AN OVERVIEW OF THE IMPACT OF CASH MANAGEMENT PRACTICES ON THE GROWTH OF SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA MUNICIPALITY
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This study aimed at assessing cash management practices and how it affects small and
medium enterprises (SMEs) growth in Buea municipality, Cameroon. It identified cash
planning, cash and bank reconciliation, cash position and credit management as the independent variables. Growth, whose measure has been based on net profit margin, was used
as the dependent variable of study. The survey method was used wherein 40 SMEs in Buea where surveyed. Although the number of SMEs surveyed was not large, the survey was distributed across all the SMEs in Buea to ensure representativeness. Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using descriptive and regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25.
The hypothesis was tested through a correlation test, and it revealed that there is a strong positive relationship between the variables (r=0.859) whereby 73.7% of performance of SMEs could be attributed to cash management. The study concluded thus that accounting information has a significant impact on commercial banks’ lending decisions. The study recommended that financial statements of borrowing companies should be audited before bank use them as basis for granting loans. The study recommended that there is dire need for the management as well as staff charged with managing cash to undergo training in managing performance metrics in order for operation-level decisions to be attached to the expected outcomes.
KEYWORDS: Cash management, performance, small and medium size enterprises
1.1 Background of the Study
In reality, Small and Medium Enterprises occupy a very important place in developing, as well as developed countries’ economy, considering its contribution to national income, employment, exports, and entrepreneurship development (Storey D. J. 1994). Cash constitutes a very significant portion of the current assets of Small and Medium Scale Enterprises because cash is both a fundamental resource and the means by which the entity acquires other resources (Prempeh 2016). Considering the level of investment required for cash in Small and Medium Scale Enterprises it is essential to manage cash efficiently and effectively in order to avoid idle or shortage resources and also ensure production continuity. Inefficient management of cash can lead to under-utilization of capacity and loss of profit.
The under-utilization of capacity can intensify the unemployment problem in any economy. For instance, many small and medium enterprises in Kenya have failed in financial performance mainly because of lack of knowledge or limited knowledge on cash management (Macharia, 2009). The New York Times has mentioned lack of cash cushion as one of the major reasons SMEs fail (Christensen, 2013). Christensen (2013) adds that amongst other methods, cash management is one of the key methods of financial management. Hence, well and efficient control of cash can contribute to the effective operation of the firm and hence the firms overall profit (Dubelaar, 2000). In many developing economies, small and medium scales enterprises employ substantial number of the work force Therefore, efficient management of cash in small and medium scale enterprises is very important for meaningful economic growth and or development of any country.
For cash to be managed, the entity needs the 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. Management of cash covers many activities and has its major purpose as controlling the company’s cash flow and efficiently managing its funds. Efficient management of cash flow is vital for all companies. Soaga (2012) points out that the aim of managing cash is to find optimal cash level for creating the highest level of performance for an entity. The major components of cash management lie in the two aspects; financial reporting and financial management (Kinyajui, 2016).
Under financial reporting the cash management tools include the cash flow statement, cash and bank reconciliation and the cash book. In financial management the components of cash management are credit control, cash position, cash planning and cash flow projection (Katz & Green, 2009). The success of enterprises largely depends on a number of factors including sound cash management practices (Attom, 2014). The essence of cash management is to ensure positive cash flow for smooth business operation (Abioro, 2013). Barrett (1999) documents that the underlying objective of cash management is having enough cash available as and when it is needed, and that 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.
Again, 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 level 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.
Furthermore, cash make up an important part of a manufacturing firm’s production process as they facilitate continued production.
The manner in which cash are managed affects the performance of an organization because it contributes to the cost of production which later affects profitability in the small and medium scale enterprises. In order to manage cash efficiently, effectively and obtain maximum performance in small and medium scale enterprises, the small and medium scale enterprises must normally have a cash management system or practice which monitors or controls the flow of cash so as to ensure that there is neither oversupply nor undersupply in the in small and medium scale enterprises. Cash management practices or system include; cash position, credit control, cash planning and bank and cash reconciliation.
While performances in SMEs will include; expansion of small and medium scale enterprises, profitability, growth of SMEs and return on capital employed. Therefore, this study intends to examine the relationship between cash management and the growth of small and medium scale enterprises in Buea Municipality.
1.2 Statement of the Problem