The effects of Cash Management Practices on the Growth of Small and Medium Size Enterprises in Buea Municipality
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In most parts of the developed world, it is almost impossible for a business to function without the implementation of cash management practices. The purpose of this study was to assess the effects of cash management practices on the growth of Small and Medium Size Enterprises in Buea Municipality of the South West Region of Cameroon. Specifically, the study shall identify the current cash management practices of small and medium-sized businesses, examined the relationship between cash management practices and the growth of those businesses, and determine the challenges SMEs face in implementing effective cash management practices. Data to be used shall be collected through questionnaires administered to 30 small and medium-sized enterprises operating in the Buea Municipality. The descriptive statistics shall be used coupled with the inferential tools (Correlation and regression) to analyze data collected.
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) 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.
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. Cash is both a fundamental resource and how the entity acquires 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. The cash value of any business is made up of the value of cash in hand and cash in the business bank account if any.
The role of Small and Medium Size Enterprises (SMEs) in the world economy has 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 birthrates 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, and 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 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 Avika (2014), one possible reason for this prevalence is those 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 a bank loan possibly because of lack of finance or the required fund. However, banks do reject the loan applications for the majority of these small-scale entrepreneurs because most business organizations do not keep records such as sales records, purchase records, 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 to partially accommodate unforeseen expenditures. The lack of cash management knowledge and skills prevents 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 of 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 to a lack of knowledge and skills to perform the task.
However, inadequate cash management has led to a slow rate of service delivery, accompanied by regular strikes of employees, insufficient medicines, and other basic 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 concerning business cash management from business to business and period to period.
However, Specific research studies in Cameroon exclusively 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-sized enterprises in the Buea Municipality of the South West region of Cameroon. To effectively carry out this study; the following research questions shall be examined.
- What are the current cash management practices of small and medium-sized businesses in Buea?
- What is the effect of cash management practices on the profitability and growth of SMEs in Buea?
- What are the challenges SMEs face in implementing effective cash management practices in Buea?
- Does the failure to implement cash management practices affect the growth of SMEs in Buea?
This study shall be guided by two types of objectives: main and specific objectives.
The main objective of this study shall be to examine the effects of cash management practices on the growth of SMEs in the Buea Municipality.
The specific objectives of this study shall be to:
- Identify the current cash management practices of small and medium-sized businesses;
- Examine the effect of cash at hand, account receivables, and account payables on the growth of SMEs;
- Determine the challenges SMEs face in implementing effective cash management practices;
- To identify if failure to implement cash management practices affects the growth of SMEs.