ELEMENTS OF AFFECTING THE EFFECTIVENESS OF MICRO

AND SMALL ENTERPRISES AND THIRE ACCOUNTING SYSTEM,

IN ADDIS ABEBA: IN CASE OF BOLE SUB CITY

BY

HIWOT GETAHUN

IDNO: UU87045R

SENIOR ESSAY SUBMITTED TO

THE FACULTY OF BUSINESS, ECONOMIC AND SOCIAL
SCIENCE, UNITY UNIVERSITY, DEPARTMENT OF
ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF
THE REQUIREMENT FOR THE
DEGREE OF BACHELOR OF ARTS IN ACCOUNTING AND

FINANCE

Advisor: Sinidu Tamiru

1
August, 2016
ADDISABABA, ETHIOPIA

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 DECLARATION

I the undersigned, confirmed that the senior paper entitled “elements of affecting the
effectiveness of micro and small enterprises in case of bole sub city” is my original work and
is being submitted in partial fulfilment of BA degree in accounting and finance in Addis abeba
Unity University. All sources of materials used for the thesis have been duly acknowledged. I
further confirm that the thesis has not been submitted either in part or in full to any other
higher learning institution for the purpose of earning any degree.

Hiwot Getahun __________________

Name Signature & Date

ENDORSEMENT

This thesis has been submitted to Unity University, department of accounting and finance for
requirement of BA degree in accounting and finance with

my approval as a university advisor.

Advisor:- Sinidu Tamiru

Signature & date:- _________

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 Acknowledgements

First of all would like to praise the almighty God for all his unspeakable gifts throughout my life,
Secondly I would like to express my deep grat itude to Unity University department of accounting
and finance for this golden educational opportunity. And I would like to thanks my adviser
Ms. Sinidu for assisting and providing important information and comments while preparing
this research paper. I am also very grateful for my family; who were beside me through out my
study in their moral and material support, Finally I would like to extend my sincere thanks to
my friends for giving me their plentiful support for doing this research paper.

I further wish to thank for Bole sub city micro and small enterprises office found in
Megenagna for their cooperation and kindness in providing access to information regarding
MSEs and to micro and to micro and small enterprises operators for giving their time to
respond questionnaire

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TABLE OF CONTENTS
CHAPTER ONE……………………………………………………………………………………8
1.1 Background of study…………….………………………………………..………..8
1.2 Statement of problem……….……………………………………………………...9
1.3 Research objective …………….……………………………………………...….10
1.3.1 General objective……………………………………………..………………10
1.3.2 Specific objective……………………………………………..………………10
1.4 Scope of the study………………………………………………..……………….11
1.5 Significance of the study……………………………………………………...…..11
1.6 Research methodology…………………..……………………………………......12
1.6.1 Research Design.…………………………………………………………….12
1.6.2 Target population.………………………………………………….………..12
1.6.3 Sampling Techniques and Sample Size.…………………………………….13
1.6.4 Data Collection ...................…………………………………………………14
1.6.5 Data Collection Techniques.…………………………………………………15
1.6.6 Data Interpritation Techniques.………………..……………………………..16
1.7 Plan Budget…………………………………………………………………..……17

CHAPTER TWO………………………….………………..……………………….19
LITERATURE REVIEW…………………………………………………..………19
THEORETICAL FRAMEWORK………………………………..………………..19
2.1 Introduction.……………………………………………………………….………19
2.2 Micro and Small Enterprises(MSEs)………………………………….…….…….19
2.2.1 Definitions…………………………………………………………..……….19
2.2.2 The revised definition of MSEs in Ethiopia…………………………………21
2.3 Definition of business performance……………………………………………….22
2.3.1 Measures of performance……………………………………………….…….23
2.4 Factors influencing MSEs performance…………………………………………..24
2.4.1 Education………………………………………………………………..……25
2.4.2 Age………………………………………………………………….….……..26
2.4.3 Management Experience……………………………………….…….….……27
2.5 Business Related Factors…………………………………………………...……..28
2.5.1 Marketing Skill of Business Owners……………………………….….……..28
2.5.2 Planning and Performance in Small Enterprisesv…………………………….29

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 2.5.3 Record Keeping and Financial Control……………………………,….……...30
2.5.4 Form of Ownership…………………………………………………....……...30
EMPIRICAL STUDIES………………………………………….…….31
2.6 Empirical Study…………………………………………………….……..……….31
2.6.1 Previous Studies on Ethiopian Micro and Small Enterprises…………….…...32
CHAPTER THREE.……………………………………………………...………….35

RESULTS AND DISCUSSION.…………………………………………....……….35

3.1. Introduction.………………………………………………………………………35
3.2. Theoretical background of organization.……………………..…….……………36
3.3. Response rate.………………………………………………………….…………37
3.4. Demographic characteristics of MSEs owners..……………………….….……..37
3.5. Business Related Characteristics.……………………...………………….………39
3.6. Primary data……………………………………………………………………...57
3.7. Secondary data……………………………………………………………………58
CHAPTER FOUR …………………………………………………………………..58
CONCLUTION AND RECCOMENDATION.……………………………………58
4.1 Introduction.……………………………………………………………….………58
4.2 Summery………………………………………………………….………………59
4.3 conclusion…………………………………………………………………………60
4.4 recommendation…………………………………………………………………..60
Reference………………………………………………………………………………...61
Appendix…………………………………………………………………………………64

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 List of Tables

PAGE

Table 1 RESPONSE RATE...............................................................................................................................36

Table 2 Profile of the Respondent...............................................................................................................36
Table 3 business event.................................................................................................................................37
Table 4 Benefit from Recording..................................................................................................................38
Table 5TRENDS AND OPPORTUNITIES...............................................................................................39
.Table 6 PRIORITIZE.................................................................................................................................39
Table 7 SUFFICIENCY..............................................................................................................................40
Table 8 MAINTAINING INVESTOR TRUST..........................................................................................41
Table 9 FORMAL FINANCIAL REPORTS.............................................................................................42
Table 10 AREAS FOR COST SAVINGS...................................................................................................42
Table 11 COMPLIANCE WITH ACCOUNTING STANDARDS...........................................................43
Table 12 REVENUES AND EXPENSES...................................................................................................44
Table 13 INVENTORY CONTROL PROCEDURES..............................................................................45
Table 14 REGULAR INVENTORY COUNTS.........................................................................................45
Table 15 INVENTORY MANAGEMENT.................................................................................................46
Table 16 IMPROVE INTERNAL CONTROLS........................................................................................47
Table 17 EMPLOYEE HONESTY.............................................................................................................47
Table 18 BUSINESSES TRACK................................................................................................................48
Table 19 SIMPLE TRANSACTIONS........................................................................................................49
Table 20 INVENTORY AND PAYROLL SYSTEMS..............................................................................49
Table 21 DIVERSE FINANCIAL NEEDS.................................................................................................50
Table 22 TAX REGULATIONS.................................................................................................................51
Table 23 FRAUD AND ERRORS...............................................................................................................52
Table 24 SEGREGATION OF DUTIES....................................................................................................52
Table 25 RELIABILITY OF FINANCIAL REPORTING.......................................................................53
Table 26 INTERNAL CONTROL PROCEDURES,.................................................................................54
Table 27 OPERATIONAL EFFICIENCY.................................................................................................54

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 CHAPTER ONE

1.1 Background of the Study

Micro and small enterprises play key role in economic growth and industrial development
of a country. They make a vital contribution in improving economic and social
development of a country through stimulating large employment, investment development
of indigenous skill and promotion of entrepreneurship and innovativeness.

Small enterprises are major drivers of both employment and economic contribution to
more than 50% to GDP and 60% to employment in developed economies. These types of
enterprises however, constitute less than 30% of employment and 17% of GDP in
developing countries. Indeed a study conducted in Africa by ILO indicates that only 20%
of the total population of working age group in many African countries was reported to
have working in the small enterprise sector.

Micro econometrics studies using enterprise level data from MSEs sector has also
indicated that many of these enterprises have low level of productivity, produce low
quality products and grow when they are young. This is surprising given that many
developing economies are characterized by labour and land abundance that creates
favourable condition to engage in labour intensive industrial activities. A question that
would then arise is as to why the MSE sector has not expanded more by absorbing the
cheaply available labour for adopting production organization that are suitable for low
range economics.

In Ethiopia, according to the central statistics agency report in Ethiopia there were
974,676 micro and 31,863 small enterprises generating a means of livelihood for about
1.3 million people. Another study conducted also reveals that 1863 MSEs had created
employment opportunities for about 97,782 citizens’ ( according to CSA).

However, having their contribution to employment in mind, according to CSA, more than
11,000 MSEs were surveyed and about 65% of them admitted having main constraints
like not applying the major elements of accounting system like: Accounting cycle,

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internal control & inventory valuation, lack of working space for production and
marketing, shortage of credit and finance, regulatory problems (licensing, organizing,
illegal business), poor production techniques, input access constraints, lack of
information, inadequate management and business skill, absence of appropriate strategy,
lack of skilled manpower, low level of awareness of MSE’s as job area, low level of
provision and interest for trainings and workshops are factors that contribute for the low
level performance and failure for MSEs as compared to other developing nations.

1.2 STATEMENT OF THE PROBLEM

Micro and small enterprises (MSEs) play significant role in the creation of employment
opportunity and generation of income for quite large proportion of population. Mead
observes that the health of the economy as a whole has strong relationship with health and
nature of MSEs.

Micro and small enterprises in developing countries are affected by multiple factors that
inhibited the sector. These factors include entrepreneurial and management capability of
the owner, mentality skill and motivation in exploring opportunities, access to technology
and capital. The regulatory and institutional environment in developing countries was also
notoriously burden some; it frequently hampered small enterprises growth, econometric
analysis underscore how these challenges disproportionately harmed smaller enterprises;
for instance strict regulations and high taxes kept firm small and informal Due to those
reasons; performance of MSEs in sub-Saharan Africa (SSA) is far below than the other
developing countries.

Given the importance of micro and small business for an economy, the survival, success
and performance of these enterprises in the sector is an issue of continuous concern.
Research on identification and analysis of those factors associated with MSEs business
performance is therefore of a great interest to policy makers, owners, manager and their
advisers.

The researcher also evaluate small enterprises which does not apply accounting system or
those which know accounting system and apply in their business. Because, Most of the

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small business enterprises handle their business traditionally, Further, the study aims at
what is the reason behind not using the major elements of accounting system in the
operation of small business enterprises and to give a possible solution as to how the
problem would be solved in Bole Sub city.

So far, some studies have been done on the topic in question. However, as shown above,
this studies focuses on the growth aspect of MSEs instead of their performance. In
addition, the studies conduct several years ago, and a lot change since then. Any good
policies and strategies need to rely on timely information if they are to promote micro and
small enterprise with the view to increase their contribution to provide reduction and
economic growth. The purpose of this mixed study is to examine the factors that influence
the growth aspect of micro and small enterprises, using data from a sample of 87
randomly selected enterprises in bole sub city of Addis abeba.

RESEARCH QUESTION
 How small businesses record their business events?
 Whether the enterprises prepare crucial financial statements periodically or not?
 What type of internal control system uses small enterprises?
 How to design accounting system for their business?
 What are the strength and weakness of internal control and inventory system in small
businesses?

1.3 RESEARCH OBJECTIVE AND QUESTION

1.3.1 GENERAL OBJECTIVE
Determinant elements of affecting the effectiveness of micro and small enterprises and
their accounting system, Addis abeba, in case of bole sub city.

1.3.2 Specific Objective

 Assess the way small businesses recording their business events.

 Determine if the statements are prepared periodically for crucial financial reporting.
 To describe the internal control system that influencing the performance of micro
and small enterprises in bole sub city.

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 Assess the way to design an accounting system for their business.
 Assess the strength and weaknesses of internal control and inventory system in small
businesses.

1.4 Scope of Study

This study will examine the elements affecting the effectiveness of micro and small
enterprises (MSEs) and their accounting systems, focusing on financial literacy, access to
financing, regulatory environment, technology adoption, and support systems within a
specified geographical context. It will utilize qualitative and quantitative methods, such as
surveys and interviews with MSE owners and managers, to analyse how these factors
correlate with business performance metrics like profitability and compliance with
accounting standards. The research aims to provide actionable insights for improving
accounting practices and enhancing the overall effectiveness of MSEs, while
acknowledging limitations related to sample size and the generalizability of findings.

In Ethiopia region, Bole sub-city. The study focuses on small enterprises which has a paid
up capital between 100,000 to 1,000,000 which are under the cooperative societies. This
excludes high technological consultancy service and other higher technological
establishments. Cooperative societies are like: construction, municipal activities, different
kind of trade and industry in the area of affecting the effectiveness of micro and small
enterprises. There were obstacles in undertaking and conducting the study. The dispersed
location of small enterprises to collect data, time and financial constraints, and
unwillingness of respondents to fill the questionnaires were the major limitation that the
researcher faced.

1.5 Significance of the Study

This research aims to provide vital support to a diverse array of stakeholders, including
entrepreneurs, academic scholars, investment groups, and researchers. By generating
valuable insights, the study seeks to empower entrepreneurs to navigate industry
complexities and foster innovation. Academic scholars can enhance their research with
the findings, while investment groups gain essential information for informed decision-
making and opportunity assessment. Additionally, researchers will find resources that

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enhance their inquiries. Ultimately, this research aspires to create a collaborative
environment that promotes the exchange of ideas and drives progress across various
fields.

The findings of this research provide valuable insights to address the challenges faced by
micro and small enterprises (MSEs) and their development offices. By analysing these
results, stakeholders—including policy-makers, business owners, and support
organizations—can better identify the specific issues impacting MSEs, such as access to
resources, market competition, and regulatory challenges. Equipped with this
understanding, enterprise owners can pursue tailored solutions that promote sustainable
growth and resilience. Additionally, the research can help development offices refine their
programs, fostering a healthier ecosystem for small business development. Ultimately,
this work encourages a collaborative approach to problem-solving, leading to more
effective strategies in supporting MSEs.

An effective accounting system is essential for prudent resource management and

providing clear financial information necessary for evaluating and improving enterprise
profitability. By systematically recording and analysing financial transactions, it enables
organizations to accurately track income and expenses, ensuring efficient resource
utilization while minimizing waste. This organized financial framework allows business
owners and stakeholders to make meaningful comparisons within their operations and
against industry standards, enhancing their understanding of performance metrics.
Reliable financial data also supports informed decision-making, strategic planning, and
risk assessment, empowering managers to identify trends and improve operations.
Additionally, a robust accounting system ensures compliance with regulatory
requirements, maintaining the trust of investors and creditors. Ultimately, its importance
goes beyond record-keeping; it is a vital tool for the financial health and strategic success
of an enterprise in a competitive environment.

1.6 Research Methodology

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1.6.1 Research Design
According to kerlinger (2001) research design is the plan and structure of investigation
conceived so as to obtain answers to research questions or test the research hypothesis.
The plan represents the overall strategy use in collecting and analysing data in order to
test research hypothesis.

In this study, a descriptive research design will use, the major purpose of descriptive
research is description of the state of affairs as it exist at present. Then this study
describes and critically assesses the factor affecting the performance of some selected
MSEs in bole sub city of Addis Abeba.

1.6.2 Target Population

Target population is the specific population about which information is desire. According
to Ngechu (2004), a population is well define or set of people, service, elements, and
events, group of things or households that are being investigated. Mugenda and Mugenda,
(2000), explains that the target population should have some observable characteristics, to
which the researcher intends to generalize the results of the study. There are 871 MSEs
which are registered in bole sub city MSEs Office which are engaged construction, food
and beverage, textile and garment, merchandise and retail shops and repair and
maintenances shops.

Table 1.1Target Population

Target population Frequency Percentage

Construction 297 34.10%

Food and beverage 106 12.17%

Textile and garment 223 25.60%

Merchandise and retail shop 129 14.81%

Repair and maintenance SVC 116 13.32%

Total 871 100%

Source: Bole sub city MSEs Office2016

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1.6.3 Sampling Techniques And Sample Size
To select sample of enterprise from the total population of MSEs a stratified random
sampling was applied to get a representative number of enterprise from each sector that
was considered in this study this technique will prefer because it will use to assist in
minimizing bias when dealing with the population with this technique. The sample frame
will organize into a relatively homogeneous group (Strata’s), before selecting elements
for the sample. The strata’s will sectors of MSEs including construction, food and
beverage, textile and garment, merchandise and retail shops, repair and maintenance
service, which are commonly available in all sub cities of Addis Ababa.

Sample of MSEs operators from each strata’s (sectors) simple random sampling method
applied from a complete list of enterprises operated in the sub city. Since Negachu (2004)
underscore the imperative of selecting a representative sample through making a sampling
frame. From the required number of subjects, respondents’ elements or firms will select in
order to make a sample. A sample is a smaller and more accessible subset of the
population that adequately represents the overall group thus enabling one to give an
accurate picture of the population as a whole with respect to the particular aspect of
interest of the study.

In this study to select sample size a list of the population formally registered by Bole sub
city until July 2016 will use. A list of containing names, address and the type of MSEs
business engage. The total population of the study area will found from Bole sub city
MSEs Office. A total population of 871 enterprises that comprise of 297(34.10%),
106(12.17%), 223(22.60%), 129(14.81%) and 116(13.32%). The sample size select here
will consider as a representative of construction, food and beverage, textile and garment,
merchandise and retail shop, and repair and maintenance respectively.

T o find the sample size of 871 enterprises

N=871
Z=1.96Z = 1.96Z=1.96 (for 95% confidence)
p=0.5p = 0.5p=0.5 (estimated proportion)
e=0.05e = 0.05e=0.05

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n=N.Z2.p.(1−p)/(N-1).e2.Z2.p.(1−p)
n=(871).(1.96)2.0.5.(1-0.5)/(871-1).(0.05)2+(1.96)2.0.5.(1−0.5)
n= 267.69…………>50 so it is good foe sampling.

Where ni = n1, n2, n3, n4 and n5 samples for each stratum. The sample size of each
stratum is calculated as follows.

n1 = 297 x 267/871 = 91 (Construction)

n2 = 106 x 267/871 = 32 (food and beverage)
n3= 223 x 267/871= 68 (textile and garment)
n4= 129 x 267/871= 39 (merchandise and retail shop)
n5= 116 x 267/871= 35 (repair and maintenance)

The total of 267 questionnaires will distribute to be filled out and 82 questionnaires were
properly filled and returned back, representing 30 percent response rate. The purpose of
the study will to analyse factors that influence the performance of MSEs which is found in
bole sub cities.

1.6.4 Data Collection

In order to achieve the research objectives, both primary and secondary data will collect
through questionnaires and specifically questionnaires will design and distribute to MSEs
engaged indifferent economic activates(manufacturing, construction, merchandise and
retail shops, repair and maintenance services) and the questioner distributed for those
enterprises includes both open and close ended questions. The questionnaire will use
because they are straight forward and less time consuming for both the researcher and the
participants(Owen's, 2002).

1.6.5 Data Collection Instrument/Techniques

questionnaire will the main techniques of the study; the research questionnaire will
administer to a stratify random sample of 267 Micro and Small Business owners. The
sample frame of the study in which the enterprises were chosen at random will access
from are cord archive of bole Sub City Micro and Small Business Development office. To

14
enhance the response rate, the questionnaires will deliver by hand to the enterprises
randomly approach and convince to participate on this study. The participants of this
study fill up most of the questionnaires by themselves but when necessary the data
collector (the researcher) gave assistance by elaborating and explaining the idea of the
questions.

This kind of distribution and collection will done to minimize the problems of non-
response error of respondents to some questions which they considered sensitive as well
as to those questions they do not understand in a way as they intended to be in the
questionnaire. The questionnaire will design as to encompass two sections: the first part
of the questionnaire is about the personal profile of the principal owners and the rest is on
business related information about the participant enterprises. Both open ended and cloth
ended questions will use to extract the required data from respondents.

Performance of the enterprises is the dependent variable of this study. Total capital
growth of MSEs is used to measure the performance of the sample enterprises from their
establishment to date. To this end open ended questions about the enterprises total initial
capital used to start the venture and the amount of the total capital enterprises currently
have was included in the questionnaire. Then based on the data from these two questions,
the capital growth of each participant enterprises from establishment to date will
calculated and then this growth index as a ratio data was taken as indicator of enterprises
performance.

The independent variables in this study are seven factors obtained from the literature of
small business: age of the principal owner, educational level of principal owner, prior
management experience of the owner, marketing skill of the owners, planning practice,
record keeping and financial control and forms of ownership of the enterprises.

VALIDITY OF THE RESEARCH INSTRUMENT/TECHNIQUES

To ascertain the validity of the questionnaire a pilot test was carried out. This was done by
administering the questionnaire into the pilot group. The content validity of the research
instrument was evaluated through the actual administration of the pilot group. In
validating the instrument 3 MSEs was selected from each strata’s, which was constituted

15
a total of 15 MSEs. The population units in the pilot study were not included in the final
sample. The study will use both face and content validity to ascertain the validity of the
questionnaires. Face validity is actual validity at face value, to check the instrument face
validity test/survey items will sent to the pilot group to obtain suggestion for
modification. Content validity is concerned with sample population representativeness.
i.e. the knowledge and skills covered by the test items should be representative to a larger
domain of knowledge and skills.

The instrument will administered by the researcher after which a discussion was made to
determine the suitability, clarity and relevance of the instrument for the final study
ambiguous and inadequate items will revise in order to elicit the required information and
to improve equality of the instrument.

1.6.6 DATA INTERPRITATION TECHNIQUES

"Elements Affecting the Effectiveness of Micro and Small Enterprises and Their
Accounting System," data interpretation techniques will include descriptive statistics to
summarize key demographic and performance indicators, correlation and regression
analyses to explore relationships between variables such as financial literacy and
technology adoption with effectiveness outcomes, and inferential statistics to draw
conclusions from sample data. Additionally, qualitative techniques like content and
thematic analysis will be employed to identify key themes from open-ended responses,
while visualization methods such as charts and graphs will help communicate findings
effectively. This combined approach will enable a comprehensive understanding of the
factors influencing MSE effectiveness and their accounting practices.

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 CHAPTER TWO
LITRETURE REVIEW
TEORETICAL FRAMEWORK

2.1 Introduction

The review of related literature will begin by defining what micro and small business
enterprises are in general and in Ethiopian context in particular. And discuss the criteria
used to differentiate them from other business activities. Then the literature will focuses
on defining what performance mean and how it is measured. Then the factors that is
assumed to influence the performance will be discussed briefly.

Then performance related factors which will be discussed in the sections here after will be
independent variables of the study in the future which is assumed to have relation and
contribution to the performance of enterprises in bole sub city. Then the literature will
review those studies that will relate the independent variables and dependent variable of
the study, finally empirical studies undertaken on micro and small business will be
discussed briefly.

2.2 Micro And Small Enterprises (Mses)

2.2.1 Definitions

There is a concern among policy makers, economists, and business experts that Micro and
Small Enterprises (MSEs) are drivers of economic growth. A healthy MSEs contributes
prominently to the economy through creating more employment opportunities, generating
higher production volumes, increasing exports and introducing innovation and
entrepreneurship skills.

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The characteristics of MSEs not only reflects the economic patterns of a country but also
the social and culture dimension. This differentiating pattern and noticeably reflected with
in different definitions and criteria of MSEs adopted by different countries: where as
some refers to the numbers of employees as their distinctive criteria for MSEs, others use
invested capital, and some other use a combination of the number of employees, invested
capital, sales and industry type.

Rigorously defining small business has always been difficult, even controversial. The
term covers a variety of firms and most writers use it rather loosely based on their purpose
of study. As Gebreeysus (2009) adopted the definition of small business from Peterson,
Albaum, and Kozmetskys (1986) ‘A small business is one which is independently owned
and operated, and which is not dominant in its field of operation’ researchers and other
interested parties have used specific criteria to operate the small business as a construct
value added, value of assets, annual sales, and number of employees. The latter two
criteria are most often used to delimit the category.

In the case of Ethiopia, there is lack of uniform definition at the national level to have a
common understanding of the MSE sector. While the definition by Ministry of Trade and
Industry (MOTI) uses capital investment, the Central Statistical Authority (CSA) uses
employment and favours capital intensive technologies as a yard stick.

The definition used by MOTI, which uses capital investment as a yardstick, has been
developed for formulating micro and small enterprise development strategy in1997.

According to MOTI

:-Micro enterprises are those businesses enterprises, in the formal and in formal
sector, with a paid up capital not exceeding Birr 20,000 and excluding high tech
consultancy firms and other high tech establishments.

:-Small enterprises are those business enterprises with a paid up capital of

aboveBirr20,000 and not exceeding Birr 500,000 and excluding high tech
consultancy firms and other high tech establishments.

:-On the other hand, CSA categorizes enterprises in to different scales of

operation on the size of employment and the nature of equipment.

18
According to CSA

:-Establishments employing less than ten persons and using motor operated
equipment are considered as small scale manufacturing enterprises.

:-Enterprises in the micro enterprise category are subdivided in to informal sector

operations and cottage industries: Cottage and handicraft industries are those
establishments performing their activities by hand and using non power driven
machines.

:-The informal sector is defined as house hold type establishments or activities,

which are non-registered companies and cooperatives operating with less than 10
persons. All enterprises employing ten or more workers are grossly considered as
medium and large enterprises.

2.2.2 The Revised Definition of Mses In Ethiopia

Based on the gathered experience by identifying the gaps of the existing definition of
MSEs, ignoring the size of employees and by taking total asset as criteria and by dividing
it in to industry and service Sector; and considering the coming 5 years inflation and
fluctuation of currency the definition was improved in January 2011 as follows. Based on
the revised sector both micro and small scale Enterprises are categorized into industrial
sector and service sector. Under industrial sector (manufacturing, construction, and
mining) micro enterprise are defined as an enterprises that operates with 5 peoples
including the owner and/or their total asset Is not exceeding birr 100,[Link] service
sector (retailers, transport, hotel and tourism, ICT and maintenance service micro
enterprises are defined as an enterprises that operates with 5 persons including the Owner
of the enterprises and/or the value of an total asset is not exceeding birr 50,000.

Under industry sector (manufacturing, construction and mining) small enterprises are
defined as operators with 6-30 persons and/or paid up capital of birr 100,000 and not
exceeding birr 1.5 million. under service sector(retailer transport, hotel and tourism, ICT
and maintenance service) small enterprises are defined as operates with 6-30 persons
and/or total asset or a paid up capital is with birr 50,001 and not exceeding birr 500,000.
When ambiguity is encountered between man power and total asset as explained above
total asset is taken as Primary yard stick(MSEDS,2011).

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TABLE2.1:THE REVISED MSE DEFINITION TABLE

Type of the enterprises sector Human power Total asset

Micro enterprises industry <5 <100000(birr)

Micro enterprises service <5 <50000

Small enterprises industry 6-30 <1.5million(birr

Small enterprises service 6-30 <500000(birr)

Source:MSEDA,2011

2.3 Definition of Business Performance

According to Martin (2010:67) performance is defined simply in terms of output terms

such as quantified objectives or profitability. Performance has been the subject of
extensive and increasing empirical and conceptual investigation in the small business
literature (Bidzakin K.J., 2009:31). The issues that remain unresolved are the goals
against which performance should be assessed and from whose perspective the goals
should be established (Etzioni, n.d:128).

Rami Alasadi and Ahmed Abdelrahim (2007:6-13) on their study defined performance as
follows. The most commonly adopted definition of success [good performance] is
financial growth with adequate profits. Other definitions of success [good performance]
are equally applicable. For example, some entrepreneurs regard success [good
performance] as the job satisfaction they derive from achieving desired goals. However,
financial growth due to increasing profits has been widely adopted by most researchers
and practitioners in business performance models.

Global Entrepreneurship Monitor (GEM) defined Performance as the act of performing;of

doing something successfully; using knowledge as distinguished from merely possessing

20
it (GEM, 2004:10). However, performance seems to be conceptualized, operation realized
and measured in different ways thus, making cross-comparison is difficult (Srinivasanet
al.,1994:22). Among the most frequently used operation nationalization are survival,
growth in employees and profitability.

A business enterprise could measure its performance using the financial and non-financial
measures. The financial measures include profit before tax and turnover while the non-
financial measures focus on issues pertaining to customers’ satisfaction and customers’
referral rates, delivery time, waiting time and employees’ turnover. Recognizing the
limitations of relying solely on either the financial or non-financial measures, owners-
managers of the modern small business has adopted a hybrid approach of using both the
financial and non-financial measures(H Gin Chong, 2008:13).

2.3.1 Measures of Performance

Business performance is usually measured in terms of economic performance. As Walker

and Brown (2004), small business performance can be measured by financial and non-
financial criteria although the former has been given most attention in the literature.
Traditional measures of business success have been based on employee numbers or
financial performance, such as profit, turn over or return on investment. Implicit in these
measures is an assumption of growth that pre supposes all small business owners want or
need to grow their businesses.

For businesses to be deemed well perform or not these financial measurements require
increases in profit or turn over and/or increased numbers of employees. As Walker and
Brown (2004) cited from the study of Hall and Fulshaw(1993), ‘The most obvious
measures of performance are profitability and growth’. In economic terms this is seen as
profit maximization. Economic measures of performance have generally been popular due
to the ease with which they can be administered and applied since they are very much
hard measures.

Furthermore Walker and Brown (2004) suggested, ‘all businesses must be financially
viable on some level in order to continue to exist’. However, given that some businesses
have no interest in growth, thereby implying that financial gain is not their primary or
only motivation, then there must therefore be other non-financial criteria that these small
business owners use to measure their business performance.

21
In smaller, entrepreneurial and independent firms, measures of performance may have
more complex dimensions than just financial performance (Mohan-Neill2009). Non-
financial measures of performance used by business owners, such as autonomy, job
satisfaction or the ability to balance work and family responsibilities (Walker and Brown,
2004, Mohan-Neill2009) are subjective and personally defined and are consequently more
difficult to quantify. The hard measures previously mentioned therefore, are easier to
understand and can be used in a comparative way against existing data and as benchmarks
for future measures.

Non-financial measures are based on criteria that are personally determined by the
individual business owner although commonalties within the partners of small business
owners occur. These non-financial measures presume that there is a given level of
financial security already established; it may be that this is within the business, or that the
small business owner does not require the business to be the primary source of income
(Walker and Brown, 2004).

The selection of performance measures that reflect the true situation of small businesses
with some degree of certainty and reliability is indeed a crucial process. The lack of
universally accepted standard performance measures left the door open to business
organizations to decide and choose its own performance measure that might not truly
reflect its performance (Alasadi and Abdelrahim, 2007)Such performance measures
include but not limited to: market share, sales volume, company reputation, return-on-
investment (ROI), profitability, and established corporate identity. While some might
argue that most of these performance measures are appropriate for large corporations,
they are not always perfectly applicable to small businesses. In this study as MSEs
concerned the financial measure of success that is the growth of total capital of the
enterprises is used since it is better than then on-financial measures in terms of reducing
the subjectivity of the measurement results.

2.4 Factors Influencing Mses Performance

Micro and small enterprises considered as a vital component of the socio-economic
development of both developed and developing countries, usually some of these
enterprises collapse within the first few years of their start-up. Of those operating, some

22
grow rapidly, while others grow slowly. So, it is important to identify the cause factors of
better performance because it helps new entrants of the sector consider the factors and use
for their future in the business (Alasadiand Abdelrahim, 2007).
These factors could vary from one country to another due to the economic, geographical
and cultural differences. This kind of investigation of the MSEs performance related
factor is very important for developing countries like Ethiopia because the research
conclusion could be useful for the economic development planners as well as to
individual entrepreneurs and business owners in the countries concerned.

To date, there is no unified the ethical model on firm performance. There are, however,
several models that shed light to the issues from various perspectives. The performance of
a firm is motivated by external opportunities, such as promising demand prospects for the
firm's product, and/or internal inducements, such as a shift to a more efficient utilization
of existing resources of the firm. On the other hand, external and internal factors may also
function as obstacles to better performance. As far as external determinants of
performance are concerned, demand for the firm’s products is the major factor. Second,
the market actions of competitors, the supply of production factors and the features of the
local business environment are typically external to a small firm. Internal determinants
include the features of the firm itself and the attributes of the business owners of the
enterprises. In this research the internal factors of the enterprises are under consideration.
There are also various factors like socio-economic, political and motivational factors that
affect the performance of small business in general and MSEs in particular. Searching on
the literature of MSEs performance across the world, we can find various factors affecting
their performance. In the following section of the review of related works of previous
researchers regarding each of the independent variables of this study, they are presented
and discussed under two main subtopics of personal and business related factors.

2.4.1 Education
Some business owners are highly educated and extremely successful whereas others have
yet to complete their high school but are equally successful. In many instances, it may
depend on the individual himself/herself. Nevertheless, education level can have an effect
on the performance of a business as noted in many studies.

23
A reason for supposing it would do so is that education improves literacy, quantitative
training, and social and communication skills. And of course specialized education is
necessary for many occupations. The study of Lussier (1995) suggested that people
without any college education who start a business have a greater chance of failing than
people with one or more years of college education.

Education can provide the skills set and knowledge, which can help owner/managers with
tools, like technology literacy, which helps to increase performance and productivity. If
education cultivates comprehensive literacy, this would help owner/managers to integrate
relevant information to do effective planning and to make well-informed decisions, which
would ultimately enhance the organization performance (Mohan-Niell, 2009).

Thapa, Goswami and Joshi (2008) in their study they found that the education of owners
has positive effect on entrepreneurial and small business performance. Similarly Rose,
Kumar and Yen (2006), in their study of the ‘Dynamics of Entrepreneurs Success
Factors’, reported that, higher education level helps the business owners to have better
knowledge and skills which contribute to the performance of their venture. Working
experience also assists the entrepreneurs with information and understanding about the
industry and thus, assisted them in venturing into the current business they are in Another
research by Charney and Libecap (2000), found that entrepreneurship education produces
self-sufficient enterprising individuals. Furthermore, they found that entrepreneurship
education increases the formation of new ventures, the likelihood of self-employment, the
likelihood of developing new products, and the likelihood of self-employed graduates
owning a high-technology business.

2.4.2 Age
Entrepreneurs vary in age from young to old in many instances; an individual may begin a
business as a hobby or secondary source of income and have it grow in to a profit-driven
enterprise. A number of studies have focused on the entrepreneurial characteristics of the
owners/managers of small businesses as key factors to small business [Link]
of the owners/managers were one of the most important characteristic that was repeatedly
used to predict small business performance and growth (Lussierand Pfeifer, 2001).

24
Lussier (1995) also argued the relationship of the business owner’s age and its effect on
the performance of the enterprises. He reported in his study that, younger people who start
a business have a greater chance to fail than older people starting a business.

Similarly, Praag (2003), in his study of business survival and success of young small
business owners, younger small business starters have a lower performance and survival
probabilities than older starters. The chance of both voluntarily and forced exit from the
business is higher to young starters. From this one can understand that the age of small
business owners’ have its own contribution to the performance of MSEs because
individuals learn not only from formal education but also from their walks of life.
Alasadiand Abdelrahim (2007), in their study of Small Business Performance in Syria
also reported that, as the age of the business owner increase it contributes to the
enterprises performance. From the study result of Alasadi and Abdelrahim, it may be
argued that increased age brings with it a sufficient level of accumulated knowledge or
experience of a certain trade to try going in to self-employment alone.

2.4.3 Management Experience

Management experience may provide entrepreneurs with prior knowledge of markets,
ways to serve markets, and of customer problems. Zeleke (2009) conducts a study on the
efficiency of management as a determinant of long-term survival in micro, small and
medium enterprises in Ethiopia, and his research as certain that high level of managerial
skills significantly promotes long-term survival and profitability in small businesses and
enterprises. Successful businesses are significantly associated with the ability to generate
profit on a sustainable basis. Profitability has enabled successful businesses to achieve
their next level of growth as well as the potential to stay competitive in business. The
main reason for failure is inexperienced management. Managers of bankrupt firms do not
have the experience, knowledge, or vision to run their businesses. In diagnosing the root
causes of small firm failure it should not be surprising that this turns out to be the
management inefficiency of owner-managers (Zeleke2009).

Managerial effectiveness influences every aspect of a business and is often believed to be

the most important factor contributing to small business performance. The management
skills and management concepts of business founders are deemed much more important

25
than their technical skills and their concern about production which has resulted in an
overall positive organizational performance (Lin andYeh-Yun1998).

In contrast, the study report of Rose, Kumar and Yen (2006), indicates management
experience was found not significant for the performance of small enterprises. Apparently
individuals who were found successful in their small business venture were less
dependent upon their previous business skills. In addition their study shows that
marketing functions such as promoting company and its product and services,
understanding market needs, customer feedback and market analysis ensure the long term
business performance of business venture.

In addition Temtime and Pansiri (2004) also reported in their study managerial
background has less significance on the performance of the enterprises. This may arise
from the fact that most managers of failed enterprises do not accept the fact that their lack
of managerial education and experience is also responsible for failure. Lin and Yeh-Yun
(1998), in their study of Success factors of small and medium sized enterprises, suggested
that the management skills and management concepts of business founders are much
more important than their technical skills and their concern about production which has
resulted in an overall positive organizational [Link] argued in their study that,
although technical skills may guarantee the survival of a given SME, for an enterprise to
truly thrive, founders need to enhance their capabilities in carrying out contemporary
management concepts, such as satisfying employees' growth needs, delegating
responsibility, and participative management.

Another study done by Okpara (2011), on MSEs operating in Nigeria supports the
argument that, lack of management experience of the small business owners is the other
major reason to small business failure. As the findings of this study shows that, most
business owners who do not have management experience and adequate training and
skills to operate a business faces a problem of collapse of their businesses.

26
2.5 Business Related Factors
2.5.1 Marketing Skill of Business Owners

The study of Lussier(1995) emphasizes on the importance of marketing skill of the

business owners as one factor to the success and better performance of small businesses.
Marketing skills, such as identifying new prospects, showing effective corporate
positioning, customer handling, finding ways to efficiently advertise, and the ability to
come up with new ideas are very important factors that micro and small business
enterprises should possess to be successful survival in the future. Temtime and Pansiri
(2004) also reported in their study of Small business Critical Success/Failure Factors in
Developing Economies, in Botswana shows that marketing activities such as product
marketing, market research, and demand forecast and so forth have greater impact on the
performance of small businesses enterprises. In this study customer relationship also
reported as one of the important factors of the small business owners performance. From
this study report one can understand the importance of marketing skills of the business
owners to be successful in their competitive environment.

Pulendran, Speed and Widing (2002), suggest that the quality of marketing planning is
associated with higher level of market orientation. Perhaps one can argue that, better
quality planning assists managers seeking to implement a market orientation to achieve
their goal, or conversely, market orientation assists planning by providing a clear and
unambiguous goal that serves to focus the planning effort.

This study also indicates that managerial functions in small enterprises are limited to
routine short term focused activities, and very little emphasizes given for long-term
competitiveness which intern has an impact on the long-term performance and
profitability of the enterprises.

2.5.2 Planning and Performance In Small Enterprises

Planning was also recognized by several studies as a key factor to small business
performance such as Lussier(1995), Lussier and Pfeifer (2001), Alasadiand
Abdelrahim(2007). A business often begins with an idea that is acted upon. However, to
get from the ideas stage to the actual business start-up generally involves considerable
Planning. In many cases, the amount of actual Planning done is dependent on the
willingness of the entrepreneur to do it. Some entrepreneurs prepare business plans as a

27
means to attain financing for their businesses while others use a plan to get all their ideas
down on paper to assess whether their business idea is sound and viable.

Ahmed, Shabazzand Mubarak (2008) suggested that no one should start a business in
today’s economy without a business plan. They argued that better performance for small
businesses is achieved through planning, commitment, and time,nurturing, financing, and
positioning to seize opportunities. Many of these activities must be done on a continual
basis as the environment in which businesses operate is continuously evolving.

Another fact rarely considered is that the majority of new businesses fail within a few
years mostly due simply to poor planning or no planning at all. Most people who go into
business enter a field related to their current employment or a favourite hobby. They don't
do a market study first to see whether the demand for their product or service is growing,
declining or stagnating.

2.5.3 Record Keeping And Financial Control

Poor record keeping can also lead to strained relationships with vendors which may result
in difficulty in obtaining and receiving merchandise. Inadequate working capital decisions
and accounting information have been referenced consistently as causes of small business
failure. In The study of Lusseir (1995), he reported that businesses that do not keep
updated and accurate records and do not use adequate financial controls have greater
chance of failure than firms that do. However, the study of Rose, Kumar and Yen (2006)
did not show any significant relationship between small business performances and the
record keeping, and financial control practices of the enterprises.

2.5.4 Form of Ownership

The other study report of Lafuente and Rabetino (2011) indicates the relationship between
enterprises performance and forms of ownership. They reported that rather than those
firms with a single-tier leadership structure (entrepreneur-manager), the presence of
entrepreneurial teams increases firm’s resources and capabilities, a fact that enhances
employment growth indicating that the presence of entrepreneurial teams improve internal
decision-making processes leading to higher growth rates. Similarly the study of lusseir

28
(1995), supports the fact that enterprises which are owned by more than own owner have
a higher chance of success than those enterprises owned and managed by a single owner.

EMPERICAL STUDIES

2.6 Empirical Study

According to Mead & Liedholm (1998) and Swierczek and Ha (2003), the main factors
that affect the performance of MSEs in developing countries is not their small size but
their isolation, Which hinders access to markets, as well as to information, finance and
institutional support. The argument that small businesses in Africa are crucial in the role
they play in employment creation and general contribution to economic growth is not
new. Although this may be true ,the vast majority of new enterprises tend to be one-
person establishments (Mwega,1991).This has tended to ensure that the journey of the
MSEs entrepreneur in many instances is short-lived, with the statistic of MSEs failure rate
in Africa being put at 99percent (Rogerson, 2000).

Various reasons for these failures have been proposed by scholars including lack of
supportive policies for MSE development (McCormick 1998),intense competition with
replication of competition with replication of micro-businesses (Manning &
Mashego,1993); manager characteristics including lack of skills and experience (Katwalo
& Madichie,2008).

A study by Hall (1992) has identified two primary causes of small business failure appear
to be a lack of appropriate management skills and inadequate capital (both at start-up and
on a continuing basis).There search undertaken in Tanzania by surveying 160 micro
enterprise showed that high tax rates, corruption, and regulation in the form of licenses
and permits, are found to be the most important constraints to business operations of
micro enterprises (Fredland etal,2006 cited in Mulugeta,2011).

29
A view expressed by Freed and Morris (2009) argued that the causes of failure cannot be
isolated and that any attempt to do so is at bottom futile exercise. However, they
suggested that The issue of causation is clarified somewhat by classifying causes as
endogenous (internal to the firm and presumably within its control) and exogenous
(external to the firm and beyond its control).Such a classification has the merit of
providing a somewhat better policy handle since if causes are endogenous, appropriate
policy helps firms help themselves if exogenous, appropriate policy may seek to change
the economic environment.

Previous evidence suggests that, although endogenous factors were the main cause of
Failure exogenous factors had a significant effect in approximately one third of small
business failures (Peters on et al., 1983). Royand Wheeler(2006) identified that the level
of training of micro entrepreneurs(both formal and informal); experience and number of
years in operation; knowledge of the market level of differentiation (in terms of price,
quality or other) and diversification of products access to the necessary resources and/or
technologies; level of planning; vision for the future; and the entrepreneur’s level of
poverty are among the factors contributing to success of MSEs while lack of market
knowledge and training, limited access to capital, and lack of co-operation among
possible business partners are some of the factor inhibiting the growth and development
of the micro enterprise sector.

2.6.1 Previous Studies on Ethiopian Micro and Small Enterprises

Eshetuand Zeleke (2008) conducted longitudinal study to assess the impact of influential
factors that affect the long-term survival and viability of small enterprises by using a
random sample of 500 MSEs from 5 major cities in Ethiopia. According to this research,
that lasted from 1996-2001, the factors that affect the long term survival of MSEs in
Ethiopia are found to be adequacy of finance, level of education level, poor managerial
skills, level of technical skills, and ability to convert part of their profit to investment.

This is so because the findings of the study revealed that businesses that failed, during the
study period were characterized by inadequate finance (61%), low-level of education

30
(55%), poor managerial skills (54%), shortage of technical skills (49%), and inability to
convert part of their profit to investment (46%).The study further indicated that
participation in social capital and networking schemes such as Iqub was critically helpful
for long-term survival of the enterprises. Businesses that did not participate in Iqub
schemes regularly were found to be 3.25times more likely to fail in comparison with
businesses that did, according to the study.

In their study, based on the survey covering 123 business units in four Kebeles of Nifas
Silk- Lafto and Kirkos sub-cities of Addis Ababa, and aimed to investigate the constraints
and key determinants of growth, particularly in employment expansion, Pauland
Rahel(2010) found out that the studied enterprises registered 25%increment in the number
of total employment they created since their establishment with an average annual
employment rate of 11.72%.With regard to the sources of initial capital of the studied
enterprises, the study indicated that, the main ones were loan from MFI (66.7%), personal
savings/Iqub (17.5%),and loan from family/friends(17.1%).Moreover, the concrete
problems that the targeted MSEs faced at their start up were lack of capital (52.8%), skills
problem (17.9%) and lack of working space (17.1%).Moreover, Daniel (2007), identified
that lack of raw material, stiff competition and shortage of working capital.

Major cities of Ethiopia namely ADAMA, HAWASSA, BAHIRDAR and MEKELLE,

Tegegne and Meheret’s research(2010) was conducted with the intention of assessing the
contribution of the MSE strategy to poverty reduction, job creation and business
development. The raised causes for this gloomy prospect of business were not growing
(33%), lack of finance (13%), lack of market (11%), and lack of working space (4%).

The major constraints identified by various studies on MSEs in Ethiopia are associated
with market and finance problems. The causes of market-related problems of MSEs
engaged in metal and wood work are shortage or absence of marketing skills, poor quality
of products, absence of marketing research, shortage of market information, shortage of
selling places, and absence of sub-contracting (FMSEDA, 2006).The product line of
MSEs activities in Ethiopia Is relatively similar(Assegedech, 2004). Accordingly she
states that: “…Lack of product diversity, however, is prevalent and as a result similar
products are over-crowding the market.

31
Some micro enterprises shift from one product to another, and in doing so, capture better
market opportunities. Nevertheless, as soon as the market has established itself, a
multitude of further micro enterprises start of find the same business and this causes the
selling price to fall immediately. “According to Assegedech (2004) “Shortage of funds
discourages the smooth operation and development of MSEs. Even if there are credit
facilities, some of the MSEs do not use the money for the intended purpose. They rather
divert it for other unintended and on- productive expenditures. Consequently, the
enterprises fail to return the money back to the lender on time. This can result in a loss of
credibility to get repeated loans when needed.”

In addition competition is also another problem that hinders the performance of MSE. She
explained it as: “As is mostly the case and common recognition, “Competition is Cruel",
which implies that some larger companies in relation to MSEs have advantages due
to:selling at reduced price with out reducing product quality using economies of scale,
customer targeting capacity, proper and intensified product/service advertising capacity,
good personal contacts and networks, sound industry reputation and sufficient information
regarding existing market and capacity to exploit more market opportunities.”

In his research Dereje (2008 studied the nature, characteristics, economic performance,
opportunities and challenges of MSEs in the construction sector based on 125 sample
enterprises.) The results of the study revealed that the main constraints of the MSEs were
shortage of capital, lack of raw materials, absence of government support, lack of market,
lack of credit facilities and high interest rate. Studies were also conducted specifically
with a purpose of identifying the problems that MSEs encounter. For instance, Workneh
(2007) research under taken in Kolfe Keraneo sub-city of Addis Ababa indicated that lack
of capital, lack of market, unfavourable policy, and inadequate infrastructure, absence of
adequate and relevant training, bureaucratic structure and procedures are among
constraints faced by MSEs. Similarly, Adil’s (2007:63) research carried out in Addis
Ababa shows that inappropriate government intervention, shortage of capital, location
disadvantage, and lack of market and lack of display room are the major challenges that
obstruct MSEs.

32
Mulugeta(2011) has also identified and categorized the critical problems of MSEs into
market- related problems, which are caused by poor market linkage and poor promotional
efforts institution-related problems including bureaucratic bottlenecks, weak institutional
capacity, lack of awareness, failure to abide policies, regulations, rules, directives,
absence of training to executives, and poor monitoring and follow-up; operator-related
short coming slick developing dependency tradition, extravagant and wasting behaviour,
and lack of vision and commitment from the side of the operators; MSEs related
challenges including lack of selling place, weak accounting and record keeping, lack of
experience sharing, and lack of cooperation within and among the MSEs and finally,
society-related problems such as its distorted attitude about the operators themselves and
their products.

Finally, based upon the literature review as it is clearly indicated there are various factors
that influence the performance of micro and small enterprises, which is undertaken by
different researchers, but still in Ethiopia the sector need more researches to be done.
There as one forth is most of the studies conducted several years ago and a lot must have
been changed since then it is vital to undertake research in the sector because any good
policy and strategies need to rely on timely information. To promote micro and small
scale enterprises, with the view to increase their contribution to poverty and
unemployment reduction and economic growth. Based on this fact the objective of this
study focus on describing factors influencing of micro and small enterprises in Addis
Abeba particularly Bole sub city.

33
 CHAPTER THREE

DATA PRESENTATION AND ANALYSIS

3.1 Introduction
It involves a blue print for the collection, measurement and analysis of data. Moreover,
the chapter reveals an overall scheme, plan or structure conceived to the researcher
interesting the research hypotheses [Link] this stage most decisions about how research will
execute and how respondents will approach, as well as when, where and how there search
will completed is discuss. Therefore in general this part of the study describes the research
design and methodology that will use to guide under the following sub-heading: the
research design, target population, sample technique and sampling size, data collection
instrument, variables and measures, data analysis technique and ethical considerations.

And also, This chapter presents analysis and interpretation of findings from data that were
gathered from the MSEs found within Bole sub city. The data was obtained through
questionnaires. To obtain mere dependable information, diversified groups of respondents
which engaged in construction, manufacturing, merchandise and retail shops and service
were involved to give information for the study.

During the data collection phase, a total of 267 questionnaires were dispatched to
respondent enterprises to gather insights on their operational practices and financial
management [Link] questionnaires served as a crucial tool in capturing relevant
data and perspectives, thereby supporting the objectives of the research and contributing
to a better understanding of the challenges and practices within the small enterprise
sector.

3.2 Theoretical Background of Organization

Addis Ababa, the capital city of Ethiopia, serves as a vital centre for the country's
economy and cultural identity, with Bole Sub-City emerging as a vibrant hub for small

34
businesses. This area has experienced significant economic transformation in recent years,
driven by increased investment, urbanization, and a growing middle class. Understanding
the development of small businesses in Bole Sub-City highlights the resilience of
Ethiopian entrepreneurs while also reflecting the broader socio-economic changes
occurring in the region.

Historically, Addis Ababa has been a focal point for trade since its establishment in the
late 19th century. The liberalization of the economy in the early 1990s fostered an
environment conducive to entrepreneurial activities, particularly in Bole Sub-City, which
is strategically located near the Bole International Airport and various commercial
developments. The youthful demographic in this area has spurred a rise in demand for
diverse services and products, leading to the growth of businesses in sectors such as retail,
hospitality, food and beverage, and technology.

Government initiatives aimed at supporting entrepreneurship have further strengthened

the small business landscape in Bole Sub-City. Programs that provide access to micro-
loans, training, and mentor-ship empower aspiring entrepreneurs, while business
incubators and co-working spaces foster a collaborative environment for start-ups.
Additionally, the influx of expatriates and foreign investors enriches this entrepreneurial
ecosystem, although challenges remain in terms of accessing financing and navigating
bureaucratic hurdles. Overall, Bole Sub-City exemplifies the dynamic nature of small
businesses in Addis Ababa, highlighting their critical role in driving economic
development and community resilience within Ethiopia's evolving economic landscape.

3.3 Response Rate

The researcher targeted a sample of 267 MSEs of which 82 of them were responded. This
represent a 31% response rate as table 1 below clearly revealed.
Table 1 RESPONSE RATE

Number Respondent category Frequency Percentage

1 Responded 82 31%

2 Didn’t respond 185 69%

Total 267 100%

35
Primary data source

3.4 Demographic Characteristics of Mses Owners

Regarding the gender of the respondents Table 3.2 shows below 64(78.04) of respondents
are male the rest 18(21.96) respondents are female. This shows the number of male and
female involvement in such enterprises are not equal or most of MSEs owners are male.

As it is indicated in the Table 3.2, from the total sample taken 30 (36.6%) enterprises are
possessed by principal owners with the age of 20-30 years old. The other 46 (56.1%)
MSEs in this study are owned by individuals with the age range of 31 to 40 years which
roughly shows the adult age group of the population in Ethiopia and the remaining
6(7.3%)enterprises have owners ‘with age above 41 years and above.

The other measurement is educational level of the respondents or owners in this regard 17
(20.7%) of the respondents were below grade 10 and 32 (39%) below 10+3. First degree
graduate business owner is only 10(12.2%) of the total sample and the rest 23(28%) have
completed 10+3.
Table 2 Profile of the Respondent

Valid Cumulative
Frequency Percent Percent Percent
Respondent Female 18 21.96 21.96 21.96
Sex Male 64 78.04 78.04 100.0
Total 82 100.0 100.0
Respondent 20 – 30 30 36.6 36.6 36.6
Age 31 – 40 46 56.1 56.1 92.7
41 – 50 6 7.3 7.3 100.0
Total 82 100.0 100.0
Respondent 10+1 23 28.0 28.0 28.0
Education 10+2 9 11.0 11.0 39.0
10+3 23 28.0 28.0 67.1
Below 17 20.7 20.7 87.8
10
Degree 10 12.2 12.2 100.0
Total 82 100.0
36 100.0
Source primary data

The analysis of the demographic characteristics of the respondents, as shown in Table 3.2,
reveals significant imbalances in gender representation among micro and small enterprise
(MSE) owners, with 78.04% of respondents being male and only 21.96% female,
highlighting a male-dominated landscape in entrepreneurial ownership. Age distribution
further emphasizes a concentration of ownership among the 31 to 40-year age group, which
comprises 56.1% of the respondents, indicating that mid-career adults are the primary drivers
of small enterprises in Ethiopia. Educationally, a concerning number of owners lack formal
qualifications, with 20.7% having not completed grade 10 and 39% falling short of 10+3
education levels, suggesting that significant gaps in educational attainment could impact the
professionalism and growth potential of these businesses. Only 12.2% of respondents hold a
first-degree qualification, underscoring the need for targeted educational initiatives that could
enhance the skills and knowledge of aspiring entrepreneurs, ultimately contributing to the
sustainability and success of the MSE sector.

3.5 Business Related Characteristics

 RECORDING BUSINESS EVENTS

Table 3 business event

NO Item Response Count Percentage of

Category total
1. All business Strongly 38 46.3%
events should be agree
recorded
Agree 12 14.6%
regardless of
Neutral 14 17.1%
their
significance? Disagree 16 19.5%
Strongly 0 0.0%
disagree
Total 82 100%

37
Source primary data

The analysis in table 3.3 shows a general tendency among respondents toward the belief
that all business events should be recorded, with a majority supporting the practice.
However, there is a substantial minority that disagrees with this idea, signifying a need for
a balanced approach tailored to the specific context and needs of individual enterprises.

Table 4 Benefit from Recording

NO Item Response Count Percentage

Category of total
1 Small businesses are less Strongly agree 33 40.2%
likely to benefit
from Agree 17 20.7%
recording events compared
Neutral 6 7.3%
to larger companies?
Disagree 24 29.3%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.4 shows the analysis reveals that a significant portion of respondents
believes that small businesses derive fewer benefits from recording events compared to
larger companies. However, a substantial minority disagrees with this perspective,
indicating that there is value in documenting events regardless of business size. This
suggests that while perceptions may vary, many small businesses could still find
substantial advantages in recording events, perhaps reflecting their unique needs and
operational contexts.

Table 5TRENDS AND OPPORTUNITIES

NO Item Response Count Percentage

Category of total
1 Recording Strongly 44 53.7%
business events agree

38
 can help small Agree 12 14.6%
businesses Neutral 4 4.9%
identify trends
Disagree 16 19.5%
and
Strongly 6 7.3%
opportunities?
disagree
Total 82 100%
Source primary data

The above table 3.5 shows the analysis indicates a predominantly positive view among
enterprises regarding the benefits of recording business events for identifying trends and
opportunities. The majority strongly supports the idea, highlighting its perceived
importance for small businesses. However, the notable minority that disagrees signals that
there may be different perspectives on how effective such practices are, emphasizing the
need for small businesses to evaluate their context and adopt practices that are beneficial
for their specific situations.

.Table 6 PRIORITIZE

NO Item Response Count Percentage

Category of total
1 Small Strongly 50 61.0%
businesses agree
should
Agree 12 14.6%
prioritize
Neutral 8 9.8%
recording
customer Disagree 12 14.6%
interactions for Strongly 0 0.0%
better service. disagree
Total 82 100%
Source primary data

39
The above table 3.6 shows the analysis shows that there is a strong belief among the
majority of small businesses in the importance of prioritizing the recording of customer
interactions to improve service. With 75.6% of respondents in favour, it is clear that many
enterprises recognize the value of understanding customer needs and preferences.
However, the 14.6% of respondents who disagree indicates a need for continued
discussion about the best practices and potential challenges surrounding this approach,
particularly in the context of smaller organizations with limited resources.

Table 7 SUFFICIENCY

NO Item Response Count Percentage

Category of total
1 Using simple Strongly 33 40.2%
tools to record agree
business events
Agree 10 12.2%
is sufficient for
Neutral 16 19.5%
small
businesses? Disagree 23 28.0%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.7 shows the analysis reveals a divided opinion among the enterprises
regarding the sufficiency of simple tools for recording business events. While a
substantial number of respondents (approximately 52.4%) see value in using
straightforward solutions, a significant portion (28.0%) disagrees, suggesting that more
complex needs may exist within their operations. This divergence emphasizes the need for
small businesses to assess their specific requirements and choose tools that align with
their unique operational demands, potentially considering a range of solutions.

40
 STATEMENT FOR FINANCIAL REPORTING AND PREPARATION.

Table 8 MAINTAINING INVESTOR TRUST

No Item Response Count Percentage

Category of total
1 Accurate Strongly 43 52.4%
financial agree
reporting is
Agree 23 28.0%
essential for
Neutral 16 19.5%
maintaining
investor trust? Disagree 0 0.0%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.8 shows the analysis underscores a strong belief among the majority of
enterprises in the importance of accurate financial reporting as a means of maintaining
investor trust. With approximately 80.5% of respondents agreeing on this point, it reflects
a widespread understanding of the significance of financial accuracy in building and
sustaining investor confidence. The absence of disagreement further reinforces the
consensus, indicating that organizations likely recognize the value of accurate reporting
in their overall financial governance and investor relations strategies
Table 9 FORMAL FINANCIAL REPORTS

No Item Response Count Percentage

Category of total
1 Small Strongly 12 14.6%
businesses do agree
not need
Agree 20 24.4%

41
 formal Neutral 16 19.5%
financial Disagree 33 40.2%
reports as
Strongly 11 13.4%
much as larger
disagree
companies do?
Total 82 100%
Source primary data

The above table 3.9 shows the analysis reveals a strong sentiment among the surveyed
enterprises that small businesses do need formal financial reports, with 65.9% of
respondents expressing disagreement with the notion that small businesses are less in
need of such reports compared to larger companies. The presence of significant
disagreement suggests that many stakeholders in small businesses recognize the
importance of formal financial documentation for effective management, compliance, and
financial planning. The relatively high number of neutral responses indicates that there
may still be some discussion needed around best practices and perceptions regarding
financial reporting in small businesses.

Table 10 AREAS FOR COST SAVINGS

No Item Response Count Percentage

Category of total
1 Regular Strongly 24 29.3%
financial agree
reporting can
Agree 50 61%
help identify
Neutral 8 9.8%
areas for cost
savings? Disagree 0 0.0%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

42
The above table 3.10 shows the analysis shows a strong belief among respondents that
regular financial reporting significantly aids in identifying opportunities for cost savings,
with an impressive 90.2% expressing agreement. This highlights the importance of
consistent financial documentation as a strategic tool for businesses seeking to optimize
their expenses and enhance operational efficiency. The absence of any disagreement
reinforces the idea that this is a widely accepted practice among the surveyed enterprises,
indicating a high level of awareness of the potential benefits of regular financial reporting.

Table 11 COMPLIANCE WITH ACCOUNTING STANDARDS

No Item Response Count Percentage

Category of total
1 Compliance Strongly 10 12.2%
with agree
accounting
Agree 33 40.2%
standards is
Neutral 6 7.3%
unnecessary
for internal Disagree 24 29.3%
financial Strongly 9 11%
reports? disagree
Total 82 100%
Source primary data

The above table 3.11 shows the analysis reveals a divided opinion among the enterprises
regarding the necessity of compliance with accounting standards for internal financial
reports. While a majority may feel that adherence to formal standards is less important
(over 51.2% agree), a significant minority (approximately 40.2%) strongly believe in its
importance. The notable disagreement highlights that many organizations understand the
value of consistency and transparency in financial reporting, even if those reports are
meant for internal use. This divergence suggests that there may be a need for further
education or discussion on the role of accounting standards in internal financial practices.

43
Table 12 REVENUES AND EXPENSES

No Item Response Count Percentage

Category of total
1 Financial Strongly 36 43.9%
preparation agree
involves
Agree 12 14.6%
forecasting
Neutral 12 14.6%
future revenues
and expenses? Disagree 12 14.6%
Strongly 10 12.2%
disagree
Total 82 100%
Source primary data

The above table 3.12 shows the analysis indicates that a significant portion of enterprises
recognizes forecasting future revenues and expenses as a crucial part of financial
preparation, with approximately 58.5% of respondents agreeing with the statement.
However, the notable minority (approximately 26.8%) that disagrees reflects a diversity
of approaches and philosophies regarding financial preparation practices. This highlights
an opportunity for dialogue and education on the role of forecasting in financial planning,
as organizations may benefit from understanding its potential contributions to informed
decision-making and strategic planning.

 INTERNAL CONTROL AND INVENTORY SYSTEMS IN SMALL

BUSINESSES.

Table 13 INVENTORY CONTROL PROCEDURES

No Item Response Count Percentage

Category of total
1 Do small Strongly 34 41.5%

44
 businesses agree
need to have Agree 8 9.8%
documented
Neutral 14 17.1%
inventory
Disagree 12 14.6%
control
procedures? Strongly 14 17.1%
disagree
Total 82 100%
Source primary data

The above table 3.13 shows there is significant support for the need for documented
inventory control procedures among small businesses, a notable minority remains
sceptical. This points to the necessity for education on the benefits of formal internal
controls and may indicate varying business practices and resource constraints in some
enterprises.

Table 14 REGULAR INVENTORY COUNTS

No Item Response Count Percentage

Category of total
1 Is it Strongly 53 64.6%
unnecessary agree
for small
Agree 14 17.1%
businesses to
Neutral 6 7.3%
conduct
regular Disagree 6 7.3%
inventory Strongly 3 3.7%
counts? disagree
Total 82 100%
Source primary data

The above table 3.14 shows the analysis reveals that the overwhelming majority of small
businesses believe regular inventory counts are unnecessary. Nonetheless, a notable

45
minority sees the value in conducting these counts, indicating a divide in belief that could
stem from differences in business models, industry types, or management priorities.

Table 15 INVENTORY MANAGEMENT

No Item Response Count Percentage

Category of total
1 Should responsibilities for Strongly agree 22 26.8%
inventory managementbe Agree 44 53.7%
segregated among different
Neutral 4 4.9%
employees?
Disagree 12 14.6%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.15 shows the strong consensus among small businesses favouring the
segregation of responsibilities in inventory management. This reflects an understanding of
the importance of internal controls to mitigate risks associated with fraud and errors.
While a minority may disagree, the lack of strong negative responses underlines a general
agreement on the need for structured processes in inventory oversight, which can enhance
accountability and operational efficiency.

Table 16 IMPROVE INTERNAL CONTROLS

No Item Response Count Percentage

Category of total
1 Can using Strongly 28 34.1%
inventory agree
management
Agree 44 53.7%
software help
Neutral 5 6.1%
improve

46
 internal Disagree 5 6.1%
controls? Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.16 shows the analysis reveals a strong consensus among the majority of
small businesses regarding the positive influence of inventory management software on
enhancing internal controls. The overwhelming majority (over 87%) support the notion,
indicating an understanding of how such tools can improve accuracy, accountability, and
efficiency in inventory management. The small proportion of neutral and disagreeing
responses may reflect individual circumstances or experiences, but overall, there is a clear
endorsement for the use of technology in reinforcing internal control mechanisms.

Table 17 EMPLOYEE HONESTY

No Item Response Count Percentage

Category of total
1 Is it acceptable Strongly 34 41.5%
for small agree
businesses to
Agree 13 15.9%
rely solely on
Neutral 14 17.1%
employee
honesty? Disagree 6 7.3%
Strongly 13 15.9%
disagree
Total 82 100%
Source primary data

The above table 3.17 shows the analysis reveals a divided perspective on whether it is
acceptable for small businesses to rely solely on employee honesty for inventory control.
While a substantial portion of respondents (57.4%) endorses this approach, a notable
minority (23.2%) emphasizes the importance of implementing formal controls. This

47
division may reflect varying business cultures, experiences, or levels of trust, highlighting
the need for small businesses to carefully consider their internal control systems to
balance trust with accountability and risk management.

 HOW CAN AN ACCOUNTING SYSTEM BE DESIGNED FOR

SMALL BUSINESSES.
Table 18 BUSINESSES TRACK

No Item Response Count Percentage

Category of total
1 A well- Strongly 45 54.8%
designed agree
accounting
Agree 7 8.5%
system can
Neutral 5 6.1%
help small
businesses Disagree 16 19.5%
track their Strongly 9 10.98%
expenses disagree
effectively.
Total 82 100%
Source primary data

The data indicates in the above table 3.18 shows that a substantial majority of enterprises
(approximately 63.42% when combining "Strongly Agree" and "Agree") believe that a
well-designed accounting system is beneficial for effectively tracking expenses. However,
the presence of nearly 30.49% of respondents (combining "Disagree" and "Strongly
Disagree") suggests that there are some who either do not have good experiences with
these systems or may not see their relevance. This analysis provides a mixed but generally
positive view on the effectiveness of accounting systems for small businesses in
managing their expenses.

Table 19 SIMPLE TRANSACTIONS

48
No Item Response Count Percentage
Category of total
1 Small Strongly 10 12.2%
businesses do agree
not need an
Agree 23 28%
accounting
Neutral 11 13.4%
system if they
have simple Disagree 25 30.4%
transactions. Strongly 13 15.8%
disagree
Total 82 100%
Source primary data

The data reveals in the above table 3.19 shows that a combined total of approximately
40.25% of respondents (combining "Strongly Agree" and "Agree") support the notion that
small businesses with simple transactions might not need an accounting system. However,
a significant majority of respondents (46.34%, combining "Disagree" and "Strongly
Disagree") believe that an accounting system is necessary, even for simple transactions.
This indicates a strong sentiment in favour of having an accounting system, suggesting
that effective financial management is valuable regardless of transaction complexity.

Table 20 INVENTORY AND PAYROLL SYSTEMS

No Item Response Count Percentage

Category of total
1 An effective Strongly 41 50%
accounting system agree
should integrate
Agree 13 15.8%
with other business
Neutral 5 6.1%
tools, such as
inventory and Disagree 15 18.2%
payroll systems, for Strongly 8 9.7%
small businesses. disagree

49
Total 82 100%
Source primary data

The analysis indicates in table 3.20 shows that a significant majority of enterprises
(approximately 65.85%, combining "Strongly Agree" and "Agree") believe that an
effective accounting system should integrate with other business tools like inventory and
payroll systems. Conversely, roughly 28.05% of respondents (combining "Disagree" and
"Strongly Disagree") express scepticism about the necessity of such integration. Overall,
there is a strong inclination among the majority of businesses towards valuing integration
in their accounting approaches, suggesting it enhances operational efficiency in small
businesses.

Table 21 DIVERSE FINANCIAL NEEDS

No Item Response Count Percentage

Category of total
1 An accounting Strongly 17 20.7%
system designed for agree
small businesses
Agree 24 29.2%
should be complex
Neutral 7 8.5%
to handle diverse
financial needs. Disagree 15 18.2%
Strongly 19 23.1%
disagree
Total 82 100%
Source primary data

The data reveals in the above table 3.21 shows that only a combined total of
approximately 50% of respondents (20.73% "Strongly Agree" and 29.27% "Agree")
support the idea that accounting systems for small businesses should be complex. In
contrast, a significant majority (about 41.46%, combining "Disagree" and "Strongly
Disagree") believe that complexity is not necessary and that simpler systems may be more
appropriate. This indicates a prevailing perspective that small businesses may benefit

50
more from straightforward accounting solutions rather than complex systems, as they may
better suit the operational needs and capabilities of smaller enterprises.

Table 22 TAX REGULATIONS.

No Item Response Count Percentage

Category of total
1 Regular updates to the Strongly 46 56.1%
accounting system are agree
essential for compliance
Agree 24 29.2%
with changing tax
Neutral 6 7.3%
regulations.
Disagree 6 7.3%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The analysis in the above table 3.22 shows that an overwhelming majority of enterprises
(approximately 85.37%, combining "Strongly Agree" and "Agree") believe that regular
updates to accounting systems are essential for compliance with changing tax regulations.
The small percentages of neutral and disagreement responses suggest a minor level of
uncertainty or differing opinions; however, they are not significant enough to counter the
overall strong consensus. This indicates a widespread recognition among small businesses
of the importance of staying up-to-date with their accounting systems to ensure adherence
to tax laws and regulations.
 THE STRENGTH AND WEAKNESS INTERNAL CONTROL

SYSTEM.

Table 23 FRAUD AND ERRORS.

No Item Response Count Percentage
Category of total
1 Effective internal Strongly 46 56.1%

51
 controls can help agree
small enterprises Agree 33 40.2%
prevent fraud and
Neutral 3 3.7%
errors.
Disagree 0 0.0%
Strongly 0 0.05
disagree
Total 82 100%
Source primary data

The above table 3.23 shows that the data suggests that small enterprises overwhelmingly
recognize the value of effective internal controls in preventing fraud and errors. This
consensus can encourage businesses to invest in and prioritize establishing robust internal
control systems to safeguard against financial mismanagement and fraud.

Table 24 SEGREGATION OF DUTIES

No Item Response Count Percentage
Category of total
1 Limited resources Strongly 0 0.0%
often lead to agree
inadequate
Agree 2 2.4%
segregation of
Neutral 7 8.5%
duties in small
enterprises. Disagree 47 57.3%
Strongly 26 31.7%
disagree
Total 82 100%
Source primary data

The data suggests in the above table 3.24 shows that small enterprises generally do not
perceive limited resources as a leading cause of inadequate segregation of duties. This
may indicate that these enterprises either manage to effectively segregate duties despite
resource constraints or prioritize internal controls in a way that mitigates this risk. The

52
strong disagreement (89% combined from disagree and strongly disagree categories)
highlights a positive outlook among small enterprises regarding their internal control
capabilities concerning resource limitations.

Table 25 RELIABILITY OF FINANCIAL

REPORTING
No Item Response Count Percentage
Category of total
1 A strong internal Strongly 40 48.8%
control system can agree
enhance the reliability
Agree 23 28.0%
of financial reporting
Neutral 7 8.5%
in small businesses.
Disagree 12 14.6%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

The above table 3.25 shows that the data shows a strong consensus among small
enterprises regarding the role of internal control systems in enhancing the reliability of
financial reporting. A combined total of over 76% of the respondents either strongly agree
or agree with the statement, indicating a clear recognition of the significance of effective
internal controls in ensuring accurate and trustworthy financial reporting outcomes. This
highlights the importance of investing in robust internal control mechanisms in small
businesses to maintain financial integrity and stakeholder confidence.

Table 26 INTERNAL CONTROL PROCEDURES,

No Item Response Count Percentage
Category of total
1 Small enterprises Strongly 10 12.2%
may lack formal agree

53
 documentation for Agree 3 3.7%
their internal control Neutral 16 19.5%
procedures, making
Disagree 28 34.1%
them less effective.
Strongly 25 30.5%
disagree
Total 82 100%
Source primary data

The data indicates in the above table 3.26 shows that the majority of small enterprises do
not believe that a lack of formal documentation for internal control procedures makes
these controls less effective. Combined, 64.6% (28 disagree and 25 strongly disagree) of
the respondents do not support the statement, suggesting a belief in the adequacy of their
internal control systems regardless of documentation practices. The presence of neutral
responses indicates some uncertainty, but overall, the trend reflects confidence in existing
practices among small enterprises. This could suggest that many businesses have informal
methods in place that they believe sufficiently support their internal control effectiveness.

Table 27 OPERATIONAL EFFICIENCY

No Item Response Count Percentage
Category of total
1 Implementing a Strongly 55 67.1%
robust internal agree
control system can
Agree 12 14.6%
improve operational
Neutral 0 0.0%
efficiency in small
enterprises. Disagree 12 14.6%
Strongly 0 0.0%
disagree
Total 82 100%
Source primary data

54
The above table 3.27 shows that the data shows a robust consensus among small
enterprises on the importance of implementing a strong internal control system to improve
operational efficiency. With 81.7% of respondents either strongly agreeing or agreeing
with the statement, it is clear that small businesses recognize the value of internal controls
in streamlining operations, enhancing processes, and potentially reducing costs. This
insight can motivate small enterprises to invest in and develop effective internal control
mechanisms to achieve greater efficiency and effectiveness in their operations.

3.5 Primary Data Obtained From the Interview of the Responsible Body
(Primary Data)

 THE MOST SIGNIFICANT CHALLENGE IN MANAGING THE

EFFECTIVENESS AND FLOW OF CASH IN MANAGEMENT SYSTEM.
 Predicting Cash Flow
 Customer Payment Delays
 Inventory Management
 Lack of Cash Flow Visibility

 THE WAY TO RECORD EVERY BUSINESS TRANSACTIONS AND

PREPARE RECEIPT FOR CASH COLLECTIONS.
 Recording Business Transactions
 Preparing Receipts for Cash Collections
 Tracking Cash Collections
 Ensuring Compliance and Security

 THE REASONS FOR NOT RECORDING BUSINESS TRANSACTION.

 Lack of Time or Resources
 Complexity of Accounting Processes
 Complexity of Accounting Processes
 Complexity of Accounting Processes

55
 TYPES OF INTERNAL CONTROL PROCEDURES APPLIED BY SMALL
ENTERPRISES.
 Segregation of Duties
 Authorization Controls
 Physical and IT Security Controls
 Documentation and Record Keeping

3.6 Information Obtained From Respondent Enterprises Documents

(Secondary Data)

Information obtained from respondent enterprises documents (secondary data)

refers to data that has been previously collected and documented by other sources, rather
than being collected directly through primary research methods like surveys or interviews.
This type of data is often used to support business analysis, strategic planning, and
decision-making.

CHAPTER FOUR
SUMMERY, CONCLUTION AND RECOMMENDATION

4.1 Introduction
This chapter presents summery, conclusion and recommendation of findings from data
that were gathered from the MSEs found within Bole sub city. The data was obtained

56
through questionnaires. To obtain mere dependable information, diversified groups of
respondents which engaged in construction, manufacturing, merchandise and retail shops
and service were involved to give information for the study.

4.2 Summery
The analysis reveals a mixed attitude toward recording business events in small
enterprises. While 46.3% of respondents agree on its importance, 19.5% disagree,
suggesting the need for tailored approaches. Many believe small businesses derive fewer
benefits from recording than larger ones, yet 53.7% see value in identifying trends and
opportunities. A strong majority (61.0%) emphasizes the need to record customer
interactions for service improvement. However, opinions vary on the adequacy of simple
recording tools, with 40.2% in favour and 28.0% arguing for more complex solutions,
reflecting the diverse operational needs of small businesses.

The analysis of financial reporting among small enterprises reveals strong support
(80.5%) for the necessity of accurate reporting to maintain investor trust, with 65.9%
rejecting the idea that they require fewer formal financial reports than larger companies.
Furthermore, 90.2% agree that regular financial reporting helps identify cost-saving
opportunities. However, opinions are divided on the importance of complying with
accounting standards for internal reports, with over half believing formal adherence is less
essential. Lastly, while 58.5% recognize the value of forecasting future revenues and
expenses, a notable 26.8% disagree, indicating a need for further discussion on financial
planning best practices.

The analysis of inventory control systems in small businesses shows mixed views on the
necessity of documented procedures, with 41.5% in favour but notable scepticism. A
majority (64.6%) believes regular inventory counts are unnecessary, highlighting differing
business priorities. Strong consensus (80.5%) exists on the importance of segregating
inventory management responsibilities to enhance internal controls, and there is general
support for using inventory management software to boost accuracy and efficiency.
However, opinions are divided on relying solely on employee honesty, with 57.4% in
favour but many advocating for formal controls, underscoring the need for a balance
between trust and accountability in inventory management.

57
The analysis indicates a generally positive view of accounting systems among small
businesses, with 63.42% recognizing their effectiveness in tracking expenses. A notable
46.34% believe that even simple transactions necessitate an accounting system, reflecting
a commitment to effective financial management. There is strong support (65.85%) for
integrating accounting systems with tools like inventory and payroll to enhance
operational efficiency. While opinions on system complexity are mixed, with 41.46%
preferring simpler solutions, 85.37% agree that regular updates are crucial for compliance
with tax regulations. Overall, the findings emphasize the importance of practicality,
integration, and compliance in accounting system design for small businesses.

The analysis reveals a strong acknowledgement of the value of internal control systems in
small enterprises, with 96.3% supporting their role in preventing fraud and errors. Limited
resources are not viewed as a significant barrier to proper segregation of duties, with 89%
disagreeing with that concern. More than 76% recognize the positive impact of robust
internal controls on financial reporting reliability, and 64.6% believe that a lack of formal
documentation does not reduce their effectiveness. Additionally, 81.7% agree that strong
internal controls can improve operational efficiency, reflecting a proactive approach to
enhancing financial integrity and streamlining operations.

4.3 Conclusion
In General, the analysis of various aspects of financial and internal control systems in
small enterprises highlights both challenges and strengths. While there is a general
consensus on the necessity of accurate financial reporting, effective internal controls, and
the value of documented procedures, opinions vary regarding the best practices and tools
to implement. Small businesses recognize the importance of maintaining investor trust
and operational efficiency, yet many remain uncertain about the complexity of accounting
systems and the need for formal documentation. The findings underscore a proactive
attitude among small enterprises toward enhancing their financial governance and internal
controls, emphasizing the need for tailored solutions that balance practicality, integration,
and compliance to address their unique operational requirements effectively. Ultimately,
fostering a culture of consistent financial practices and robust internal controls will enable

58
small businesses to navigate challenges and seize opportunities for growth and
sustainability.

4.4 Recommendation
Based on the analysis and conclusions drawn, it is recommended that small enterprises
invest in customized training and resources that enhance their understanding of financial
and internal control systems. This could include workshops on the importance of accurate
financial reporting, the implementation of effective internal controls, and the appropriate
use of technology for inventory and accounting management. Furthermore, small
businesses should consider adopting flexible accounting systems that can adapt to their
specific operational needs, ensuring they are both practical and compliant with evolving
tax regulations. It is also crucial to establish formal documentation for internal control
procedures, as this could enhance accountability and operational efficiency. Lastly,
encouraging a culture of transparency and continuous improvement by regularly
evaluating and updating financial practices will help small enterprises build investor trust
and achieve sustainable growth amidst changing market dynamics.

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Appendix
UNITY UNIVERSITY
COLLEGE OF BUSINESS, ECONOMICS AND SOCIAL SCIENCES

DEPARTMENT OF ACCOUNTING AND FINANCE

QUESTIONNAIRES
I want to sincerely thank you in advance for your generous time and your honest and
prompt replies. This questionnaire has been created by students at Unity University as
part of their research paper for a Degree in Accounting. The purpose of this questionnaire
is to investigate the "Elements of affecting the effectiveness of micro and small
enterprises and their accounting system, in Addis Ababa; in case of bole sub city." Please
respond to the questions by marking your answers in the table provided. I assure you that
all your responses will be used solely for academic purposes and will be kept confidential.
How to answer this questionnaire
I. General
 Would you be kind enough to answer and making (√) mark the box provided
 No need to write you name
II. Back ground

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 1. Personal
Your approximate age
20-30 years or below ☐
31-40 years ☐
41-50 years ☐
Gender
Female ☐
Male ☐
2. Education
Below 10 ☐
10+1 ☐
10+2 ☐
10+3 and above ☐
3. Work experience
No experience ☐
1-3 years ☐
3-5 years ☐
Above 5 years ☐
Instructions
Please answer the following questions honestly and thoroughly by putting a tick mark ( )
in the box provided. Your feedback is essential for identifying problems related to cash
management practices of the bank.
QUESTIONNAIRE OF EVALUATE ELEMENTS OF AFFECTING
THE EFFECTIVENESS OF MICRO AND SMALL ENTERPRISES
AND THIRE ACCOUNTING SYSTEM.
Part I: What is the main focus of accounting system?
1= Strongly Agree 2= Agree 3=Neutral 4=Disagree 5= Strongly
Disagree
Item 1 2 3 4 5

PART I: RECORDING BUSINESS EVENTS

All business events should be recorded regardless of their significance?
Small businesses are less likely to benefit from recording events
compared to larger companies?

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 Recording business events can help small businesses identify trends and
opportunities?
Small businesses should prioritize recording customer interactions for
better service.
Using simple tools to record business events is sufficient for small
businesses.
PART II: STATEMENT FOR FINANCIAL REPORTING AND
PREPARATION.
Accurate financial reporting is essential for maintaining investor trust?

Small businesses do not need formal financial reports as much as larger

companies do?
Regular financial reporting can help identify areas for cost savings?

Compliance with accounting standards is unnecessary for internal

financial reports?
Financial preparation involves forecasting future revenues and
expenses?
PART III : INTERNAL CONTROL AND INVENTORY SYSTEMS IN
SMALL BUSINESSES.
Do small businesses need to have documented inventory control
procedures?
Is it unnecessary for small businesses to conduct regular inventory
counts?
Should responsibilities for inventory management be segregated among
different employees?
Can using inventory management software help improve internal
controls?
Is it acceptable for small businesses to rely solely on employee honesty?
for inventory control?
PART IV: HOW CAN AN ACCOUNTING SYSTEM BE DESIGNED FOR
SMALL BUSINESSES.
A well-designed accounting system can help small businesses track their
expenses effectively.

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 Small businesses do not need an accounting system if they have simple
transactions.
An effective accounting system should integrate with other business
tools, such as inventory and payroll systems, for small businesses.
An accounting system designed for small businesses should be complex
to handle diverse financial needs.
Regular updates to the accounting system are essential for compliance
with changing tax regulations.
PART V: THE STRENGTH AND WEAKNESS INTERNAL CONTROL

Effective internal controls can help small enterprises prevent fraud and
errors.
Limited resources often lead to inadequate segregation of duties in small
enterprises.
A strong internal control system can enhance the reliability of financial
reporting in small businesses.
Small enterprises may lack formal documentation for their internal
control procedures, making them less effective.
Implementing a robust internal control system can improve operational
efficiency in small enterprises.

 What are the most significant challenge you encounter in managing the effectiveness
and flow of cash in your company management system? And how much physical
counting period?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_____________________________________________
 How does you record every business transactions and prepare receipt for cash
collections? If not what are the reasons for not recording business transaction.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________

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 What was the amount of total capital invested in Birr to start this business? And Currently
how much the total capital of your business in Birr?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
______________________________________________
 How does the current inventory system impact your day to day operation and what
improvements would you suggest? And what types of internal control procedures
applied by small enterprises.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_______________________________________________

66