Abstract

Small and Medium Enterprises largely contribute to an economic agenda by expanding employment, fostering growth and providing crucial services from global, regional to the local stages. In Cameroon, Small and Medium Enterprises (SMEs) have continued to face a mountain of challenges and struggle to achieve significant growth despite their importance to the Cameroon Economy.

Imprudent working capital decisions have been highlighted in literature as some of the principal causes of their stagnation and decline in growth. Nevertheless, there is scarce empirical evidence on whether working capital management activities significantly affect growth of these institutions. The general objective of the study was to determine the effect of working capital management practices on Growth of Small and Medium Enterprises in Buea-Fako, Southwest region of Cameroon.

The specific objectives were to establish the effect of cash management practices, debtors management practices, creditors management practices and inventory management practices on growth of Small and Medium Enterprises in Fako, Cameroon. The study was anchored on: Trade-Off Theory of Liquidity, the Cash Conversion Cycle Theory and the Economic Order Quantity model.

The target population comprised of a total of 841 SMEs operating in Buea. Proportionate stratified random sampling was used to select a sample of 89 SMEs. Questionnaires were used as the suitable data collection tool. Statistical software was used to undertake descriptive analysis, multiple regression and correlation coefficient.

The study found that cash management practices had positive and statistically significant effect on the growth of SMEs (p= 0.000); debtors management practices had a positive and statistically significant effect on the growth of SMEs (p=0.000). Additionally, creditors management practices had a positive but statistically insignificant effect on the growth of SMEs (p=0.196) whereas inventory management practices had a positive but statistically insignificant effect on the growth of SMEs (p= 0.263). From correlation analysis, the study found a positive relationship between cash management practices and growth (r = 0.790, p = 0.000) at 5% level of significance.

Debtors management practices had a positive relationship with growth (r = 0.771, p= 0.000); creditors management practices had a positive relationship with growth of SMEs (r = 0.267, p = 0.019) whereas inventory management practices had a positive relationship with growth (r = 0.551, p = 0.000) at level of significance.

The study recommends that SMEs in Fako Division should formulate cash management policy to guide the effective maintenance of liquidity at optimal levels and ensure proper implementation of cash budgeting and planning framework. SMEs should also review the credit policy to ensure effective credit administration decisions. In addition, there should be a clear policy that spells out effective account payables management practices that ensures optimal credit purchases as well as stipulate creditors’ settlement criteria.

Moreover, management of SMEs in Fako Divsion should formulate inventory management policy which focuses on ensuring that optimal stock levels are maintained to avoid overstocking and under stocking of certain products.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study:

Small and medium enterprises (SMEs) make important contributions to economic and social development of any country. ILO (2008) reported that about 80% of the labour force in Japan and 50% of workers in Germany are employed in the SME sector. With respect to developing countries, SMEs made a significant contribution to the gross domestic product of Uganda (20%), Kenya (19.5%), and Nigeria (24.5%).

As in most developing countries, small and medium-scale enterprises equally form a significant part of the economic growth in Cameroon (34%). Nevertheless, they face a number of problems, including access to finance from formal sources, which is often considered the most challenging problem (MFPED, 2008). In terms of numbers, small and medium size enterprises constitute a vast majority of business establishments and are usually responsible for the majority of employment opportunities created. They account for about two third of the private sector turnover (Ntsika, 2002).

It is estimated that SMEs contribute 56% of private sector employment and 36% of the Gross Domestic Product (GDP) worldwide (Arianoff, 2010). In Cameroon particularly, Small and medium-sized enterprises constitute 99.8% of businesses, and employ above 72.6% of the working population, (SMESEH, 2018). In addition, they constitute a major source of employment and generate significant domestic and export earnings.

As such, SMEs development emerges as a key instrument in poverty reduction efforts (OECD, 2004). The growth and sustainability of SMEs becomes a big concern to most economies. Considering that SMEs contribute so much in the economic development of underdeveloped and developing economies, there is increasing need for these enterprises to operate economically, efficiently, effectively, sustainably and ethically. To achieve this, financial management practices has potentially a crucial role to play in improving the quality of planning, control and decision- making.

The attainment of this role relies more on quality of information generated from the financial management accounting systems. Unfortunately, little research has been done in this domain to unveil the role of financial management practices in SMEs especially in developing economies. Considering the relevance of SMEs as discussed before, the growth and development of any economy largely depends on how well and organized small and medium enterprises are managed.

In this respect, the adoption of some corporate governance practices, management accounting practices, financial accounting practices, and financial management practices such as types of financial records keeping, cash flows, working capital, accounts payables, credit management, saving and investment habits, as well as credit management, could be a fundamental contributing factor to the growth and development of small and medium size businesses in developing economies. (Pieterson, 2012).

Though SMEs are making positive contributions to economic growth and development in Cameroon, the rate of failure is high. Hostile business environment threatens the survival of enterprises and is often responsible for the closure of many businesses. They identified factors constraining the survival and growth of SMEs in Cameroon, which include corruption, difficulties in obtaining financing, the country’s economic situation, the time taken for customers to pay and the country’s legal environment.

Also The report observed that there are significant disincentives in the business environment in Cameroon which includes payment of taxes and duties, expensive and irregular electricity supply, poor transport infrastructure, lack of protection of minority investors, difficulties in transfer of ownership, problems resolving insolvency, difficulties in obtaining building permits.

Abor (2017) defines working capital management practices as the control of current assets and liabilities which includes cash, inventories, account payables and receivables management, in a manner that optimizes the benefits accruing to the firm Cash management involves an objective valuation and control of market liquidity, cash flow, and investments.

Dobie (2015) describes inventory management as the control of activities pertaining to stock including ordering, shipment, storage and decisions on the quantities and frequency with which merchandise will be replenished. Dobie (2015) describes inventory management as the control of activities pertaining to stock including ordering, shipment, storage and decisions on the quantities and frequency with which merchandise will be replenished.

Ai- guo (2016) argues that debtors management involves establishment of an effective credit collection procedures for firms’ dues which includes managing accounts receivables and deciding whether one will sell on credit. Creditors management or account payables management represents a business processes, policies, procedures, relating to administration of its trade credit purchases (Muller, 2019).

1.2 Problem Statement

Many researchers have put forward the fact that lack of managerial expertise and capital are the major problems inhibiting the development of SMEs in most underdeveloped and emerging economies (Abang, 2012; Maziriri&Mapuranga, 2017).

Other researchers have identified high competition, technological development, market globalization, increase employees’ turnover rate and liquidity as some of the challenges faced by SMEs (Johnson & Kaplan, 1987; Oro &Hieldl, 2015). This study strongly holds that even with limited resources and tight global competition among large firms, SMEs could still survive if proper financial management practices are used.

Kamilah (2014) points out the lack of adequate working capital, poor management skill and inadequate use of essential business and management practices as some of the many reasons for discontinuity of business among SMEs besides rapidly changing market conditions.

In his view, the use of financial and non-financial management practices that can provide crucial information to managers is vital to ensure the effectiveness and efficiency of SMEs businesses. The wisdom to determine adequate working capital and other crucial information for decision-making still lie on proper financial management practices.

SMEs usually have only limited access to resources and are less able to take advantage of economies of scale (Oro &Hieldl, 2015). In order to compete with large enterprises having huge resources, it is crucial for SMEs to manage their scarce resources using proper information and control systems (Mitchell & Reid, 2000).

According to Nfor (2016), the business environment in Cameroon is considered to be among the main causes of business failure and poor competitive capacity of SMEs. He identified factors constraining the survival and growth of SMEs in Cameroon, which include the following: corruption, poor taxation system, lack of capital, lack of managerial expertise, lack of competitive strength, difficulties in obtaining financing, the country’s economic situation, the time taken for customers to pay and the country’s legal environment,

while The growth and development of any economy depends largely on how well organised the small and medium enterprises are, and this is linked to best practices with respect to financial management practices such as types of financial records keeping, cash flows, working capital, accounts payables, credit management, saving and investment habits, types of loans as well as process of payment of their loans in their business activities (Pieterson, 2012).

Even though the success and growth of SMEs depends also largely on government’s policy on the general operations of SMEs, yet executing the best practices throughout the existence of the life span of the business has been the best interest of the SMEs.

Regardless of the position occupied by SMEs in most economies, empirical evidence still show that their performance in terms of GDP contribution is below expectation. Azian et al., (2013) pointed out the lack of managerial capabilities, shortage in financing and human resources as some key barriers in the management of SMEs. Majority of SMEs tend to fail because of the lack of planning, marketing knowledge, absence of managerial skills and competency of capabilities (Kamyabi, 2011). Abang, (2012) confirmed the same facts.

However, this study postulates that Financial management position should be the main concern of Cameroon SMEs. The Cameroon government has recently realised the need to tilt economic development through the promotion and enhancement of SMEs. This is evident through many government policies such as the creation of “one stop shops” in major towns to ease registration formalities of SMEs and the creation of a bank for Small and Medium Size enterprises that went operational in 2014.

Besides the government, international organisations such as the African Guarantee Fund (AGF) for SMEs and a consortium of banks signed a protocol agreement worth USD100 million to finance and support SMEs in Cameroon. Nevertheless, endemic corruption still beleaguers the country and makes it a challenging business environment (Dominguez & Foster, 2011). The policies seem not to have significantly helped the situation as many SMEs keep winding down day by day due to enormous internal and external challenges. This study therefore focuses on examining internal challenges that could be causes of Cameroon SMEs failure.

While theories present a case for adoption of working capital management as a key to enhance growth, empirical literature existing provides gaps to support or challenge the relationship between working capital management practices and growth of SMEs. The contextual gaps emerge on the time factor, considering that the business environment may have changed since when the studies were carried out.

Conceptual gaps arise as the studies considered a narrow framework biased upon one aspect of working capital management such as cash management, debtors management, inventory management, payables management independently thus leaving out other important aspects.

This study considers comprehensive assessment of working capital management variables. Empirical gaps are established in that existing studies mainly focused on sales dimension of growth leaving out other facets of enterprise growth such as assets and profit growth.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of Working capital management practices on the growth of SMEs in Fako Division?

1.3.2 Specific Research Question

1. What is the effect of working capital management practices on the growth of SMEs in the Fako Division?
2. How do financing decision practices influence the growth of SMEs in the Fako Division?

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