AN EMPIRICAL ANALYSIS OF FACTORS AFFECTING PROFITABILITY OF SMES
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AN EMPIRICAL ANALYSIS OF FACTORS AFFECTING PROFITABILITY OF SMES
INTRODUCTION TO CHAPTER ONE OF AN EMPIRICAL ANALYSIS OF FACTORS AFFECTING Profitability OF SMES
1.1 Background Of The Study
In a competitive marketplace, business owners must learn how to reach a reasonable level of profitability. Profitability is a ratio used to assess a company’s success. It is a critical component of a company’s financial reporting.
A company’s profitability demonstrates its ability to make earnings over a specific time period at a given rate of sales, assets, and capital stock. Understanding the profitability determinants is a critical aspect in assisting managers in building an effective profitability strategy for their organisation (Gitman and Zutter, 2012).
Firm profitability, according to Yazdanfar (2013), is an important requirement for long-term firm survival and success. The firm’s profitability determinant has a substantial impact on its achievement and other financial goals.
These elements are significant because they influence economic growth, employment, innovation, and technological development.
The company’s principal purpose is to maximise profitability. Without profitability, a company cannot attract outside money and will not exist in the long run.
Knowing and comprehending firm profitability will provide feedback for the firm. The company can identify a policy that should be implemented to fix the problem and reduce the negative impact on business continuity.
The basic goal of SMEs, like that of other firms, is to maximise profit. The capabilities, role, and contribution of SMEs varied from industry to industry and country to country. SMEs, like other firms, encounter a variety of issues that can have an impact on their profitability and growth.
To deal with the continual and rapid changes in the business environment, the organisation must have a well-versed and good business managerial competence.
Given the preceding circumstances, the significant and fascinating issue to explore at this stage would be variables to assure the success and profitability of Nigeria’s SMEs sector. As a result, this study will conduct an empirical investigation of the factors influencing the profitability of SMEs.
1.2 Statement of the Problem
The failure rate of SMEs in Nigeria is increasing, with most dying during the first five years of operation, while a few survive for six to 10 years and 5% mature (Basil, 2015, cited in Aremu & Adeyemi 2011). The absence of enough profitability was recognised as a crucial contributing factor to the untimely mortality.
As a result, the relative importance of small and medium-sized enterprises in advanced and emerging countries has led to, and will continue to lead to, a reconsideration of the role of SME in national economies.
The need to increase the performance and profitability of SMEs in Ilorin metropolitan is critical if the state’s economy is to develop.
1.3 Research Questions
This study seeks to answer the following questions:
I. What is the relationship between SMEs’ profitability and internal firm characteristics (managerial efficiency, business knowledge)?
II. What is the relationship between SMEs’ profitability and external factors (customer preferences, government policies)?
1.4 Justification of The Study
Several studies have been undertaken on the elements influencing an organization’s profitability. Yahaya and Susela (2011) investigated the factors that influence accounting function outsourcing as well as the impact of outsourcing on firm performance in Iranian manufacturing small and medium businesses (SMEs).
According to the findings of a survey of 658 SMEs, outsourcing is positively associated with owner/manager knowledge and technical ability, however there is no positive relationship between outsourcing and firm size. It was discovered that outsourcing had a favourable impact on the performance of SMEs.
Farah and Nina (2015) also investigated profitability indicators such as business size, firm age, growth, lagged profitability, productivity, and industry affiliation of SMEs listed on the Indonesia Stock Exchange. The study relied on secondary data based on the index PEFINDO 25.
The findings revealed that business size, growth, lagged profitability, productivity, and industry affiliation all had a substantial impact on profitability, however variable firm age has no significant impact on profitability.
The regression coefficient results show that variable firm size, growth, and lagged profitability have a negative impact on profitability, whereas variable productivity and industry affiliation have a favourable impact.
As a result, in order to boost the company’s performance even further, the management should design a strategy for expanding profitability while focusing on productivity and industry affiliation.
Despite all of the recommendations they provided at the end of their work, the failure rate of SMEs continues to rise with no sign of improvement in sight. As previously stated in the background to this work, this gave rise to the researcher’s intention to come up with better recommendations that will go a long way in assisting and reducing to a bare minimum, the great deal of business failure caused by poor business knowledge, application of ICT, and government policies.
The gap that this research work intends to fill is to determine the factors (e.g. Internal Factors such as Business Knowledge, Educational Qualification, Source of Finance, Strategic Planning e.t.c and External Factors such as Government Policies,
Application of ICT, Political Instability, Inadequate Infrastructural Development e.t.c) that influence the profitability of SMEs in terms of its continuous competitive advantage, market share, and overall profitability of SMEs.
1.5 Objectives of The Study
The primary goal of this research will be to conduct an empirical investigation of the factors influencing the profitability of SMEs.
The precise goals are as follows:
i. investigate the relationship between profitability and internal firm characteristics (managerial efficiency, business knowledge) in SMEs.
ii. investigate the relationship between profitability and firm external factors (customer preferences, government policies) in SMEs.
1.6 Research Hypothesis
The following hypotheses will be generated and empirically investigated in order to provide a solution to the research challenge stated above and to achieve the goal of this study.
The First Hypothesis
H0: There is no association between SMEs’ profitability and internal firm characteristics (managerial efficiency, business knowledge).
Hypothesis No. 2
H0: There is no relationship between SMEs’ profitability and external factors (consumer preferences, government policies).
1.7 Scope of The Study
This study would focus on the empirical examination of factors influencing the profitability of SMEs in Ilorin in 2015. This research will look at the activity of a few selected enterprises in the SMEs sector in Ilorin in 2015.
1.8 Definition of Key Terms
Business Knowledge: A thorough awareness of broad business functions as well as the specific areas under consideration.
Government Policy: A strategy or course of action devised by the government to influence and affect decisions, activities, and other matters.
Consumer Taste: Are measured in terms of consumer preference.
Managerial Efficiency: Assesses how successfully managers perform at the lowest possible cost to the firm.
Measured against conventional or regulated indices of effectiveness, efficiency, and environmental responsibility, such as profit growth, liquidity, cycle time, productivity, waste reduction, and regulatory compliance.
Profit: The difference between revenue and costs.
Profitability: The state or condition of generating a monetary profit or benefit. It is frequently assessed by the price to earnings ratio.
Small and Medium-sized Enterprises (SMEs): Also known as SME’s or small and medium-sized firms. Small and medium-sized enterprises (SMEs) have less than 500 employees.
1.9 Plan of The Study
The study project will be divided into five chapters. The first chapter will discuss the study’s background, objectives, issue statement, research questions, hypotheses, and scope of the investigation. The second chapter analyses the relevant and related literatures in order to emphasise the key area of the study.
The third chapter is on research methodology, which includes research design, data kinds and sources, study population, sample size and sampling method, data collection instrument, and data analysis.
The fourth chapter discusses data presentation, analysis, and explanation of the results to be produced. The summary, conclusion, and recommendations based on the study’s findings will be covered in Chapter 5.
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