Abstract

Small businesses are vital for economic development and employment generation. The study set out to analyze the effects of cash management practices on the growth of SMEs in the Buea Municipality, (a) To find out how the delay of payment of customers affect the growth of small and medium-size enterprises in Buea (b) to find out how the delay of payment of suppliers ‘debts affect the growth of small and medium-size enterprises in the municipality of Buea, (c) to find out the effect of inventory turnover ratio on the growth of small and medium-sized enterprises in Buea.

This study was adopted a quantitative research design. Stratified random and convenience and purposive method were adopted while undertaking research. 50 samples of SMEs in Buea were used for the study, data were collected using five-point Likert Scale Questionnaires.

The study found that cash management practices has a significant effect on the growth of SMEs. It clarifies that t values was significant for one of the independent variables (Delay of payment of suppliers ‘debts) and less significant with a delay of payment of customers and Inventory turnover ratio are significant at 0.005 levels Both variables have a coefficient which means that growth of SMEs increases with increasing level of delay of payment of suppliers ‘debts and to a lesser extent the delay of payment of customers and Inventory turnover ratio.

Base on the findings of the study, the following conclusions was drawn that holding inventory by the enterprise for long can lead to possibilities of expiring and destruction of goods over time and lastly that high inventory ratio enhances high cash level. It was, therefore, recommended that FINANCIAL management training sessions should be offered to the managers of SMEs as well as the recruitment of field officers to provide counsel and other non-financial services to the small business operators so as to help improve their cash management efficiency levels

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The government has identified SMEs as one of the vital sectors that contribute towards economic development (Weda, 2015). Heinonen, Soini & Veseli (2011) point out that SMEs play the role of reducing levels of poverty, thus creating job opportunities, mentoring entrepreneurship culture and creating inter-economic link via supply chain in trade activities. Sitharam (2014) further states that in the manufacturing sector, SMEs come 4th in rank after Agriculture, retail and wholesale trade, and the communication and transport sector.

In most of the world’s economies, small and medium-sized enterprises (SMEs) are regarded as vectors of job creation. Through their investments and consumption, they create value and produce a surplus of goods and services, thereby playing a significant role in funding public services and creating a dynamic local economy. In Sub-Saharan Africa, the SMEs sector accounts for more than 90% of all firms. Between 70% and 80% of SMEs are very small firms.

In Cameroon, SMEs officially makeup 95% of the country’s economy, affirms Laurent Serge Etoudi Ngoa, Minister of Small and Medium-Sized enterprises, Social Economy and Craft. Fully aware of SMEs’ importance in any development strategy, Cameroon has been increasing in the last few years, its support for them.

This includes the creation of the SME bank on July 20th, 2015 in Yaounde which was conceived to reduce the challenges faced by SMEs in Cameroon when seeking financing and the opening of the Upgrading office with the EU’s support, to reinforce the competitiveness of Cameroonians. In addition, Cameroon now has an Agency for the Promotion of SMEs, which aims to transition SMEs from an informal to a formal economy and tax management centers put in place by the Finance Ministry, where SMEs receive tax advice to better play their part in the development of the Cameroonian economy.

Weda (2015) makes reference to the economic survey conducted in 2006 and states that in the year 2005, at least 20% of the GDP is directly attributable to Small and Medium-sized enterprises. SMEs are vital for developing nations due to the role they play in poverty reduction and growth of the economy (Kongolo, 2010). SMEs situated in developing countries experience a range of challenges, one of which is limited knowledge by the stakeholders in cash management.

According to Macharia (2009), the major factor affecting SMEs’ financial performance is cash management. SMEs’ role in creating employment and development of the economy has been the topic of discussion recently amongst researchers, policymakers and governments. Small enterprise owners all over the world have similar characteristics and face similar constraints but differ in the knowledge of how SMEs contribute to economic growth. SMEs can fuel economic growth in a big way as they drive innovation and inventiveness, expand on a country’s tax base and create employment (Widyaningrum, Raharjo & Nuzula, 2017)

Cash is the lifeblood of every business, big and small alike (Abioro, 2013). A business may be profitable and yet without cash to meet its obligations they fall due will be forced to close down (Enow2015).Cash management has attracted increasing attention among both academics and practitioners during the last decades.

The term cash management has been defined in different ways by different scholars. Barrett (1999) defines cash management as the series of processes used by an organization to obtain the maximum benefit from its flow of cash funds. Sound cash management involves better timing of expenditure decisions, earlier collection and banking of revenue, and more accurate forecasts of cash flows. Positive cash flow is the lifeblood of small and medium enterprises (SMEs)—critical to sustaining and growing the business.

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-sized 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.

To run a successful business requires effective management of resources which include all or some of the following: people, equipment, property, cash, brand, product(s), service(s), and inventory. Of all these resources cash is probably the most important.

With sufficient cash, a business has the ability to buy any other resources in which it may be deficient (Agbeja&Afolabi, 2016). Whether the purchase of that resource is worthwhile at the price required is another matter, but the purchase can still be made. All the resources other than cash have a value to a business that is dependent on their availability, utilization, market demand and the prevailing economic climate.

It is cash and only cash that maintains a constant value (though with changing purchasing power during economic instability i.e. inflation and deflation) and can easily be turned into other assets or resources. But cash flow management goes beyond keeping track of how much money goes into and out of the business. By taking a more strategic approach, companies can free up cash flow so that they can invest in new products and markets, pay down debt, and finance other strategic initiatives.

Strong cash flow also puts businesses in a better position to negotiate more attractive financing terms with lenders and steeper discounts with suppliers. Efficient cash management contributes positively to the performance of enterprises and their survival. Other resources. To manage cash is to manage the entity’s 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. Cash is the most liquid assets element of the current assets besides inventory, debtors, and prepayments. Cash value of any business is made up of the value of cash in hand and cash in the business bank account if any.

Cash management is seen as one of the key aspects of efficient working capital management. Cash management involve planning and controlling cash flows within the business and cash balances held by a business at a point in time (Pandey, 2004) according to Wetson and Copeland (2008), cash management is concerned with optimizing the amount of cash available, maximizing the interest earned by spare funds not required immediately and reducing losses caused by delays in the transmission of funds. Holding cash to meet short term-needs incurs an opportunity cost equal to return which could have been earned if cash had been invested or put to productive use.

Efficient cash management involves the determination of the optimal cash to hold by considering the tradeoff between the opportunity cost of holding much cash and the trading cost of holding too little cash. There is a need for careful planning and monitoring of cash flows overtime so as to determine the optimal cash to hold. Good cash management can have a major impact on overall with capital management, it is objectively used to managed and determine the optimal level of cash required for the business operation and the investment of marketable securities which is suitable for the nature of the business operation cycle.

1.2 Statement of the Problem

Small and medium sized enterprises (SMEs) have a purpose in developed as well as developing economies (Afande,2015). As result, many governments have increased their interest in this sector with an aim of improving it. The role of Small and Medium Size Enterprises (SMEs) in the world economy have been highly emphasized as the means through which rapid industrialization and other development goals of a nation can be realized. Despite their significance and the increased efforts by governments and other stakeholders to ensure the success of small scale enterprises, they continue to exhibit high birth rates and high death rates 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, Baah-Nuakoh, Tutu and Osei, 1992). Ch‘ng and Chang (1986: 28) have stated that ―cash management, an important aspect of financial planning, has 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 SME failure are inadequate capital, cash flow management, delay payment of customers, delay payment of suppliers ‘debts and poor inventory control. Despite the notable contributions of small businesses as drivers of economic growth in terms of employment, GDP contributions, SMEs globally still face high failure rates (Fatoki, 2011).

In South Africa, Fatoki, (2011) stated that the estimated failure rate of SMEs 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 these lists 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 Avika (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 accounts and those that do, do so with the intention that one day, they could benefit from the bank, in form of bank loan possibly because of lack of finance or the required fund. However, banks do reject the loan applications for majority of these small scale entrepreneurs because most of the business organizations do not keep record such as sales records, purchase record, inventory records, and accounts receivable records among others.

Cash management is necessary to avoid mismatches between the timing of payments 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 (Attom, 2014). Many hospitals have maintained large cash reserves and liquidity positions within their investment portfolios in an effort 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 small retail businesses still operated after four years. Unvi (2014) also investigated the major causes for their failure. 46% indicated that the major cause was business owner incompetence.

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

However, inadequate cash management has led to slow rate of service delivery, accompanied with regular strikes of employees, insufficient medicines and otherbasic equipment for use in hospitals and further employee strikes are all linked to inappropriate management of funds within public hospitals in Cameroon. Several research works have already been conducted on cash management practices of SMEs in other parts of the world, in Ghana by Marfo-Yiadom and Kweku-Agyei (2006); in South Africa by Fatoki, (2011).

Business owners are sometimes confused with business cash management and personal cash management by mixing up business cash and home cash management and at the end of the day, there cannot be a clear cut proper reporting with respect to business cash management from business to business and period to period on cash management practices and financial performance of small and Medium-Sized enterprises are scarce or seemingly none.

Keeping this in view and the wider recognition of the potential contribution of the SME sector to the Cameroon economy, the study is an attempt to explore the effect of effective cash management practices on the financial performance of sampled SMEs in Cameroon and its results are expected to contribute to the existing literature on cash management practices of SMEs and to provide a solution to the cash management challenges faced by SMEs.

Therefore, the purpose of the study is to investigate the effects of cash management on the growth of small and medium-size enterprises in Buea Municipality of the South West region of Cameroon. In order to effectively carry out this study; the following research questions shall be examined.

1.3 Research Questions

The research questions are divided into two parts; the general research question and the specific research questions.

1.3.1 General Research Question

What is the effect of cash management practices on the performance of small and medium size enterprises in Cameroon?

1.3.2 Specific Research Questions

1. What is the effect of the delay of payment of customers on the growth of SMEs businesses in Buea?
2. What is the effect of delay of payment of suppliers ‘debt on the growth of small and medium-size businesses in Buea?
3. What is the effect of inventory turnover ratio on the growth of small and medium-size enterprise in Buea?