Role of Financial statements in decision making in Small and Medium Enterprises in Tanzania:

Abstract

This study assessed the role of financial statements in decision making process in small and medium enterprises in Tanzania. It was a case study of selected traders in Moshi Municipality, Kilimanjaro. Good accounting records ensure that the financial statements of the small enterprises are readily available when required. However, despite the importance mentioned large number of small enterprises are said to have neglected an important role of practicing and using financial statements in decision making. As a result, they have been pursuing poor financial and economic decisions which caused the collapse of the enterprise. Specifically, the study explored the degree to which financial statements are involved in the decision-making process, identified the financial statements related factors that affect business decision making by SME Managers and described the ways of addressing financial statements related factors that affect business decision making. The study employed case study research design and the population consisted of 175 enterprises in Moshi Municipality, the researcher relied upon the use of quantitative research approach. The sample size consisted of 91 respondents. The study employed simple random sampling to arrive at the desired sample size. In gathering data, questionnaires were used as a research tool. The data collected were analysed by employing descriptive statistics. The study revealed that most of SMEs prepare financial statements. Some of the reasons as to why SMEs use financial statements in decision making include foreseeing the probable liquidity and financial crisis, setting organisational goals and for tax estimation purposes. It was also found out that the use of financial statements to make decisions are influenced by owners experience and confidence on the correctness of the statements and own capability to interpret the statements. It was also revealed that SMEs owners’ financial literacy on financial statements is the best way to address problem of not understanding the role of financial statements in decision making. The study recommends that business support institutions should provide training with integrated approach to SMEs owners to study financial accounting whereby they will be able to gain financial literacy on accounts record keeping to better understand their decision making process. Policymakers should increase efforts on SME sector, especially in ensuring there are policy measures that promote SMEs’ preparation and the use of financial statements to facilitate managerial decision making.