CHAPTER ONE 1.

0 INTRODUCTION This chapter covers the background of the study, statement of the problem, objectives, scope of the study, significance of the study and definition of key concepts.

1.1 BACKGROUND TO THE PROBLEM According to Miller & Miller (1991), financial analysis also referred to as ‘Financial statement analysis’ or ‘accounting analysis’ refers to an assessment of profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of the bases in making business decisions. Based on these reports, management may continue or discontinue certain operations or part of its business, make or purchase certain materials in the manufacture of its products; acquire or rent/lease certain machineries and equipments in the production of its goods, issue stokes or negotiate for a bank loan to increase its working capital, make decisions regarding investing or lending capital. The other decisions allow management to make an informed selection on various alternatives in conducting its business. Muller further noted that financial analysts often assess the firm’s profitability which is the firm’s ability to earn income and sustain growth in both short-term and long-term. A company’s degree of profitability is usually based on the results of its operations. Solvency is the firm’s ability to maintain positive cash flows, while satisfying immediate obligations. Both solvency and liquidity are based on the company’s balance sheet, which indicate the financial conditions of a business as at a given point in time. Stability is the firm’s ability to remain in business in the long-run without having to sustain significant losses in conducting its business. Assessing a company’s stability requires the use of the income statement, and the balance sheet, as well as other financial and non financial indicators.
1

the viability, stability, and

There are several methods used in financial analysis. Kreso, et al, (2007), also noted that financial analysts often compared financial ratios of solvency, profit accounting (profitability), growth, etc. Past performance is done across historical figures, certain mathematical with statistical techniques, including present and future values. This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects plus comparative performance which is a comparison between similar firms. These ratios are calculated by dividing a group of account balances, taken from the balance sheet and or the income statement by another for example N / equity = return on equity, Net income / total assets = return on assets, Stoke price / earnings per share = P / E – ratio This scholar has further noted that comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges for instance, they say little about the firm’s prospects in absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning, and as indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comparative picture of the firm’s performance. Several factors may prevent year end values from being representatives. A ratio value may be distorted as account balances change from the beginning to the end of an accounting period. So, use average values for such accounts whenever possible. Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amounts. (Kreso, D.E, Waygandt, J.J, and Warfield, T.D). For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over time, period expressed as a percentage is known as horizontal analysis (Kresto, et. Al, 2007, p. 1320).

2

Another method is comparative analysis. This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to aloe for easy analysis.

3

1.2 STATEMENT OF THE PROBLEM Following Kats et al, (2000), SMEs offer particularly attractive form of management issues because they live and die quickly. SMEs offer particularly attractive form of management issues because they live and die quickly. SMEs performances are very essentials for the development of the economy of any country. History indicates that most new business failures occur in the first five years of their life. (Casrogiovanni, 1996). If a large percentage of the SMEs were able to survive and grow into large competitive players in the global economy, then there would be a very positive impact on the world’s economy (Monk, 2000). Castrovagionni (1996) expresses the opinion that little if any research has directly examined the factors influencing the survival of SMEs. Our understanding of entrepreneurship and SMEs indicates that survival and growth rates have not significantly improved since the research interest in the small company sectors started sometime. It is imperative that guidelines or models for financial viability and success in this industry are put in place to ensure the survival of SMEs. In other industries, models of financial health have been developed as guideline and benchmarks. Business analysis tools, particularly financial ratios analysis are used to measure financial health. Identification of weaknesses in financial analysis of an organization, coupled with subsequent appropriate action, can lead to improved financial health, efficiency and long-term viability (Miller & Miller, 1991).

1.3 OBJECTIVES OF THE STUDY The research study will aim at achieving the following objectives; however they are sub-divided into general and specific objectives.

4

(a) General objectives To establish analysis tools and financial ratios that may be effectively applied to SMEs in Uganda in developing fiscal viability. (b) Specific objectives (i) (ii) (iii)
(iv)

To find out the importance of these ratios used in SMEs. To know the type of financial analysis used. To know the socio-economic background to the study To know the weaknesses and problems involved in the system of financial analysis.

(v)

To find out possible solutions for the research study.

1.4 SCOPE OF THE STUDY This section of the research proposal will concentrate on the content or subject matter, geographical location, sample size and data collection. Geographical location The area selected for the research study will be Kampala district which is the capital city of Uganda located in the Central region. Content The subject matter of the research study is the financial analysis of small and medium enterprises in Uganda specifically the industrial area. Sample sizes

5

The samples selected are women, men boys and girls in the ranges of 10 women, 10 men, 10 girls and 10 boys respectively. Data collection Data will be collected by use of interviews from the accounts departments through the use of qualitative and quantitative methods.

1.5 SIGNIFICANCE OF THE STUDY The research study will be of significance to the same people. These are policy makers, practitioners, researchers and theoreticians. It is anticipated that these research will have multiple benefits. Among them are the following;
(i) Generate basetime industry averages and a model for assessing fiscal viability of SMEs

in the industrial area 6th street, Kampala. (ii) Stimulate further discussion and research on the relationship between financial analysis and long-term viability of SMEs (iii) The study will provide literature on financial ratio analysis, which will therefore act as a basis for other academic researchers. (iv)The study will form a basis for further research by other scholars in the area of financial ratio analysis. (v) The study will enable the researcher to qualify for the award of a Bachelor of Business Administration degree.

1.6. DEFINITION OF KEY CONCEPTS

6

1. Financial Analysis: Financial analysis is a process which assesses a business to deal with the planning, budgeting, monitoring, forecasting and improvement of all financial details within the organization. 2. Small Medium Enterprises: These are enterprises that require minimal amounts of capital to startup business and employ not more than 50 people and with capital employment of not more than 120 million annually. 3. Ratios: Ratios indicate the relationship between two items on the financial statement and how they are expected to be related.

CHAPTER TWO 2.0 THE LITERATURE REVIEW

2.1 INTRODUCTION This chapter reviews the existing literature about financial analysis of SMEs. The literature review will concentrate on the types of financial analysis used by SMEs, Socio-Economic Background, importance of these financial ratios, weaknesses and possible solutions to the problem.

2.2 SOCIO-ECONOMIC BACKGROUND The term financial assessment quite literally refers to investigating certain key financial figures of relationships for a particular individual, entity, or group of entities (Kaap), 2005; Merrill Lynch, & third Age 1997). Financial assessment may as well be referred to as financial analysis Helfect( 1997); White et al, 1998). To avoid confusion, the author notes that the term, financial assessment is also a term widely used in government settings where it has a very different meaning and specific application (Cambridge geshire county council, 2006 office of government commerce, 2002). The governmental use of the term is not there meaning referred in this study.
7

The figures or relationships investigated through financial assessment may be industry specific (Ahang, 2005). Whether applied to individuals, profit oriented businesses, non-profit organizations, associations, trusts, foundations or governmental entities, they all are used to provide important information regarding financial health of entity (Fernandez, 2003) MGT of America, (2005)

2.3 TYPES OF FINANCIAL RATIOS Kresto, et al, (2007), also noted that financial analyst often compare financial ratios of solvency, profit accounting (profitability), growth etc. past performance which is done using historical figures and certain mathematical and statistical techniques, including present and future values, this extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects, comparative performance which is a comparison between similar firms. These ratios are calculated by dividing a group of account balance(s), taken from the balance sheet, and or the income statement, by another, For example, N / Equity = Return on equity. Net income / total assets = Return on assets. Stock price / Earnings per share = P/E – ratio. This scholar has further noted that comparing financial ratios is merely one way of conducting financial analysis. Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amounts.( Kreso, D.E, Waygandt, J.J, and
8

Warfield, T.D). For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over time, period expressed as a percentage is known as (horizontal analysis (Kresto, et. Al, 2007, p. 1320). Vertical or common size analysis, reduces all items on a statement to a “common size” as a percentage of some base value which assists in comparability with other companies of different sizes. (Kreso, et al, 2007, p.1320). Another method is comparative analysis. This provides a better way to compare trends. Comparative analysis presents the same information for two or more time periods and is presented side by side to allow for easy analysis. (Kreso, et al, 2007, P. 1319) A micro enterprise is defined as an enterprise employing a maximum of 4 people; annual sales/revenue turns over of maximum Uganda shillings 12 million. A small enterprise is defined as an enterprise employing maximum 50 people; annual sales revenue turnover of maximum Uganda shillings 360 million. A medium enterprise is defined as an enterprise employing more than 50 people; annual sales revenue turnover of more than Uganda shillings 360 million. Uganda investment authority (2008)

2.4 THE IMPORTANCE OF FINANCIAL RATIOS The benefits of preparing financial statements according to GAAP including consistency, comparability, understandability, reliability, objectivity, and disclosure (Revsine, Collins, & Joanson, 2002, Roberts,et al, 1998) statements may be used for internal purposes ( management information and decision making) or they may be prepared for external use (lending institutions, regulatory agencies). These statements are generally subjected to an external audit and may be widely circulated (White et al, 1998). They form the basis for external evaluation such as those performed by bond rating companies, financial analysts, stoke brokerage firms, individual investors, lenders etc. however the researchers gap of study will be to research for further importance’s and make them known to small and medium enterprises.

2.5 WEAKNESSES OR DISADVANTAGES OF FINANCIAL RATIOS

9

Financial ratios face several theoretical challenges. They say little about the firm’s prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firm’s one ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firms’ performance. Seasonal factors may prevent year-end values from being representatives. A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different values. They fail to account for exogenous factors like investor behavior that are not based upon economic fundamentals of the firm (fundamental analysis) by themselves; financial ratios may not be extremely useful in assessing an individual organizations financial health. However, using specific analysis tools to examine the information contained in an organizations statement analysis.

2.6 SOLUTIONS TO PROBLEMS FACED BY SMALL MEDIUM ENTERPRISES WHILE

USING RATIOS Training of financial analysts Small and medium enterprises through their management should be able to train financial analysts who are able to use and interpret ratios and financial statements. This will help the organization to have correct accounting figures. Adopt simpler systems Firms especially small and medium enterprises should adopt other simple financial ratios systems. Uses of complex financial ratios do not yield good accounting information. The researcher’s study will help in advocating and searching for simpler methods. Use according to size

10

Small and medium enterprises should use financial ratios in accordance to the size and financial standard of the firm; small firms don’t use complicated ratios because they have limited funds. Computerization Use of computers should be encouraged in small and medium enterprises since some firms use complex ways of solving, understanding and interpreting organizational resources. This eases on the problem(s) faced for it makes work simpler with the use of computerized programs.

CONCEPTUAL FRAMEWORK SOCIO ECONOMIC BACKGROUND TYPES/ METHODS

used by professionals operations of business purchase of certain materials
Training of financial analysts Adopting other simple financial systems

-

SOLUTIONS

-

equity ratios liquidity ratios efficiency ratios profitability ratios

IMPORTANCE
Financial accounting Profitability accounting To know past performance

11

WEAKNESS
Poor managers Invalidity Difficult to use Unreliable

DESCRIPTION OF THE CONCEPTUAL FRAMEWORK The conceptual framework is made up of five (5) themes. They are socio-economic background, types of ratios, importance, weaknesses and solutions. The socio-economic background has got professionals, business operations, materials and equipments for use. The company then adopts various ratios to analyze its operations such as equity, liquidity, efficiency, profitability and investment. These ratios are important for the company in evaluating previous performances, profitability and the future prospects of the company. Weaknesses are bound to occur such as poor management, unreliability, invalidity and difficulty in use. However, weaknesses tend to have solutions and they are training financial analysts, computerization and usage according to size of the company and adopting simpler financial systems.

12

CHAPTER THREE 3.0 METHODOLOGY This chapter presents a detailed plan of how the study was conducted. It represents the research design, area and population of study, sample selection and size, data collection and data analysis plus limitation of the study.

3.1 RESEARCH DESIGN The study will adopt a cross sectional research design based on both quantitative and qualitative data and an explanatory research design that will be used to seeking to know why the SMEs continually die in their early ages from both primary and secondary sources.

3.2 AREA AND POPULATION OF STUDY 13

The area of the study will be on 6th. Street (Uganda Batteries), Industrial area and the population will include the accounts officers of SMEs in the industrial area Kampala.

3.3 SAMPLE SELECTION AND SIZE Both stratified sampling and simple random sampling will be used to select respondents. The study will use a sample of respondents that will provide the required data that represents the view of the overall population. The respondents will be limited to accounts officers who will constitute the sample size. The sample size will constitute 40 participants

3.4 APPROACH TABLE Approach • Quantitative Sample selection techniques Stratified Purposive Simple random Sample type 10 Managers 10 Accountants 20 Employees 40 Respondents Data collection Interviews Questionnaires Focus groups

Qualitative

3.5 DATA COLLECTION 3.5.1 PRIMARY SOURCE

This project will use business analysis tools to explore the financial health of SMEs in Uganda in order to build a model for assessment of financial viability. 3.5.2 SECONDARY DATA

This will be obtained from literature on financial analysis, company reports, and financial accounts of the company for the previous years. Therefore both qualitative and quantitative methods

14

3.6 DATA ANALYSIS. Data will be retrieved from copies of revenue of revenue reports, which will be entered by the author into Excel spreadsheets. The data will be used for further analysis and application of business analysis techniques. Data analysis using financial analysis tools identified in chapter two will be performed in conjunction with the research questions.

3.7 LIMITATION OF THE STUDY The following will be the anticipated limitation of the study. (i) Time may not be enough to have data collected (ii) Lack of enough research materials (iii) The study is likely to be costly (iv) Different people have different languages therefore language barrier is likely to be a danger to the researcher.

REFERENCES Abell. D.F. defining the Business: the starting point of strategic planning, Engle wood cliffs Agbonifor, et al, (1999), The Business Enterprise in Nigeria Asika N. (1991), Research Methodology in Behavioral Sciences, Nigeria Bahemuka P.K. (2006). Income Tax in Uganda, 2nd Ed Kampala. Kreso, D.E, Waygadnt, J.J and Warfield T.D (2007) International Accounting 12th Ed Hoboken, N.J: John Willy & sons Pg 1320 ISBN 0-471-74955 Bergevin, P.M (2002). Financial Statement Analysis, Prentice Hall. Bers, T.H (2001). Measuring and reporting completeness. New directions for Institutional Research, summer 2001(110), 29-40

15

APPENDIX I Particulars Airtime Transport Typing & Printing Gifts Meals Total Unit cost (UGX) 30 000 75 000 15 000 20 000 30 000 170 000

16

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.