success of an organization in achieving its objectives, measured through indicators such as profitability, growth rate, and operational efficiency (Oladejo, 2010).
…
