Abstract

Working capital for small and medium enterprises as blood is to the system of a human being thus suitable working capital management is crucial for business existence. This is because an enterprise incapacity to recognize relevant working capital management practices can be its source of inability to perform.

The main purpose of this study was to examine the effects of working capital management on profitability in small and medium sized enterprises in Buea southwest region of Cameroon. This study adopted four research questions to guide the process. To realize this, a descriptive research design was adopted also, the population of the study was made up of all the small and medium sized enterprises in Buea southwest region of Cameroon from which using a purposive and stratified random sampling, a sample size of 15 respondents were selected. Data was collected using structured questionnaire. Using SPSS, a regression analysis was carried out between the dependent variable and all other variables and an ANOVA analysis was undertaken to determine the differences in means between the variables.

The results show that the p-values obtain for account receivable (0.269), Cash Conversion Cycle (0.756) Inventory Holding (0.065) and Accounts Payable (0.672) for the regression coefficients are also higher than the alpha level of significant of 5% specified in SPSS for the analysis. From the result of the study, the alternative hypothesis was rejected in favour of the null hypothesis.

The study concluded that most of these firms are able to do a thorough screens of customers’ or client’s references before giving credit. This is a way of mitigating credit risks associated with credit sales. Equally, some recommendations were made; SMEs should be educated on such effects on their performances.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The focus of this study is to investigate the impact of working capital management on the performance of small and medium-sized enterprises. For this purpose therefore a local government Fako, Buea is selected as the case study. Working capital is the lifeline of every organization. Working capital is the money used in the business for the day-to-day running of business activities and operations. The success of every business is revolved around how well it manages its working capital.

Working capital management is considered to be very important in the sustainability process of production or operation activities of the business. Working capital management is the monitoring of a company’s cash flow, current assets, and current liabilities through ratio analysis of the key element of operating expenses including; the working capital ratio, collection ratio and inventory turnover.

Working capital management improves the company’s earnings and profitability through the efficient use of its resources. Ratio analysis helps the management to identify areas of focus such as inventory management, cash management, account receivables and account payable management. The aim is to ensure that there are checks and balances to ensure that the amount of cash flowing into the business is enough to sustain the company’s operation. A company’s working capital is made up of its current assets minus its current liabilities.

Working capital management can be achieved by managing the company’s current assets and liabilities. Assets management refers to the process of developing, operating, maintaining and selling in cost-effective manner. Every company needs to keep track of its assets in such a way that the stakeholders will know which assets available to be employed to provide optimal returns. The assets owned by every company are divided into fixed and current assets. Fixed or non-current assets are assets that are required for a long term such as plant and equipment while current assets are assets that can be converted into cash within a short period, which are   cash, account receivables, inventory.

A company may not utilize its fixed assets if the company does not have sufficient stock of raw materials. If a company does not have enough cash on hand it is will not be able to pay for the expenses incurred. Effective management of assets is very important as it can reduce costs, boost productivity, improve your goods or services and help you comply with regulatory obligations. Working capital management ensures that a company has sufficient cash flow in order to meet its short-term debt obligation and operating expenses. Implementing an efficient working capital management system is an excellent way for companies to improve their earnings.

The two main aspects of working capital management are ratio analysis and management of individual components of working capital. Some of the key performance ratios of working capital management system helps to maintain the smooth operation of  the net operating cycle, also known as cash conversion cycle(CCC) that is the minimum amount of time required to convert current assets and liabilities into cash. When a company does not have enough working capital to cover its obligation, financial insolvency can result leading to liquidation of assets and potential bankruptcy.

According to Elijelly (2004), states that WCM involves planning and calculating of current assets and current liabilities in a manner   that eliminates the risk of failure to pay due short-term   obligation on one hand avoid unnecessary investment on current assets and on the other hand, cash is the common factor of all businesses being it small or big. The part of a company’s capital, which is blocked on a permanent basis, is called fixed capital. Funds needed for short-term purposes for the purchase of raw materials, payment of wages and meeting everyday expenses. Not all the goods that are produced during a time may be sold in that period. Therefore, some goods like raw materials, semi-finished goods, and finished goods remain in stock until the next period. These funds are known as working capital.

Working capital management involves balancing the movement related to five main items, which are; cash, trade receivables, trade payables, shorter financing and inventory to make sure business possess adequate resources to operate efficiently. Ensuring that the company has adequate resources for its day-to-day activities means protecting the company’s existence and ensuring it can keep operating as going concern. The company also manages its inventory as well as possible so that the company’s sales activities can be running well. Excessive investment in inventory resulted in accruing costs like storage costs, insurance costs, tax costs, obsolescence cost and changes to the inventory itself (Subramany and Wild, 2010). When these costs have a large portion in the working capital ratio, it will reduce profitability.

Decisions about how much should be invested in the  customer and inventory accounts, and how much credit to accept from suppliers, are reflected in the firm’s cash conversion cycle, which represents the average number of days between the date when the firm must start paying its suppliers and the date when its begins to collect its payment from its customer.

Specifically, Shin and Some(1998) analyze the relation between the cash conversion cycle and profitability for a sample of firms listed on the US stock exchange during the period of 1974-1994. The results show that reducing the cash conversion cycle to a reasonable extent will increase firm’s profitability. More recently, Delof (2003) analysis a sample of a Belgian firm during the period 1992-1996. His results confirmed that receivables are outstanding and reducing the inventories. Moreover, he finds out that less profitable firms wait longer before paying their bills.

1.2 Statement of Problem and Justification of Study

Small and medium size enterprises have a purpose in developed as well as developing countries (Afande 2015). As a result, many governments have increased their interest in this sector with the aim of improving it. The role of small and medium size enterprises (SMEs) in the world have been emphasized as the means through which rapid industrialization and other development goals of a nation can be realized. Despite their significance and increased effort by governments and other stakeholders to ensure the success of small-scale enterprises, they continue to exhibit high birth rate and high death rate day-in-day-out. The significance of finance in promoting the growth of small businesses has been well recognized in prior studies on small business growth and development (Abor and Biekpe, 2006).

Other studies have identified finance as the most important constraint to growth in the small business sector (Aryeetey et al., 1994; Steel and Webster, 1992; Sowa,Baal Nuakoh, Tutu and Osei,1992). Ch’ng and Chang (1986:28) have stated that-cash management,an important aspect of financial planning as become a common factor for small business failure in Singapore.

Some of the most important internal problems identified by Grablowsky and Rowell (1980) which contribute to small and medium size enterprises (SMEs) failure are inadequate capital, cash flow management,delay payment of customers, delay payment of supplier’s debts and poor inventory control. Despite the notable contributions of small businesses as drivers of the economic growth in terms of employment,GDP contributions, SMEs globally still face high failure rates (Fatoki,2011).

In South Africa, Fatoki, (2011) that the estimated rate of SMEs failure is between 70% and 80%. The high failure rate has been attributed to many factors such as poor inventory, management challenges and lack of working capital and at the top of this list is poor cash flow management. Ineffective cash flow management has incapacitated businesses by hampering their ability to fund strategic investments or burdening it with excessive interest payments and higher capital costs.

According to Avila (2014), one possible reason for this prevalence is that small business owners are not equipped to identify the problem areas within their businesses, due to the lack of necessary skills and tools to increase profitability and sustainability. In this light, most businesses do not operate bank account and those that do so, do it with the intention that one day they will benefit from the bank, in the form of bank loan possibly because of lack of finance or they require fund. However, banks do reject the loan applications for majority of these small scale entrepreneurs because most of the business organization do not keep  records such as sales record, purchase record, inventory record and account receivable records among others.

Cash management is necessary to avoid mismatches between the timing of payment and the availability of cash. Past studies note that cash shortage is a chronic challenge to most firms, and its management is crucial to the survival and growth of enterprises (Atom, 2014). Many hospitals have maintained large cash reserves and liquidity positions within their investment portfolios in an effect to partially accommodate unforeseen expenditures.

The lack of cash management knowledge and skills prevent small business owners to adequately manage their cash flow. A study by Unvi (2014) revealed that just 47% of the retail businesses still operate after four years. Unvi (2014) also investigated the major causes of their failure. 46% indicated that their major cause was business owner incompetence.

The specific pitfalls were poor collection and control of debtors’ payments, no knowledge of pricing, lack of budgeting and planning, no knowledge of financing, and no experience in record keeping. The gap identified was that small business owners do not perform the basics cash management practices in their businesses. This practice is omitted in business largely due to lack of knowledge and skills to perform the task.

However, inadequate cash management has led to slow rate  of service delivery, accompanied with strikes by employees, insufficient medicines and other basic equipment for use in hospitals and further employee strikes are all linked to inappropriate management of public funds in Cameroon.

Cameroon sanguinity to achieve her optimum goal of reaching vision 2035 of becoming an emerging nation is the terminus. With this, small and medium-sized enterprises are key in reaching that destination since it contributes to the economy as well as allows a path to the decline of unemployment. It is hard for the SMEs to access finances from the financial institutions since they lack proper working capital management skills Atrill (2006). The management of working capital is essential for small and medium enterprises for them to remain liquid enough to meet it short term creditors, but can proper working capital management make small and medium enterprises more profitable than a competitor who those not manages working capital?

The major problem that arises is on how working capital management practices affect the profitability of SMEs. Most of the Small and Medium Enterprises face challenges in balancing between surplus and shortage of working capital. As a result, these firms have been experiencing slow growth because of inability to pay daily expenses of their operations and difficulty to exploit new markets and undertake profitable projects due to shortage of working capital mainly because of poor working capital management. There is, therefore, a need for firms to have efficient working capital management practices. The study is structured to provide answers to the following research questions below;

1.3 Research Questions

1.3.1 The main research question

to find out the effects of working capital management (cash) on the performance of small and medium-sized enterprises in Buea municipality.

1.3.2 Specific Research Question

1. Do accounts receivables affect the profitability of small and medium-sized enterprises in Buea municipality?
2. What is the effect of the cash conversion cycle on the profitability of small and medium-sized enterprises in Buea municipality?
3. How does the inventory-holding period affect the profitability of small and medium-sized enterprises in Buea municipality?
4. What is the effect of accounts payable on small and medium-sized enterprises’ profitability in Buea municipality?

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