Abstract

Working capital is to the 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 based on the fact that an enterprise’s 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 the 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 the Buea southwest region of Cameroon from which using a purposive and stratified random sampling, a sample size of 15 respondents were selected.

Data were collected using a 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 significance 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 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 the performances. Additionally, another issue that arises is the levels of the Economic Order Quantity (EOQ) as such there is also a need for education and awareness.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The history of working capital management has undergone different eras which can be broken down into three stages as seen below.

Awareness era (1900-the 1940s): The period between 1900 and 1940s found limited development in WCM research as a discrete management practice, largely due to limited research. A search of the ABI Inform Database found only 23 studies related to working capital published in various journals in this period and there appeared to be an inconsistent interpretation of what was included within the term working capital.

One of the earliest definitions of working capital was proposed by Mann (1918). He defined working capital, as the amount of money or money equivalent required to finance a company’s operations. It is also known as Net Working Capital (NWC), the amount of capital required to keep a company in operations or staying liquid. NWC is a reflection of the operating cycles, financing alternatives, and liabilities obligations.

In 1947, the Committee on Accounting Procedure of the American Institute of Accountants issued an Accounting Research Bulletin (ARB), No. 30 which defined working capital and classified the operating cycle. It stated: Working capital, sometimes called net working capital is represented by the excess of current assets over current liabilities and identifies the relatively liquid portion of total enterprise capital which constitutes a margin or buffer for meeting obligations to be incurred and liquidated within the ordinary operating cycle of the business (CAP/ATA, 1947)

The pre and post-World War II (WWII) era (l 920-l 950s) had a significant influence on the development of working capital studies. The overlapping period between the awareness stage and this era was due to similar operating environments and evidence (development of working capital) appeared in both periods. The main arguments in this period are revolved around appropriate levels and financing of working capital.

According to Chandler (1994), interwar (between WWI and II), American companies expanded their international market shares and even dominated British Domestic Markets. He highlighted how large American corporations having high capital capabilities and economies of scale were important factors to compete in this period.

The industrialization era between 1950 and 1980s resulted in a change of direction in working capital studies. Advanced technologies and machinery transformed manufacturing sectors, enabling companies to gain benefits of economies of scale hence lowering operational cost (Kaplan, 1994).

Chandler (1994) identified that after the 1950s, American companies grew in size and created multiple divisions to focus on many different business activities. He explained that senior managers lacked the necessary training and experience to evaluate the performance of different business activities and a range of mathematical models were used to support their decision-making processes. Consequently, working capital studies in this period developed various mathematical and simulation models to help managers.

Gentry (1988) provides a summary of research into optimization models and working capital. He states that optimization models can be categorized to support managers and academicians for specific function and purpose

As with many developing countries, there is limited research and scholarly studies about the working capital management in the SME sector in Cameroon. Precolonial Cameroon did standard working capital as the case today. However, small and medium, and medium-size enterprises in Cameroon are on a rise to meet up with the new standards on proper working capital management.

 

1.2 Statement of Problem

Cameroon’s 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 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 to remain liquid enough to meet their 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 how working capital management practices affect the profitability of SMEs. Most 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 the 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.

 

1.3 Research Questions

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

 

1.4 Objective Of The Study

The main objective of this study was to determine the impact of working capital management on the profitability of Small and Medium-sized enterprises in the Buea southwest region of Cameroon.

1.4.1 Specific objectives

1. To investigate the effect of accounts receivables on the profitability of small and medium-sized enterprises.
2. To find out the effect of the cash conversion cycle on the profitability of small and medium-sized enterprises
3. To examine the effect of the inventory holding period on the profitability of small and medium-sized enterprises.
4. To find out the effect of accounts payable on small and medium-enterprises profitability.

Further Readings 

WORKING CAPITAL MANAGEMENT AND ITS EFFECTS ON THE FINANCIAL PERFORMANCE OF MIDEPECAM