Abstract

This study aimed at assessing the effect of cash management on the performance of small and

medium enterprises (SMEs) in Buea municipality, Cameroon. The study has as specific objectives to establish the effect of cash control on the performance of SMEs, to examine the effect of cash position on the performance of SMEs, to examine the effect of cash planning on the performance of SMEs and to assess the effect of credit management on the performance of SMEs.

The survey method was used wherein 40 SMEs in Buea where surveyed. Although the number of SMEs surveyed was not large, the survey was distributed across all the SMEs in Buea to ensure representativeness.

Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using descriptive and regression analysis with the help of Statistical Package for Social Sciences (SPSS). The hypothesis was tested through a correlation test, and it revealed that there is a strong positive relationship between the variables (r=0.859) whereby 73.7% of performance of SMEs could be attributed to cash management. Base on the specific objectives, the findings revealed that there exist a significant positive effect between cash control, cash position, cash planning, and credit management and the performance of SMEs in Buea municipality.

The study recommended that there is dire need for the management as well as staff charged with managing cash to undergo training in managing performance metrics in order for operation-level decisions to be attached to the expected outcomes.

The study also recommended that SME managers should invest their cash surpluses in ventures that yield high returns such as treasury bills or in overnight call accounts which yield high returns. This will help avoid keeping large cash balances in non-interest-yielding current accounts. They should also make use of computerized accounting packages to help improve their efficiency in cash management.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In reality, Small and Medium Enterprises occupy a very important place in developing, as well as developed countries’ economy, considering its contribution to national income, employment, exports, and entrepreneurship development (Storey D. J. 1994).

Cash constitutes a very significant portion of the current assets of Small and Medium Scale Enterprises because cash is both a fundamental resource and the means by which the entity acquires other resources (Prempeh 2016).  Considering the level of investment required for cash in Small and Medium Scale Enterprises it is essential to manage cash efficiently and effectively in order to avoid idle or shortage resources and also ensure production continuity. Inefficient management of cash can lead to under-utilisation of capacity and loss of profit. The under-utilisation of capacity can intensify the unemployment problem in any economy.

For instance, many small and medium enterprises in Kenya have failed in financial performance mainly because of lack of knowledge or limited knowledge on cash management (Macharia, 2009). The New York Times has mentioned lack of cash cushion as one of the major reasons SMEs fail (Christensen, 2013). Christensen (2013) adds that amongst other methods, cash management is one of the key methods of financial management.

Hence, well and efficient control of cash can contribute to the effective operation of the firm and hence the firms overall profit (Dubelaar, 2000).  In many developing economies, small and medium scales enterprises employ substantial number of the work force Therefore, efficient management of cash in small and medium scale enterprises is very important for meaningful economic growth and or development of any country.

For cash to be managed, the entity needs the ability to purchase assets, service debt, pay employees, and control operations. Thus, effective cash management directly correlates with the entity’s ability to realize its mission, goals, and objectives. Management of cash covers many activities and has its major purpose as controlling the company’s cash flow and efficiently managing its funds.

Efficient management of cash flow is vital for all companies. Soaga (2012) points out that the aim of managing cash is to find optimal cash level for creating the highest level of performance for an entity. The major components of cash management lie in the two aspects; financial reporting and financial management (Kinyajui, 2016).

Under financial reporting the cash management tools include the cash flow statement, cash and bank reconciliation and the cash book. In financial management the components of cash management are credit control, cash position, cash planning and cash flow projection (Katz & Green, 2009). The success of enterprises largely depends on a number of factors including sound cash management practices (Attom, 2014).

The essence of cash management is to ensure positive cash flow for smooth business operation (Abioro, 2013). Barrett (1999) documents that the underlying objective of cash management is having enough cash available as and when it is needed, and that sound cash management involves better timing of expenditure decisions, earlier collection and banking of revenue, and more accurate forecasts of cash flows. This helps minimize the cost of any borrowing that is necessary and facilitates investing surplus funds to achieve the best return overall.

Again, Sound cash management involves better timing of expenditure decisions, earlier collection and banking of revenue, and more accurate forecasts of cash flows. This helps minimize the cost of any borrowing that is necessary and facilitates investing surplus funds to achieve the best return overall (Barret, 1999). The techniques of cash management and the degree of sophistication in business processes will vary from entity to entity and will be influenced by an entity size, geographical location and the nature of its operations.

This can be exhibited by the fact that small and medium level enterprises with diverse branches located in different regions within a given country or in different countries normally will try to adopt the cash pooling technique in managing its cash since it takes into consideration cross currency variations thus eliminating currency risk exposure (Ondiek et al., 2013). Basically, the process of managing cash today has been significantly influenced by the growing developments in the business world over the years (Kesseven, 2006).

Lienert (2009) found out that modern cash management has four major objectives, namely; to ensure that adequate cash is available to pay for expenditures when they are due, to borrow only when needed and to minimize government borrowing costs, to maximize returns on idle cash and to manage risks, by investing temporary surpluses productively, against adequate collateral.

Furthermore, cash make up an important part of a manufacturing firm’s production process as they facilitate continued production. The manner in which cash are managed affects the performance of an organization because it contributes to the cost of production which later affects profitability in the small and medium scale enterprises.

In order to manage cash efficiently, effectively and obtain maximum performance in small and medium scale enterprises, the small and medium scale enterprises must normally have a cash management system or practice which monitors or controls the flow of cash so as to ensure that there is neither oversupply nor undersupply in the in small and medium scale enterprises.

Cash management practices or system include; cash position, credit control, cash planning and bank and cash reconciliation. While performances in SMEs will include; expansion of small and medium scale enterprises, profitability, growth of SMEs and return on capital employed.

In Africa, cash management implementation is becoming more sophisticated. It has been 15 years since the original cash management handbook was written.  Equally, a work by Kwame (2007) that was centered on the fact that, the putting in place of a cash balance policy ensures prudent cash budgeting and investment of surplus of cash. Therefore, reducing the time cash is tied up in the operating cycle improves business profitability and market value as well as business performance.

Proper management of cash wi1l enable the owners of micro and small enterprises to meet up with cash dısbursement, minimizing funds, committed to cash balance as well as to meet up with optimum cash balance.  The various ways through which an enterprise can manage cash includes; planning, control, budgeting and co1lection of cash.

However, the perception of cash management is not different like that in Cameroon. Globally in Buea, there exist many micro and small businesses.  Some of these enterprises include clothing vendors’, book venders’, shoe vendors’, saloons, bakeries, poultry vendors, restaurants, hotels, tomatoes sellers, provision shops, micro institutions just to name the few. The operation of these businesses through employment has contributed tremendously to the booming nature and growth of the area. Due to it hospitality nature, it has therefore let to the cohabitation of other inhabitants who are not indigenes of the area.

These enterprises are however facing some challenges. Some of the problems encountered by these Businesses include absence to get micro credits, inadequate Infrastructures, bad debts challenges as well the absences of good record keeping and bank accounts problem. Also, poor financial performance was equally seen as an issue to these micro and small enterprises (Information from the owners of micro and small enterprises Buea, 2022). It is therefore because of this that the researcher decided to carry out a study in these enterprises.

More deeply with the willingness to investigate the reasons behind the issue with their financial performance. So, it is observed that, they equally encountered issues with their cash planning, control budgeting, and collection as it was noticed by these MSEs in the Buea municipality. Therefore, this study intends to examine the relationship between cash management and the performance of small and medium scale enterprises in Buea Municipality.

1.2 Statement of the Problem

Cash management is necessary because there are mismatches between the timing of payments and the availability of cash. Even when the annual budget is balanced, with the realistic revenue and expenditure estimates, year budget execution will not be smooth, since both the timing and seasonality of cash inflows and of expenditures can result in conditions of temporary cash surpluses or temporary cash shortfalls (Lienert, 2013).

However, studies have noted that cash shortage is a chronic challenge to most firms, and yet cash management is very crucial to the survival and growth of micro and small-scale enterprises (Attom, 2014).  Lobel (2013) found out that improper accounts preparation and inadequate cash management procedure were some of the major challenges facing organizations leading to close up of the enterprises.

SMEs are in enhancing self-employment as well as minimizing poverty and increasing growth of the economy. Even though they are very significant, evidence shows that SMEs slump within the initial months after establishment (Kimunyi, 2015). Sharu and Guyo (2015) indicate that SMEs have low chances of survival, with major challenges prompting 60% failures with regards to performance before 3 years of initial operation.

Mungai (2013) after carrying out a study on 45 private hospitals to determine the relationship between working capital management and financial performance of private hospitals in Kenya using data from the financial reports of the 45 listed private hospitals from 2002 to 2008, by using both regular and panel data analysis showed that there exists a positive relationship with working capital management signifying that profitability increases with increase in inventory and average accounts payable while decreasing with increasing average accounts payable. Hamza et al. (2015) after conducting a survey on “Practices of Cash Management and Performance of SMEs in Ghana’s Northern Region” found out that SMEs in Northern Ghana are poor at cash   management resulting in poor financial performances.

According to them cash planning is a cash management tool which actually means cash budgeting through a cash budget that shows projected cash payments and receipts. He points out that even though preparation of cash budgets is a detailed and cumbersome process, it brings out the realization of the objective of ensuring there is enough cash to operate the entity throughout for better financial performance.

Hence, it is wise to make provision for a little more than the optimal cash to have some to cater for error margins in planning. Soaga (2012) examined “Basics of Cash Management for Financial Management and Reporting”. In his study he states that one of the most important and a dependable report in an entity is the cash position report. Sharma & Kumar (2011), also pointed out that before disbursing any payment, accountants and finance managers must know the cash position as it acts as pre-reconciliation ensuring limited errors of omission, commission, entry reversals and transposition hence, ensuring there is soundness in liquidity of the firm which lead to increase in profits (Soaga, 2012).

Irrespective of the effort made by the government of Cameroon through the ministry of small and medium sized enterprises as well as chamber of commerce to support the growth of MSEs sector by creating and enabling good business environment through appropriate legal and regulatory procedures.

And in spite the fact that banks have recently made micro-credit accessible to MSEs. There is no indication that the sector is growing. For the past decade in the South West region specifically in Buea the financial performance of some micro and small enterprise has been dropping drastically (Information from the owners of micro and small enterprises Buea, 2022).

This has been the alternate reason why some of them have reduced their employment capacity send away most of their workers, inability to have other branches elsewhere, less diversification, drop down in their market share and decrease in profit, inadequate cash as well as a reduction in the return on capital employed. So the researcher has been wondering why the situation is the way is and he started looking for what could have been the reasons for this poor financial performance.

However, the perception of cash management is not different like that in Cameroon as the researcher discovers that, the poor performance observed in these micro and small enterprises are as result of the poor cash management practices in these enterprises. In fact, these enterprises face a lot of challenges with their cash management practices.

For instance, in the cash planning, they are facing problems like having a very vague estimation of the amount of cash they will have in the next month, did not have a proper plan for their expected cash inflows and outflows. For the cash budgeting, the problem observed is that they fail to practice sound cash forecasting to know when they will experience the peaks and slump of the business cycle (Information from the owners of micro and small enterprises Buea, 2022).

As it was found out by Mong (2011) that, only 28°% of the small businesses drew up cash budget. With the case of cash control, these owners cited that, they don’t have good safeguarding cash procedures as well as sound record keeping procedures and equally at times fails to issues receipts on their invoices issued.

On the part of cash collection, the researcher noticed that these micro and small enterprises face issues of bad debt as well as debtors’ payment period. As it is asserted that, sound receivable timing helps for businesses success. It’s therefore out of this poor background that the researcher seeks to ascertain whether this poor financial performance observed in this micro and small enterprises is being resulted in the poor cash management practices among them by providing answers to the following research questions:

1.3 Research Questions

1. What is the effect of cash control on the performance of SMEs in the municipality of Buea?
2. What is the effect of cash position on the performance of SMEs in the municipality of Buea?
3. What is the effect of cash planning on the performance of SMEs in the municipality of Buea?
4. What is the effect of credit management on the performance of SMEs in the Buea municipality?

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