An Empirical Study Into the Used of Financial Accounting Inflection as Predictor of Business Failure, (a Study of SME in Fct Abuja)
CHAPTER ONE
OBJECTIVES OF THE STUDY
The Main Objective of the study is to proffer an empirical study into the use of financial ratios as a predictor of business failure. A case study of selected SMES in FCT Abuja; The specific objectives include:
- To assess the relevance of financial ratios on business organizations.
- To determine what are the various financial ratios used in small scale businesses.
- To establish what ratios are the significant predictors of business failure.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Using accounting ratios to predict failure
Public limited companies are obliged to issue financial statements every year, to provide information, which is “useful to a wide range of users making economic decisions” (Melville 2011: 37). From this information users could perform ratio analysis using a number of accounting techniques. These ratios are used to indicate the performance of a firm over different time periods. This research will focus on the predictive ability of accounting ratios on predicting business failure. William Beaver (1966: 72) wanted to test the ability of ratios as predictors of failure. To test this Beaver created a sample using failed firms from Moody’s industrial manual, which tend to be large U.S. corporations in terms of assets, which failed between 1954 and 1964 (1966:74). Although Moody’s list contained thousands of names, Beaver only used 79 firms, due to lack of information of other firms. His sample excludes smaller corporations and privately owned firms due to the availability of information causing a drawback. Beaver (1966: 74) acknowledges it is not advisable to have only large companies because, if two similar firms have the same ratio, the largest firm will be less likely to fail. He selected the non- failed firms from a list of 12,000 firms found in the news front magazine of leading U.S. Corporations. However, he only used the firms he paired up by industry and assets size (Beaver 1966:74) with failed firms. He wanted them to be as comparable as possible, to prevent biased results to increase the reliability of the results. However, Beaver (1966: 74) admitted some bias could be contained as the non-failed firms tended to be older, than failed firms. Beaver’s (1966:73) chosen failed firms included 38 different industries were many were from the manufacturing electric equipment sector. This shows a major constraint in the validity of Beaver’s findings, because even though in the years 1954 to 1964 the USA manufacturing sector was vast, the U.S. department of commerce (2004:18) shows that since 1980 to 2004 it has shrunk massively. This is due to the ever-increasing competition from countries such as Japan and China, but also because wages in the manufacturing are on average higher than in all other sectors in the U.S.
Beaver wanted this study to be a benchmark for future investigation as he was one of the first scholars in this field of study. He managed to make a huge impact to many academics, as a large amount of literature proceeded from his findings.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine an empirical study into the used of financial accounting inflection as predictor of business failure. selected SMES in FCT Abuja. forms the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain an empirical study into the used of financial accounting inflection as predictor of business failure. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges used of financial accounting inflection as predictor of business failure
Summary
This study was on an empirical study into the used of financial accounting inflection as predictor of business failure. Three objectives were raised which included: To assess the relevance of financial ratios on business organizations, to determine what are the various financial ratios used in small scale businesses and to establish what ratios are the significant predictors of business failure. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from selected SMES in FCT Abuja. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
Corruption increases the risk of business failure by causing an increase in the cost of doing business and also causing delays and inefficiencies in the decision-making process. A reduction in institutional corruption will have a considerable effect on the ability of businesses to survive and thrive. We further conclude that the menace of financial statement fraud significantly increases the risk of business failure. From the conclusions, it is recommended that the government must take serious measures to tackle the problem of corruption in order to ensure that the economic environment is safe for private businesses to navigate. It is important that corruption is reduced considerably. This can be achieved by encouraging businesses that are victims of corruption to report the erring officials and where such reports are received, investigating allegations of corruption against public officials and if found culpable handed the severest punishment as a deterrence to others in the future.
Recommendation
It is also recommended that regulators take proactive measures to reduce the incidences of financial statement fraud perpetrated in the country. Like in the case of corruption, where cases of the financial statement are reported, proper investigations are instituted and erring individuals severely punished as a deterrence to others in the future. Finally, it is recommended that business organizations review the processes involved in producing their financial statements in order to identify loopholes that may be exploited by fraudulent officials.
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