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FINANCIAL RECORD KEEPING SYSTEM AND PERFORMANCE OF SMALL & MEDIUM ENTERPRISES: A CASE STUDY OF NAKAWA DIVISION

ACKNOWLEDGEMENT

I owe much tribute to Almighty God for giving me ‘’life worth living’’ and thank Him for giving me strength to accomplish this work.

Special thanks go to my supervisor Dr. Owino Phillip who sacrificed his time and provided me with professional guidance indeed his criticism and parental approach made my research a success. 

I appreciate the efforts, encouragement advice and assistance rendered by my family members, relatives and beloved son Prince Carlton Bbosa.

I thank my friends; Zam Ibrahim, Nalumansi Josephine and Nakawunde Harriet among others for the support rendered to me during my whole course.

I extend special gratitude to the authors of the literature used in this report, thank you so much for the vital information.

TABLE OF CONTENTS

DECLARATION i

APPROVAL ii

DEDICATION iii

ACKNOWLEDGEMENT iv

LIST OF TABLES viii

LIST OF FIGURES ix

ABSTRACT x

CHAPTER ONE 1

INTRODUCTION 1

1.1 Background to the study 1

1.2 Statement of problem 3

1.3 Purpose of the study 3

1.4 Specific objectives 3

1.5 Research questions 3

1.6 Scope of the study 4

1.7 Justification of the study 4

1.8 Significance of the study 4

CHAPTER TWO 5

LITERATURE REVIEW 5

2.0 Introduction. 5

2.1 Financial record keeping 5

2.2 Benefits of record keeping in SMEs 6

2.3 Factors that account for the failure of SMEs in keeping proper books of accounts 8

2.4 Summary of the existing gap in the literature 11

CHAPTER THREE 13

METHODOLOGY 13

3.0 Introduction 13

3.1 Research design 13

3.2 Study Area 13

3.3 Study population 13

3.4 Sample size 14

3.5 Sampling method 14

3.6 Data collection methods and instruments 14

3.6.1 Questionnaire method 14

3.6.2 Interview method 15

3.7 Data collection procedure 15

3.8 Validity and reliability of research instruments 15

3.9 Data analysis 16

3.10 Data Presentation 16

3.11 Limitations of the Study 17

CHAPTER FOUR 18

DATA PRESENTATION, ANALYSIS AND INTERPRETATION 18

4.0 Introduction 18

4.1 Background information of the respondents 18

4.2 Kinds of financial records kept by small and medium enterprises’ operators 21

4.3 Benefits of proper records keeping in small and medium enterprises. 23

4.4 Factors that account for the failure of small and medium enterprises in keeping proper books of accounts. 24

4.5 Financial record keeping systems effect on performance of small and medium enterprises 25

CHAPTER FIVE 27

DISCUSSION, CONCLUSION AND RECOMMENDATION 27

5.0 Introduction 27

5.1 Discussion of findings 27

5.1.1 Kinds of financial records kept by small and medium enterprises’ operators. 27

5.1.2 Benefits of proper records keeping in small and medium enterprises. 27

5.1.3 Factors that account for the failure of small and medium enterprises in keeping proper books of accounts. 28

5.1.4 Financial record keeping systems on the performance of small and medium enterprises. 28

5.2. Conclusions 29

5.3. Recommendations 29

5.4 Areas for Further Research 30

APPENDICES 34

APPENDIX I: QUESTIONNAIRES FOR MANAGEMENT AND STAFF 34

LIST OF TABLES

Table 4.1: Age bracket of Respondents

Table 4.2: Kinds of financial records kept by small and medium enterprises’ operators

Table 4.3: Benefits of proper records keeping in small and medium enterprises.

Table 4.4: Failure of SMEs in keeping proper books of accounts

Table 4.5: Effect of financial record keeping systems on performance of SMEs

 LIST OF FIGURES

Figure 4.1: Gender of Respondents

Figure 4.2: Highest Level of education

Figure 4.3: Period of Work

ABSTRACT

The study was carried out in Nakawa division, Kampala district. The main purpose of the study was to examine the effect of financial record keeping systems on the performance of small and scale enterprises. The specific objectives included; to find out the kinds of financial records kept by SMEs, it’s benefits, factors that account for the failure of small and medium enterprises in keeping proper books of accounts and how financial record keeping systems affect the performance of small and medium enterprises. 

The literature review was done basing on study objectives and a descriptive research design was used where both qualitative and quantitative approaches of data collection were adopted on 52 respondents using questionnaires. 

As per the study, majority of SMEs do not keep proper records of their businesses, hence, inability to measure financial performance and position of their businesses. The factors that accounted for the failure of SMEs to keep proper records among others include: lack of knowledge in accounting; expensive to hire qualified accounting staff; exposing financial information for tax; time consuming and inability to quantify the value of proper records keeping and lack of internal control procedures. It was also observed that the volume and value of transactions can influence records keeping behavior of SMEs owners. 

The study, therefore, recommends that the National Board for Small Scale Industries (NBSSI) should assist small scale business operators to keep proper records by organizing training on proper record keeping for them. The government agencies should sensitize the small scale business operators about the need to keep proper records. A law on financial records of small scale businesses should be passed and strictly enforced. The regulatory bodies should also provide simple accounting manual for the businesses.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Record keeping is clearly essential to good administrative decision-making, consistency and fairness, impartiality, continuous learning and improvement, and effective risk management (Tacy,2004). Quality record keeping is critical and important for any kind of enterprises. Financial record keeping is critical and important for any kind of enterprise. It serves as a means of assessing business financial performance and setting standards and making corrective measures in order to make up for past losses. Therefore, financial record keeping can be said to be a tool used in performance management.

Financial record keeping is defined as procedure used by firms to make records of business transactions. The American Institute of Certified Public Accountants defines financial record keeping as the analysis, classification and recording of financial transactions in books of accounts to permit informed judgement and decision making by the users of the information (Saleem,2008).

Williams et al. (2008) financial record keeping is about the maintenance of a history of one’s activities, as financial dealings, by entering data in ledgers or journals, putting documents into files. The importance of financial record keeping can therefore not be overemphasized both in our contemporary lives and particularly in our businesses. From properly kept financial record a person can at any time ascertain: what property he possesses, what amount he owes and to whom, what profit he has made or what loss he has sustained for any given period and the manner in which the profit and loss has risen, and the amount of his capital or deficiency. If no records are kept, it will be difficult to find accurate net profit. Under such circumstances, tax authorities may overestimate the profits and thus a trader will suffer for not having kept the business records. 

In absence of proper business records, the trader will find it difficult to submit the true position to the court in case he becomes insolvent. Keeping of records help the trader to make future business plans and policies; also, it was difficult to ascertain and fix the price of business to be sold or disposed-off if no records are kept. Finally, in spite of the best memory, it is beyond the capacity of a trader to remember all the business dealings with back references(Williams et al, 2008).

Small and medium enterprises (SMEs) comprise the largest proportion of businesses in most economies and frequently offer the greatest potential for job creation(Asquith et al,1994). The Ugandan government has placed a lot of emphasis on the development of SMEs as a means of encouraging self – employment, poverty reduction and accelerating economic growth. SMEs contribute to the employment opportunities in Uganda and over 40% of the GDP. Despite their significance, recent studies show that 60% of the SMEs fail within the first few months of operation (Uganda Bureau of Statistics, 2007). It is hard for SMEs to access finances from the financial institutions since they lack financial records as a requirement (Williams et al.,2008). 

Performance of a business, that is how well or poorly a business is doing viz-a viz owner- manager set objectives is crucial to business success. Once a business is not performing well, certain danger signals such as poor profit growth will manifest. Murray(1994) argues that “many small and medium enterprises owners either do not understand the significance of these warnings or tend to optimistically believe that things will get better on their own”. 

Poor performance of SMEs results into high failure rates: 75% of them fail within the first two years (Flusche et al, 2001) and 95% fail within the first five years (Gerber, 2003). Studies by Elkan (2008), Liedholm and Mead (2003) in Southern and Eastern Africa show that most small businesses stagnate at start-up size while Tulip and Bitekerezo (2003) further note that most small businesses in Uganda fail in the short run: one out of every two fails within the first two years of operation. 

While the performance levels of small businesses have traditionally been attributed to general managerial factors, such as manufacturing, marketing and operation, accounting systems may have a strong impact on the survival and growth of SMEs. The Financial Accounting Standards board (FASB, 2009) bases measurement of quality financial reporting on relevancy and reliability. However, financial reporting is not commonly practised in SMEs. Consequently, in practice, relevancy and reliability measurement of financial information in SMEs is based on financial record keeping (type of, adequacy and update of financial records). SMEs are less capital intensive in Uganda likewise in some parts of Africa which is provided by the informal sector of the economy.

1.2 Statement of problem

The causes of business failure includes management incompetence, lack of experience , lack of capital, over investment in fixed assets, poor customer credit practices, unplanned expansion and improper attitudes such as laziness, extensive vacation and unethical behavior. Some of the researchers did not link business failure to lack of proper record keeping. However, in recent times, increased attention has been focused on the effect of inadequate financial recordkeeping as a source of business failure. Thus, the study sought to examine the effect of financial record keeping systems on the performance of small and scale enterprises.

1.3 Purpose of the study

The study sought to examine the effect of financial record keeping systems on the performance of small and scale enterprises. A case study of Nakawa Division, Kampala district.

1.4 Specific objectives

Specifically, this study seeks to achieve the following objectives: 

1. To find out the kinds of financial records kept by small and medium enterprises’ operators. 
2. To examine the benefits of proper records keeping in small and medium enterprises.
3. To determine the factors that account for the failure of small and medium enterprises in keeping proper books of accounts.
4. To assess how financial record keeping systems affect the performance of small and medium enterprises.

1.5 Research questions

1. What are the kinds of financial records kept by small and medium enterprises’ operators?
2. What are the benefits of proper records keeping in small and medium enterprises?
3. What factors account for the failure of small and medium enterprises in keeping proper books of accounts?
4. How do financial record keeping systems affect the performance of small and medium enterprises?

1.6 Scope of the study

The study was carried out in Nakawa division, Kampala district. The main purpose of the study was to examine the effect of financial record keeping systems on the performance of small and scale enterprises with specific emphasis on finding out the kinds of financial records kept by SMEs, it’s benefits, factors that account for the failure of small and medium enterprises in keeping proper books of accounts and how financial record keeping systems affect the performance of small and medium enterprises. This took a period from March to October, 2017.

1.7 Justification of the study

The SMEs play a great role in Uganda economy. Despite their significance, the past statistics has shown that majority of the SMEs do not last for long after their establishment (Bowen, 2009). One major factor that has been blamed for the failure of the SMEs is poor or lack of knowledge in the business management by the entrepreneurs (Germain, 2010). Very few researches have been conducted in this area (Nakawa division). A study to investigate the extent to which the SMEs owners or managers keep records of their business operations will therefore be justified. In essence it is cost effective for this study to be conducted. 

1.8 Significance of the study

It the findings of this study would provide a more comprehensive picture of the current status of SMEs in terms of purpose of recordkeeping. 

A more comprehensive picture would, in turn, lead to a better understanding of this phenomenon and thereby the development of more effective strategies to aid effective operation of the SMEs. 

To the researcher, the study findings would contribute an award of a bachelor degree of Kyambogo University. 

To the policy makers, the study findings would bring forward remedies that can be applied to improve on their financial record keeping.

The findings would further lead to an increased knowledge base to future academicians and researchers.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction.

This chapter consisted of related literature. It based on the research objectives; to find out the kinds of financial records kept by small and medium enterprises ‘operators; to examine the benefits of proper records keeping in small and medium enterprises; to determine the factors that account for the failure of small and medium enterprises in keeping proper books of accounts and to assess how financial record keeping systems affect the performance of small and medium enterprises.

2.1 Financial record keeping

Financial record keeping is influenced by so many factors including the type or nature of business, type of information required, and volume of activities and others. Many business owners choose to use software to keep track of various aspects of their business, and resources are provided here to help you institute computer automation. The key to taking full advantage of accounting software is to save time and give freedom to concentrate on running your business

Revenue and Expense; a business will use a revenue and expense journal or a ledger to keep track of records of how much money is going out, where it is going, what is coming in. A revenue and expense journal is used by most small businesses and is single –entry accounting, recording receipts and expenditures only. Double entry accounting involves a ledger and necessitates that each activity be recorded as a debit and credit on your books. In the past it was thought all businesses need to use the more cumbersome method of double entry, but the single entry system is now used by many business owners. Single – entry accounting can be kept on paper or computer. A ledger is used to record every transaction twice based on the idea that each transaction has two halves that affect your business. For example, if you sell an item, your book will reflect decrease in inventory (debit) and inflow of payment (credit).

Cash Expenditures; cash spent in an organization needs to be accounted for if you want to record all business expenses in a given year. There are at least two ways to do this: write yourself reimbursable cheque or keep a petty cash record. If you choose to pay yourself back with a cheque, simply keep track of all cash receipts and total them weekly , bi-weekly or monthly , depending on your volume of expenses. Keep a log of each category of expenses, for tax purposes; write yourself a cheque for the total. Write cash reimbursable in your cheque register to differentiate this from taxable income. Alternatively, you can keep a petty cash record by writing a cheque to petty cash and keeping a log of each expense paid out of petty cash.

Inventory Records; keeping your inventory records will enable business owners to prevent pilferage, keep inventory holdings to a minimum, and track buying trends among other things. The crucial inventory information needs to capture date purchased, stock number of items purchased, purchased price, date sold and sale price.

Accounts Receivables; products or services are paid for at time of delivery, an account receivable tracking system is needed. However, if services are provided or products for which people pay at a later date, the accounts receivable record keeps track of what is owed to you. Business owners can monitor accounts receivable by holding on to a copy of all invoices sent out or by keeping an account receivable record. Either of the ways, the information is needed to capture invoice date, invoice number, invoice amount, terms, date paid, amount paid, and the name of the entity being billed.

Accounts payable are debts owed by an organization for goods and services . Keeping track of what is owed and when it is due will enable the organization to establish good credit and hold on to your money as long as possible. Business owners with few accounts payable items use accordion file folders labeled with dates to keep track. Larger companies use account payable paper records organized by creditor. Regardless of the system you choose, you should retain the following information about accounts payable: invoice date, invoice amount, invoice number, terms, date paid, amount paid, balance (if applicable), and clients’ names and address.

2.2 Benefits of record keeping in SMEs

Since financial record keeping involves keeping accurate records of companies’ spending and revenues. Some small business owners decide to do their own financial record to save on costs while others prefer to hire a trained accountant. Some of the benefits are as follows:

Financial Comparison; a comprehensive record keeping system allows a business owner to analyze spending and revenue at any particular point in time. The data can be grouped by the week, month, quarter or year to be analyzed and compared to past years. This is one way that business owner can discover ways to cut back on company’s spending and improve profitability. The books of accounts maintained correctly and in a proper manner helps a lot of making comparison of the current year profit with that of the previous year and tell significant factors as to why profit is more or less in comparison to that of the previous year.

Budget Monitoring; Companies require an accurate report of current spending and revenue to help compare actual results with projection in the annual budget. A record keeping system facilitates up- to- date company financial information that can be cross- checked with the budget to make sure that the company is not over spending. Financial record keeping also identifies instances of under –spending so the company may find new uses for the extra money to help productivity.

Tax Deduction; a financial record keeping system makes it easier to report revenue for tax filings at the end of the year, but a comprehensive spending profile can also help you find tax deduction that will lower your tax burden. If you do your own record keeping , you need to stay updated on tax laws and changes in the tax code that may allow you take deduction to help offset the costs of doing business. Without a record keeping system, you would have no documentation to back up your deduction. Properly prepared accounts help a business man in dealing with various tax regulating authorities like sales tax, central excise, income tax etc. These require filing of periodic returns and submitting proof of activities. The records maintained under the accounting system help in preparing such returns.

Payroll; Record keeping services include checking the accuracy of each payroll period to make sure that each employee receives the proper amount , an especially important function in organizations that pay bonuses, sales commission and supplemental payment based on a percentage of revenue. Confirming payroll numbers keeps employees satisfied with their pay and prevents the company from over or underpaying payroll taxes as well.

Information Regarding Performance and Position; The final account reveals how much profit has been gained or loss suffered during the period. The balance sheet or position statement also depicts the exact financial position of a business by showing assets and liabilities on a particular date.

Legal Obligation; One of the advantages to record keeping is that you are meeting a legal obligation to maintain financial reports for your company. You must track and document revenue and expenditure in order to pay appropriate taxes each year. Not maintaining company books can result in government penalties if you are audited and asked to produce evidence of your company’s business transactions. Properly prepared books of accounts can be produced as a proof of matters. This is admitted by the courts as evidence in legal matters.

Helpful in raising loans; Every business needs additional funds for its growth. This requirement is met by commercial banks and other financial institutions in form of loans. These institutions before granting loans , screen various statements prepared under accounting information such as final accounts, fund flow statements , etc.

Accountability and Transparency; Another advantage of keeping financial records is accountability and transparency. It creates accountability with customers, since you are able to look at previous transactions to verify prices and payments made. It also creates accountability among business partners, since authorized partners may access the company’s books to review revenues and expenditures, or to scan for signals that money is being used or reported inappropriately. It creates greater transparency; companies can open their books to potential investors interested in documentation of the business financial health.

Assistance to various parties; Accounting assists and guides the management or owners in planning business activities taking certain decision where choice of alternatives is involved and controlling the business operation to ensure the achievement of goals.

Minimization of Errors and Frauds; Proper accounting system not only checks errors and frauds, but also minimizes them. As in double entry system of book keeping, business transactions are recorded at many places to minimize frauds.

2.3 Factors that account for the failure of SMEs in keeping proper books of accounts

The factors that account for improper records keeping has been identified as illiteracy, lack of qualified personnel and hire cost to hire a consultant (Maseko & Manyani, 2011).  They disclosed that the most predominant challenge is costs constraints, followed by inadequate accounting skills of manager and owners of SMEs. These studies believed that most business owners and employees have no vocational and technical training and were therefore inexperienced as far as record keeping was concerned and that considering the size of the SMEs, the owners deemed it waste of resources to employ qualified accountants. SMEs are reluctant to maintain proper books of accounts as they think there is no need to keep accounting records and believe that, it would even expose their financial position for tax purposes (Amoako, 2013). 

Musah & Ibrahim (2014) were also of the view that owners of these businesses feel reluctant to record their daily activities (revenues and expenditures) because of the low worth, returns and performance of their businesses. They argued that the owners, therefore, tend to rely on their memory and do not necessarily see the need to maintain books of accounts. 

Poor or lack of records keeping by small scale businesses in the country would not only limit their ability to accurately and reliably measure their financial performance and position, but also deny the government the right tax revenue from them. Other users such as customers, suppliers, financial institutions, existing and potential investors would find it difficult to make financial decisions due to improper or non-availability of financial records (Musah & Ibrahim, 2014).

SMEs Owners have many tasks. One of the most important and vital to the success of their business is keeping good records. According to Howard (2009) many small businesses fail to keep adequate records. This leads to major problems and quite possibly the closing of the business. Evidence shows that keeping good records helps increase the chances of business survival. In essence, the SMEs owners or manager should be personally involved in record keeping (Sian, 2006). Good record keeping will make them more aware of what is going on in their businesses and it will save them money. 

The system used to record information may vary from business to business, but the principles are the same (Howard, 2009). According to Walistedt (2006) one must record all monies coming and going out of the business. The first action to take is to identify financial transactions. Look at how the business operates and identify how financial transactions are processed. The question the owner or manager need to ask is how he invoice customers and how the inventory is purchased. This is followed by making a list of these transactions and the paperwork that supports them. One has to put a system in place for records and set up and operate a system that includes the following: Sales that is used to record invoices relating to sales, Purchases that is used to record invoices relating to purchases, Cash transactions that is used to record cash payments and receipts, Returns that is used to record credits given to customers and for goods returned and the General that is used to record other transactions. 

Another key action of the manager or owner of the SMES is to identify paid and unpaid items. One has to set up two files. One used to store the paid items and the other to store unpaid items. Decision should also be made when to write up entries where one has to set up a procedure for recording entries. Information should be recorded consistently and at set times. Daily is ideal, but one may be able to do it weekly or monthly, depending on the amount of transactions. One has to make sure that the records are being followed and set up and operate systems for checking and monitoring the recording of financial information. It is essential to make sure that an invoice has been issued for every transaction; that a receipt is requested and obtained for every purchase (Zhou, 2010). It is also imperative to reconcile frequently once a month, reconcile the petty cash against receipts and even the bank statements. This will enables to check that all payments have reached the owner of the enterprise account.

In many countries, the laws mostly require that the Enterprises prepare financial statements and, often, have them audited (EC, 2008). This requires that the owners of the enterprises have some knowledge of bookkeeping and accounting. Ismail and King (2007) conclude that the development of a sound accounting information in SMEs depends on the owners’ level of accounting knowledge. Research has shown that majority of the SMEs owners do not have the required accounting knowledge and therefore few able owners use professional firms to account for their business (Keasy and Short, 2000). However, Jayabalan and Dorasamy (2009) argue that the high cost of hiring professional accountants leaves the SMEs owner or managers with no option but to relegate accounting information management. Wichman (2003) concludes that accounting and marketing pose major challenges to management of SMEs and recommends that managers or owners in SMEs must learn about record keeping and accounting.

According to research, there are some basic financial records SMEs managers or owners need to keep for the success of a business. These basic records will normally include the sales day book (sales journal), purchases day book (purchases journal), cash receipt book, cheque payments book, petty cash book, general journal, nominal ledger, debtors’ ledger and creditors’ ledger. These according to McMahon, (2009) must be kept and maintained in a sound accounting arrangement. In essence, one has to ensure proper record of the following financial records: (i) a record of all business sales, with copies of any invoices one has issued, (ii) a record of all one’s business purchases and expenses, (iii) invoices for all business purchases and expenses, (iv) details of any amounts one personally pay into or take from the business and (v) copies of business bank statements Entrepreneur or an accountant will use these records to create a profit and loss account which shows the sales income one received, and the expenses one paid, and what profit/ loss one actually made.

Furthermore, since businesses are different, there are many specific types of detailed records that may need to be kept. Some examples of records one should keep include: cash book petty cash book, order notes and invoices, copy sales invoices, details of any other business income received, details of any private money brought into the business, till rolls or other form of electronic record of sales, details of any other income, any cash taken out of the till to pay small business expenses, bills and invoices for purchases and expenses, a record of stock on hand at the end of the year and all bank and building society statements, pass books, cheque stubs and paying-in slips which include details of business transactions. 

Perhaps cash flow is one of the major records in any enterprise. Germain (2010) asserts that small businesses must consider maintaining a positive cash flow as a vital element. A pertinent question one might ask at this point is; to what extent do the owners and managers of SMEs keep good records of their business transactions? It would be helpful to curried out a study in endeavor to answer this question.

2.4 Summary of the existing gap in the literature 

Perhaps an ideal way to conclude the literature reviewed in this chapter is to in summary form highlight the major assertions and research findings and then comment on gap that this study endeavours to bridge. To begin with, researches on the contribution of SSEs to the Uganda economy reveal that SSEs play a vital role to creation of jobs and reduction of poverty in the country. The findings of the researches show that the Government of Uganda recognises this role and has made effort in terms of policies and financial support to aid the sector. It has also been proven that most of the SSEs in the country, despite the government support through favourable policies and bank support through removing barrier that are deterrent to access credit, these enterprises fail within few months of their establishment. Scholars and researchers also asserted that if business transaction records are well kept then the SSEs can succeed.

The research findings and the assertions by scholars presented in this chapter could be said to be very supportive to the growth of SSEs sector. However, unless research were conducted to specifically find out why even after the banks and government intervention majority of SSEs fail, then one cannot correctly argue out that much help to support this sector has been done. One kind of this research which was actually the major concern of this study was that of recordkeeping. A conspicuous gap this study endeavoured to bridge was that of the extent to which SSEs entrepreneurs kept accurate records of their business transactions.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the research methodology which include; Research design, study population, study area, instruments of data collection, data processing, Study  instruments, sources of data and data  analysis.

3.1 Research design

Thornhill et. al (2003) defined a research design as a general plan on how the researcher plans to answer the research question. Specifically, the case study was used. A case study is an empirical enquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident and it relies on multiples sources of evidence (Yin, 1994). A case study research design, combined with both quantitative and qualitative methods was used for this study. According to Baron (2011), qualitative research design helps to capture qualitative data, based on qualitative aspects that may not be quantified. It aids in discovering the motives and desires or what people think and how they feel about a given subject or situation. This method involves an unstructured approach to inquiry and allows flexibility in all aspects of the research process. According to Silverrman (2001), quantification gives greater confidence in the accuracy of conclusions derived from qualitative data; and it gives the reader a chance to think through the data on their own to cap on the researcher’s findings. The research used this method because it produces information only on the particular cases studied.

3.2 Study Area

The study was carried out in Nakawa division, Kampala district. The selection of the study area is because of the easy accessibility.

3.3 Study population

Study population is a complete set of individuals, cases or objects with some common observable characteristics. The population included employees holding familiar and unfamiliar titles but are deemed to be suitable stakeholders for generating relevant data to the problem which was under investigation

3.4 Sample size

The sample size consisted of 50 respondents from the study area. It is determine based on the Krejcie and Morgan’s sample size calculation which same as using the Krejcie and Morgan’s sample size determination table. The sample size determination is derivative from the sample size calculation which expressed as below equation (Krejcie and Morgan, 1970). 

The study used a sample size selected 52 respondents because it was enough for the study to obtain reliable information. In addition, it helped the researcher to finish her study in time.

3.5 Sampling method

According to Baron (2011), this is a definite plan determined before data collection for obtaining a sample from a given population. It involves three decisions: who to be sampled, how many people to sample, and how to obtain the sample. Simple stratified random sampling was then used to select samples from the population strata. It’s a method in which the population is divided into a number of divisions and a sample is drawn from division and such sample makes us the final sample. This technique was employed since it eases the making of proportionate samples, and therefore meaningful, comparisons between homogeneous sub-groups. 

The study also employed purposive sampling technique. Silverrman (2001), purposive sampling involves deliberate selection of particular units of the population for constituting a representative sample. The researcher used purposive sampling because it saves time, money and effort. It is flexible and meets multiple needs and interests. It enables researchers to select a sample based on the purpose of the study and knowledge of a population.

3.6 Data collection methods and instruments

3.6.1 Questionnaire method

The researcher used the questioning method whereby she drafted to respondents structured questions. This method was used because some respondents may have no time to sit down and answer during interviews.

A questionnaire was used and this was in form of close ended in nature and this allowed the study respondents to fill the questionnaire in the study field. The questionnaire method of data collection was used because of being cheap and that the method collects responses with minimum errors and high level of confidentiality.

3.6.2 Interview method

An interview is a conversation where questions are asked and answers are given. Interview refers to a one-on-one conversation with one person acting in the role of the interviewer and the other in the role of the interviewee.

An interview guide was drafted with a set of questions that the researcher asked during an interview and this was structured (close ended) in nature. Interview guide was used by the study since the methods helps in the collection of more data as it allows the interaction of both the researcher and the respondents. 

3.7 Data collection procedure

The study observed all procedures followed in research. Using the letter of introduction obtained from the Research Coordinator, School of management and Entrepreneurship, the researcher was introduced to every respondent reached at, fully explaining the purpose of research. After getting their consent, she set a program with the respondents on when the questionnaires was administered and date for the interview sessions was set. The researcher also built the confidence of the respondents by assuring them that their views was confidential and was used only for academic purposes.

3.8 Validity and reliability of research instruments

There are no scientific principles which would guarantee a valid and reliable research instrument, but there are ways in which this can be pursued. First, the items in the research instruments should be based on prior research whenever possible. Due to this, in this study most of the questions were to be based on prior research. Secondly, the questionnaire should be pre-tested (Malhotra & Birks 2007).

3.8.1 Validity

In order to ensure validity the questionnaire was made clear and understandable, the questionnaire was first discussed by the researcher with the supervisor; this included careful choice of words, order and structure of questions. After receiving the questionnaires, manual editing was done, followed by coding. Frequency count of different provisions was done and this gave the number of occurrences and percentages out of total occurrences for different responses. And lastly simple conclusions were drawn from the given percentages and numbers. 

3.8.2 Reliability

Reliability is influenced by random error, that is, as random error increases, reliability decreases. The random error is the deviation from the true measurement due to the factors that have not effectively been addressed by the researcher. Mugenda study indicated that the questionnaire has to be well structured to achieve the purpose of the research thereby meeting the test of reliability. The reliability of the research instruments was tested through a pre-test. 

3.9 Data analysis

3.9.1 Qualitative Data 

Data processing involved editing raw data to detect errors and omissions, classifying data according to common features, and tabulation to summarize and organize it. Data analysis involved the qualitative approach of identifying the major themes arising respondents’ answers; assigning of codes to the themes: classification of the themes under the main theme; and integrating the responses into the report in a more descriptive and analytical manner.

3.9.2 Quantitative Data

Manual editing of questionnaires was done to eliminate errors. After coding, tabulation was done to clearly present various responses and the interpretation. Frequencies and percentages were used to portray statistics used to analyze and interpret the findings of the study. Data analysis was done using; correlation analysis to establish the relationships that exist between the variables. For ease of analysis, procedures within Statistical Package for Social Sciences (SPSS) were used.

3.10 Data Presentation

Presentation of data involved use of tables, pie-charts and graphs that was generated from the questions relevant to the study variables. Interpretation and discussion of the results was done as the researcher explained the strength of the study variables basing on the frequencies and percentages, charts and graphs. 

3.11 Limitations of the Study

The study was faced with a problem of not finding all respondents in the study area. The researcher however arranged with them to fix for her an appropriate time in order to collect reliable and valid information from them for the study.

The study also was expensive in terms of stationary. However the researcher mobilized funds from her friends and family members for the study to be completed successfully in time with the help of her supervisor.

The researcher further faced a problem of some respondents not providing information for the study as information relating to the study variables, however to this, researcher explained to them that the information was only for academic purpose while making them to understand the study variables. 

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION 

4.0 Introduction

The study looked at the financial record keeping systems and performance of SMEs. The findings from the study were presented and analyzed orderly based on the formulated study objectives. The chapter begins by presenting the biographic characteristics of respondents in terms of gender; age, education levels and period of work. The study there after discusses findings as per the formulated objectives of the study.

4.1 Background information of the respondents

Under the gender distribution of respondents, the study was delighted with both male and female respondents as shown in the table below;

Figure 4.1: Gender of Respondents

Source: Primary Data

According to figure 4.1 above, 51.67% majority of respondents were male while 48.33% were women. Males were found to be more active in participation which explains their highest number. The results indicate that both sexes are almost equally dominant in these business units, with each sex dominating a particular business unit as shown fig. 1. 

Table 4.1: Age bracket of Respondents

Source: Primary Data

From the table above, (46.2%) were in the age bracket of 31-40 of the respondents who were 41 and above, (17.3%) were in the age bracket of 18-30years. From the study majority of the respondents were in the age group between 31-40 years. This can be explained to the fact that it’s mainly the adults in this bracket that are married. 

Figure 4.2: Highest Level of education

Source: Primary Data

From figure 4.2 above, majority of respondents constituting 46.67% were diploma holders, 28.33% of them acquired 1st degree and 25% of the respondents had acquired secondary level. This implies that the selected sample had the capacity to avail the researcher with reliable and appropriate information on the topic under study.

Education is critical in understanding the dynamics and challenges businesses encounter and as such it is expected that if an SME has a reasonable educational background, it will undoubtedly enable the owner to either directly or indirectly implement the necessary accounting and control systems (Mbroh & Attom, 2012). This assertion holds especially, if an SME intends to maintain adequately relevant financial records for effective business decision-making and increased performance.

Figure 4.3: Period of Work

Source: Primary Data

According to the figure 4.3 above, majority of the respondents (50%) had been in the organization for less than 2years while 40% of them had been in the organization from 2-5years and 10% of the respondents have stayed in the organization for 6-10years. This shows that the working experience for the categories of workers was enough to get conclusive results, since its assumed that by virtue of their positions, they know about the variables under study.

4.2 Kinds of financial records kept by small and medium enterprises’ operators

Objective one was to identify the kinds of financial records kept by small and medium enterprises’ operators. Respondents were asked to show their level of agreement on the objectives of store management. The results were obtained and are presented below;

Table 4.2: Kinds of financial records kept by small and medium enterprises’ operators

Source: Primary Data

According to the table above, most of the respondents (94.2%) of the respondents agreed with we keep receipts, 1.9% of them disagreed and only 3.8% of them were not sure. This implies that SMEs in Nakawa division keep receipts.

Table above also indicate that 70.1% of the respondents agreed with we keep payment vouchers, 25% of the respondents disagreed, 1.9% of the respondents were not sure. This implies that SMEs keep payment vouchers. 

The table indicates that, most of the respondents (59.6%) of them agreed, 34.7% of them disagree, 5.8% of the study respondents were not sure. This implies that cash books are also kept in most SMEs in Nakawa division. 

Table above show that majority of study respondents (63.5%) agreed with we also keep sales day books, 36.5% of them disagreed while no respondents were not sure. This implies that most of SMEs in Nakawa division keep sales day book.

Findings also indicate that majority of the respondents (69.2%) agreed with the organization keeps petty cash, 30.7% of the study respondents disagreed, no respondents were not sure. This implies that petty cash is one of the financial kept by most SMEs in Nakawa division.

Table above also shows that majority of the study respondents (86.5%) agreed with we also make invoices, while 13.5% of them disagreed, no respondents were not sure implying that most SMEs in Nakawa division make invoices. 

The study findings as indicated in the table above indicate that majority of the respondents (96.2%) agreed with we keep income statements, while 3.8% of them disagreed, no respondents were not sure. However, most of the responses were positive implying that most SMEs in Nakawa division keep income statements.

The study findings as indicated in the table above, majority of the respondents (71.2%) agreed with we also make statement of financial position, 28.8% of the respondents disagreed, no respondents were not sure. However, from the results most of the respondents were on a positive side implying that statement of financial position are made and kept by most SMEs in Nakawa division.

Finally, study findings as indicated in the table above indicate that majority of the respondents (86.7%) agreed with we have ledger accounts, while 17.3% of them disagreed, no respondents were not sure. However, most of the responses were positive implying that most SMEs in Nakawa division keep ledger accounts.

At least theoretically, the specific types of financial records held by a business entity have a lot of influence on the respective business in one way or another (Ismail & King, 2005; Grant et al, 2008; and Barker, 2003). Similarly, there are several components of relevant financial records; from receipts and invoices through the day books, the ledgers and then the final accounts (income statement and statement of financial position especially. In their view, Mbroh and Attom (2012) observed that underlying the success of a business enterprise is the establishment and application of controls by the owners or management in addition to the systematic record keeping of business transactions, which, at the end of the period, keeps the owner well-informed about the performance of the business.

4.3 Benefits of proper records keeping in small and medium enterprises.

The study also sought to examine the benefits of keeping proper financial records of a business. To achieve this objective, the benefits were presented on likert-type of scale from strongly disagree (1) to strongly agree (5). The result is presented in the table 4.3.

Table 4.3: Benefits of proper records keeping in small and medium enterprises.

Source: Primary Data

Even though not all respondents keep proper books of accounts, they recognized that there are numerous benefits of keeping proper books of accounts. Results from Table 4.3 revealed that, the respondents unanimously strongly agreed that, it facilitates the determination of financial position of a business for the purpose of decision making and planning (75%). This confirms the study of reference (Ademola, Samuel, & Ifedolapo, 2012), who observed that financial records keeping enable businesses to assess their financial performance and position over a period of time. This evidence implies that if SMEs owners are trained on how to keep records, they was willing to do it hence leading to the success of the business.

They also agreed that, having access to credit facilities (82.7%) agreed, payment of appropriate tax (88.5%) agreed, facilitating management of creditors and debtors (57.7%) are the other benefits a business can derive from keeping proper records of accounts. It is obvious that the business owners know that when they keep proper records of accounts, they was able to secure loan from financial institutions, pay appropriate tax, manage their debtors and creditors properly and to also plan well and take good decision for their businesses. If the owners appreciate the importance of keeping proper records of accounts, why should they fail to keep records? The next section answers this question.

4.4 Factors that account for the failure of small and medium enterprises in keeping proper books of accounts.

This section examines the factors that account for the failure of SMEs to keep proper books of accounts. The factors were presented on likert-type of scale from strongly disagree (1) to strongly agree (5). Table 4.4 depicts the results.

Table 4.4: Failure of SMEs in keeping proper books of accounts

Source: Primary Data

It can be deduced from Table 4.4 that, the most serious factors that account for the failure of SMEs in keeping proper financial records are lack of knowledge in accounting (100) agreed and expensive to hire qualified personnel (100) agreed. This is because most SMEs operators are not educated and they believed that hiring qualified persons to be in charge of keeping accounts of their businesses would increase their overheads cost. This confirms the assertion of reference (Abdul-Rahamon & Adejare, 2014) who argued that the most predominant challenge is costs constraints, followed by inadequate accounting skills of manager and owners of SMEs. 

The respondents also agreed that, exposing business for tax (78.8%), time consumption (98.1) and ignorance of the value of financial records keeping (88.5) are the other key factors that account for their failure to keep proper records. also argued that If the SMEs owners are to appreciate the relevance of financial records keeping, education on these factors should be given to them. This would improve their behavior towards financial records keeping.

It was also observed that, majority (47) representing 90.4% of the respondents are running their businesses without any structured and effective internal controls. The roles of employees were not clearly defined and documented and there is no Segregation of incompatible duties. In our view, this is also a contributing factor to the failure of SMEs to maintain proper financial records. Any well-designed and effective set of internal control procedures guarantees good financial control and records.

4.5 Financial record keeping systems effect on performance of small and medium enterprises

This section established the effect of financial record keeping systems on performance of SMEs. The relationships were presented on likert-type of scale from strongly disagree (1) to strongly agree (5). Table 4.5 depicts the results.

Table 4.5: Effect of financial record keeping systems on performance of SMEs

Source: Primary Data

According to the table above, most of the respondents (94.2%) of the respondents agreed with financial record keeping improves on cash flow management, 1.9% of them disagreed and only 3.8% of them were not sure. This implies that SMEs in Nakawa division, financial record keeping have improved on cash flow management.

Table above show that majority of study respondents (63.5%) agreed with improves on budget estimations, 36.5% of them disagreed while no respondents were not sure. This implies that most of budget estimations of SMEs in Nakawa division has improved as a result of keeping financial records.

Table above also shows that majority of the study respondents (86.5%) agreed with company assets are identified, while 13.5% of them disagreed, no respondents were not sure implying that keeping financial records have helped most SMEs in Nakawa division to identify their assets. 

The study findings as indicated in the table above indicate that majority of the respondents (96.2%) agreed with Profit position is identified, while 3.8% of them disagreed, no respondents were not sure. However, most of the responses were positive implying that most SMEs in Nakawa division have been able to identify their profit position as a result of keeping financial records.

Results in table above indicated that majority of the respondents (86.7%) agreed with liquidity of the company is identified, while 17.3% of them disagreed, no respondents were not sure. However, most of the responses were positive implying that most SMEs in Nakawa division have been able to identify their liquidity as a result of keeping records.

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATION

5.0 Introduction

The data was analyzed using description and percentages. This chapter therefore presents the discussion of the study in sub-sections on the basis of the specific objectives set to achieve as analyzed in chapter four, the conclusion, and recommendations. 

5.1 Discussion of findings

5.1.1 Kinds of financial records kept by small and medium enterprises’ operators. 

The first objective of the study was to find out types of financial records the SMEs kept of their business operations. The findings showed that some of the SMEs owners/managers kept various records which included receipt, income statements, ledger accounts, payment vouchers. In addition to keeping these, some of the SMEs prepared statements on incomes, statement of cash flow, statement of financial position. Some of the enterprises however did not keep any records of their business transactions and they did not also prepare the accounting statements.

5.1.2 Benefits of proper records keeping in small and medium enterprises.

Findings from Table 4.3 revealed that, the respondents unanimously strongly agreed that, it facilitates the determination of financial position of a business for the purpose of decision making and planning (75%). This confirms the study of reference (Ademola, Samuel, & Ifedolapo, 2012), who observed that financial records keeping enable businesses to assess their financial performance and position over a period of time. This evidence implies that if SMEs owners are trained on how to keep records, they was willing to do it hence leading to the success of the business.

They also agreed that, having access to credit facilities (82.7%) agreed, payment of appropriate tax (88.5%) agreed, facilitating management of creditors and debtors (57.7%) are the other benefits a business can derive from keeping proper records of accounts. It is obvious that the business owners know that when they keep proper records of accounts, they was able to secure loan from financial institutions, pay appropriate tax, manage their debtors and creditors properly and to also plan well and take good decision for their businesses.

5.1.3 Factors that account for the failure of small and medium enterprises in keeping proper books of accounts.

It can be deduced from Table 4.4 that, the most serious factors that account for the failure of SMEs in keeping proper financial records are lack of knowledge in accounting (100) agreed and expensive to hire qualified personnel (100) agreed. This is because most SMEs operators are not educated and they believed that hiring qualified persons to be in charge of keeping accounts of their businesses would increase their overheads cost. This confirms the assertion of reference (Abdul-Rahamon & Adejare, 2014) who argued that the most predominant challenge is costs constraints, followed by inadequate accounting skills of manager and owners of SMEs. 

In addition, other factors included exposing business for tax (78.8%), time consumption (98.1) and ignorance of the value of financial records keeping (88.5) are the other key factors that account for their failure to keep proper records. also argued that If the SMEs owners are to appreciate the relevance of financial records keeping, education on these factors should be given to them. This would improve their behavior towards financial records keeping.

5.1.4 Financial record keeping systems on the performance of small and medium enterprises.

Study findings also indicate that keeping financial records improves on cash flow management, budget estimations. Also assets, profit position and liquidity of most SMEs are identified.

These findings are in with Sian and Roberts (2009) who lamented that financial record keeping provides a wealth of information that is used by managers, investors, leaders, customers, suppliers and regulators. Analysis of its statement can highlight a company’s strengths and shortcomings to enable managers use this information to help improve performance. Also, Ismail and Zin (2008) had highlighted the crucial role of financial statement analysis by managers which is only made possible through proper financial record keeping. Similarly, Damant (2003) observed that financial record keeping conveys substantial information about the financial strength and current performance of an enterprise. That even though the financial records are primarily prepared for stakeholders, the respective business manager(s) find these records useful in decision-making.

5.2. Conclusions 

In addition, it is posited in this paper that, SMEs owners are ignorant of the value of keeping proper financial records and have perception that it is waste of time and resources to create finance and accounting department with qualified staff considering the scale of their operations. This may be true for businesses which are not generating much revenue. It could be argued from this evidence that, the volume and value of transactions can influence records keeping behavior of SMEs owners. This paper also uncovered that, most SMEs do not have a well-designed and effective set of internal control procedures and their failure to keep proper financial records could also be attributed to it. Any well-designed and effective set of internal control procedures guarantees good financial control and records. Cash control method is the best method for businesses who do not keep proper books of accounts. 

The overall effect of poor financial records keeping is that, the owners cannot perform financial analysis to establish trends to know whether their businesses are doing well or not. They cannot understand and predict business environment and this can lead to business failure. Effective working capital management would also be a problem for them without keeping good financial records. Inadequate or poor financial records affect users such as government agencies, financial institutions, investors and other users in decision making and economic planning. Avoiding or evading tax payment would have negative impact on the revenue generation capacity of the government since this sector forms larger part of the economy.

The study also concludes that keeping financial records improves on cash flow management, budget estimations. Also assets, profit position and liquidity of most SMEs are identified.

5.3. Recommendations 

In view of the conclusions drawn from the study, the following recommendations are provided to help enhance an accelerated and sustainable growth in small and medium enterprises and the economy as a whole. 

The Government and NGOs should assist the SMEs operators to keep proper records by organizing financial accounting training for them. 

Accounting software packages should also be made available by government to all institutions and also for sale at affordable prices for them to be able to purchase and use. 

A law on financial records of SMEs should be passed and strictly enforced. 

The regulatory bodies should come out with accounting manual and accounting standards for SMEs. Regular training on the application of accounting standards and manual should be organized for the operators of these businesses. They should ensure that SMEs comply with their directives and punish those who fail to comply. 

The local authority should have a reliable database for SMEs so that their activities can be monitored including proper records keeping. 

The cost of hiring qualified accounting staff should be moderate to enable the operators to seek for their services. Government can also play a role here by controlling the cost of hiring qualified accounting staff.

5.4 Areas for Further Research 

This paper focuses on financial records keeping behavior of SMEs. No provision was made in the paper to find out whether those SMEs owners or managers, who keep financial records, prepare their accounts in compliance with the International Accounting Standards (IAS). The researcher, therefore, recommends further research in this area. 

The study recommends that further studies should be carried out on whether SMEs have internal control procedures and whether they are well documented. 

This study suggests that a research be conducted to find out the best way to approach the training or to come up with a training programme for entrepreneurs which will not disrupting the operation of their businesses.

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APPENDICES

APPENDIX I: QUESTIONNAIRES FOR MANAGEMENT AND STAFF

Dear respondent, 

My name is WANYANA CHRISTINE and as partial requirement of the award of Bachelor degree of Administrative and Secretarial Science. I am carrying out a study on “Financial record keeping system and performance of small & medium enterprises: a case study of Nakawa Division”.  You have been selected to provide vital information that will facilitate the study. Your response was treated with utmost confidentiality. Thank you very much for your valuable time. 

Section A: Background information about the respondent 

Section B: kinds of financial records kept by small and medium enterprises’ operators

5. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD). 

Section C: Benefits of proper records keeping in small and medium enterprises.

6. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD).

Section D: Factors that account for the failure of small and medium enterprises in keeping proper books of accounts.

7.. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD).

Section E: Financial record keeping systems effect on performance of small and medium enterprises

8. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D), Strongly Disagree (SD). 

Thank you for your time