The impact of cash flow management on the performance small and medium size enterprises

ABSTRACT

Globalization and intense competition have pushed a lot of businesses including SMEs to improve their performance by rethinking how they get products into the hands of their customers and how they can quickly respond to their customers’ needs in a constantly changing environment. As a result, understanding and practicing cash flow Management is a must for SMEs to improve performance and remain competitive in today’s global and dynamic market (Roman 2020). This study investigated the impact of cash flow management on the performance of SMEs in Douala. Sub- objectives were developed and initial hypothesis too in line to these objectives. Primary data was used by the administration of questionnaires to some selected SMEs in Doula. The data were analyzed using descriptive statistics and ordinary least square was employed to test the hypothesis. The findings of the research revealed that cash flow planning affect the performance of these SMEs. The results further revealed that cash flow control influences performance positively, and there exist a significant relationship between cash flow monitoring and the performance of the selected SMEs in Douala. Thus, it was concluded cash flow management affect the performance of some selected SMEs in Doula.

The study recommended Small and medium size enterprises in Douala to develop a cash flow management plan that outlines how cash will be received and disbursed within their business. The study further recommended small and medium size enterprises to consistently monitor their cash flow. This will help them identify areas that need improvement and make necessary adjustments accordingy, and finally to engage with a financial professional who can assist them in developing and monitoring their cash flow management plan. This will ensure that they receive expert guidance and support in managing their finances effectively.

CHAPTER ONE

INTRODUCTION

• Introduction

This study is out to investigate cash flow management in small and medium size enterprises. This chapter focuses on the background to the study, the problem statement, research questions, research objective, hypothesis of the study, significance of the study, scope of the study, organization of the study and the definition of key terminology.

• Background of the Study

Globalization and intense competition have pushed a lot of businesses including SMEs to improve their performance by rethinking how they get products into the hands of their customers and how they can quickly respond to their customers’ needs in a constantly changing environment. As a result, understanding and practicing cash flow Management is a must for SMEs to improve performance and remain competitive in today’s global and dynamic market (Roman 2020).  Every organization that wants to fulfill its short-term financial responsibilities must practice good cash management. A company’s ability to succeed depends on how well its management has planned and managed its cash flows. Effective financial management is concerned with cash management to maintain the best possible level of cash in the company’s working capital. The primary resource required to launch and maintain a firm is cash. (Jensen, 2019).

Effective cash flow management refers to the tactical actions taken by business executives to maximize existing resources and reduce financial expenditures associated with the need for third-party resources when necessary (Hansen et al., 2021). To keep its operations running properly, small and medium size enterprises must maintain a healthy cash balance. A lack of cash will cause operational disruptions and may possibly result in the company going bankrupt. Excessive cash will unnecessarily lock up long-term capital, resulting in a low return on capital utilized. Thus, a business must have a healthy cash position.

An organization’s cash flow management strategy is crucial to its success. Cash management helps businesses run more efficiently, perform better, and increase their chances of long-term survival (Breiki & Nobanee, 2019). Therefore, in order to assist financial management, it is crucial that small and medium-sized business management receives training on the best ways to handle cash, including planning cash flows, monitoring cash flows, and controlling cash flows. Neneh (2021), assert that an efficient cash management procedure is crucial to helping a corporation accomplish its primary goals and plan for its long-term survival. The sustainability and profitability of small and medium size enterprises may be dependent on the cash-flow management practices of the leaders. Thus, it is therefore relevant to comment on performance of small and medium size enterprises when dealing with their cash flow management practices.

Performance is defined as the actual output of a company measured against its intended output. It is a broad field that deals with what an organization does and can accomplish when it interacts with its various constituencies (Romao, Costa, & Costa, 2019). In a different viewpoint, performance measures are systems by which organizations monitor their operations and evaluate whether the organization is attaining its goals. The purpose of performance assessment is not only to know how well a business is performing but also to ensure that the business performs better so as to help it to serve its customers, employees, owners and stakeholders (George King-Aidoo, 2020). Measures of performance combine both financial and non-financial performance. Financial performances measures consist of performance indicators such as, operating profit, net profit, dividend yield, and return on asset, cash flows, return on capital employed, residual income and value added income. Non-financial, on the other hand, are performance indicators based on non-financial information which originates in and is used by cost and profit centres to monitor and control their activities without any accounting input. Examples of non-financial performance measures include quality of service, flexibility, resource utilization, innovation and competitive performance.

The relevance of small and medium size enterprises is well recognized worldwide due to its significant contribution to the global economy such as higher growth of employment, output, promotion of exports and fostering entrepreneurship. Small and medium-sized enterprises (SMEs) account for a large number of businesses in the world and have important contributions to employment and economic stability. SMEs have inherent advantages of size and flexibility. They have the ability to innovate, diversify their products and services, and contribute significantly towards job creation (Mukherjee, 2018). Despite their so many advantages, yet there are still limited by a number of factors.

In the Cameroonian economy, the relevance of small and medium size enterprises can never be neglected. Infact they make up majority of the businesses in Cameroon. Thus, their growth, sustainability and profitability would be of great importance to the economy as a whole. Despite government and private-sector funding initiatives, these enterprises are still limited by a number of factors, amongst which cash management is one of the dominant factor (Cant & Wiid, 2018).  This has consistently hampered their long term sustainability and profitability.

Several empirical findings have provided insight to cash flow management and performance. Amongst these is the study of Sibongiseni (2018), that revealed that the sustainability and growth of small and medium size enterprises is greatly influence by their cash flow management. Augustine (2019), noted in his findings that cash flow management is extremely important to the survival of a business, particularly small businesses, and poor cash flow management can also lead to small business failure. To Gilbert and Gulu (2021), The study revealed limited application of cash flow management by SMEs contribute to the declining levels of long-term solvency and growth.

Theoretical investigations carried out on cash flow management and performance has also contributed greatly to it. Amongst these, is the Resource Based View theory which is an important strategic management theory. Developed by Wernerfelt in 1984, which was focused on analyzing firms in terms of firms’ resources rather than in terms of firms’ products. Another theory that provide insight to cash flow management and performance is the Agency theory proposed by Jensen and Meckling (1976), which explains the relationship between the principal and the agent.

The relevance of small and medium size enterprises in the Cameroonian economy is one that could not be ignore. Thus, their growth and sustainability would mean the growth of Cameroon. This study is relevant in the Cameroon economy and Buea in particular as the how well these SMS perform would mean a lot to the economy. As such, this study is out to investigate to investigate cash management on the performance of small and medium size enterprises, the case of the MANISON group.

1.2 Problem statement

The performance of small and medium size enterprises depends on how well they meet their respective goals. For better performance, most small and medium size enterprises have engage into several investigation on what could better sustain them in business and kept them profitable, and several factors account for this. Despite the accountability of these several factors to their performance, one of the most essential factor is their cash flow management practices. Therefore, cash flow management is a vital requirement for the performance of small and medium size enterprises.

Despite the fact that small and medium size enterprises have realized the importance of implementing good cash flow management practices for their performance, they often do not know exactly what to implement, due to a lack of understanding of what constitutes a comprehensive set of cash flow (Zahoor et al., 2022). Furthermore, given the failure of so many cash flow management efforts to yield the desired performance to these businesses, the question of their impact of these cash management practices on performance remains unanswered. Thus, these all remain the main motivations to this study which is out to investigate cash flow practices on the performance of small and medium size enterprises in Douala

1.3 Research questions

• Main question

What are the effects of cash flow management on the performance of small and medium size enterprises?

• Specific questions

The following specific questions were adopted to ease the achievement of the main research question

• To what extent does cash flow planning influence the performance of small and medium size enterprises?
• Does cash flow control influence the performance of small and medium size enterprises?
• What is the impact of cash flow monitoring on the performance of small and medium size enterprises?

 Research objectives

• • Main objective

The main objective of this study is to investigate the impact of cash flow management on the performance small and medium size enterprises

• Specific objectives

To ease the achievement of the above research objective, the following specific objectives developed.

• To ascertain the extent to which cash flow planning affect the performance of small and medium size enterprises
• To examine the impact of cash flow control on the performance of small and medium size enterprises.
• To find out the relationship that exist between cash flow monitoring on the performance of small and medium size enterprises.