CHAPTER ONE

INTRODUCTION

This chapter consists of the background of the study, the statement of the problem, the research questions, the objectives of the study, the hypotheses of the study, and the significance of the study and the organisation of the study.

1.1  Background of the Study 

The business environment today is very competitive, impacting every organization large or small. An impulsive reaction under the current circumstances is just to cut all costs to the minimum level. Every aspect of an organization’s cost structure must be carefully examined to eliminate unnecessary discretionary and non-value adding costs, while yet retaining its competitive position. The growth of any company is largely determined by how well it can manage its costs. This is partly because to be able to maximize profit, the cost must be reduced to the minimum level possible. Cost reduction has become a vital tool for companies to constantly stay ahead of the increased competition in the business environment. The ultimate goal of every firm is profit maximization and cost minimization through proper cost management, to maximize shareholder wealth. The profit motive behind business income is universal to most business entities.

Cost control across the globe is fundamental as organizations strive to attain a competitive edge. (Shrank, 2001), opined that to determine the strategic impact of cost cutting, management across the globe is fundamental if the organization has to weigh the net effects of the proposed change on all areas of the business. For example, reducing variable costs related directly to manufacturing a product such as materials and transportation costs could be the key to greater incremental profits. However, management must also consider whether saving money on production is jeopardizing other strategic interests like quality or time to market. If a cheaper material or transportation system negatively impacts other strategic variables, the nominal cost savings may not benefit the company in the bigger picture, i.e., it may lose sales in such scenario manager requires the discipline not to place short term savings over long term interests. They further opined that one trend in cost control has been toward narrowing the focus of corporate responsibility centers, thereby shifting some of the cost control function to day-to-day managers who have the most knowledge or influence over how their areas spend money (Marcus, 2015).

The African design of countries provides a means for which cost control for the profitability of the organizations. (Cashin, 1998), posited that responsibility accounting is a system designed to accumulate and report costs by individual levels of responsibility, each supervisory area is charged only with the cost for which it is responsible and over which it has control. The responsibility accounting system should also provide costs for establishing policies and for making daily decision. Most cost accounting systems were originally designed to accumulate and distribute costs for product or inventory cost and for general cost control. The accounts were set up to gather products costs and period costs in accordance with the needs of the income statement and balance sheet.

The success of a company largely depends on the profit that it can realize, the profit is determined by the costs that are made. Therefore, it is essential for a company to know the costs and being able to control them. Therefore, most multinational companies are suffering from profitability fluctuation due to improper cost control. Realization of profit targets, in ability of cost recovery, poor sales volume and less competitiveness are the major signs of poor profitability. In case this problem (poor profitability) remains unchanged it may cause liquidation of many companies, bankruptcy and insolvency which negatively reflect to the entire well-being of the economy. To succeed and improve their financial performance, businesses must have a solid human resource strategy and maintain a competitive edge. The multinational companies must employ cost-reduction and cost-control techniques that would increase output, productivity, and profitability while preserving product quality in order to survive and preserve the stated competitive advantage in the current market. According to (A, 2020), cutting operating expenses will directly affect profitability. These companies have to do a better job of directing precious resources away from underperforming regions and toward its strongest sectors with the most room for expansion. The quality and worth of a company’s resources as well as its ability to reduce costs are key factors in determining its success, regardless of how big or small it is.

1.2  Statement of the Problem

In Bamenda city, small and medium-sized enterprises (SMEs) are grappling with significant challenges affecting their financial performance, primarily due to ineffective cost management practices. This inadequacy in managing costs limits their ability to achieve optimal financial results, raising concerns about the long-term viability and competitiveness of these enterprises in a rapidly evolving market. Effective cost control is crucial for analyzing an organization’s performance and enhancing financial outcomes, making it essential for SMEs to adopt robust cost management strategies.

Cost control practices are vital for improving profitability and competitiveness through reduced costs and enhanced productivity. However, SMEs face various challenges—both internal and external—that complicate cost management. These include the rapid pace of technological advancements, which necessitate continual reinvestment in new technologies that can be prohibitively expensive. Additionally, many organizations struggle with unskilled or inexperienced labor, impacting their ability to produce expected results. Budget overruns also pose a significant challenge, as unexpected expenses can exceed planned budgets, complicating financial management.

The combined effects of technological adaptation, workforce skill gaps, and issues related to fraud significantly contribute to the decline in financial performance for SMEs in Bamenda. This research aims to address these critical issues by examining the impact of inadequate cost control methods on profitability. By identifying and proposing effective cost management practices, the study seeks to enhance the financial viability and competitiveness of SMEs in the region.

1.3 Research Questions

1.3.1 Main Question

What is the Effect of costs control on the financial performance of small and medium sized enterprises in Bamenda city?

1.3.2 Specific Questions

1. How does material cost control affect the financial performance of small and medium sized enterprises in Bamenda city?
2. What is the effect of labour cost control on the financial performance of small and medium sized enterprises in Bamenda city?

iii. To what extend does overheads cost control affect the financial performance of small and medium sized enterprises in Bamenda city?

1.4 Objective of the Study

1.4.1 Main Objective

To assess the effect of costs control on the financial performance of small and medium sized enterprises in Bamenda city

1.4.2 Specific Objectives

The specific objectives of this study are to:

1. Analyse the effect of material cost control on the financial performance of small and medium sized enterprises in Bamenda city.
2. Evaluate the effect of labour cost control on the financial performance of small and medium sized enterprises in Bamenda city.

iii. Examine the effect of overheads cost control on the financial performance of small and medium sized enterprises in Bamenda city.

1.5 Research Hypotheses

The following null hypotheses were formulated to guide the study:

H₀₁: Material cost control has no statistical significant effect on the financial performance of small and medium sized enterprises in Bamenda city.

H₀₂: Labour cost control has no statistical significant effect on the financial performance of small and medium sized enterprises in Bamenda city.

H₀₃: Overheads cost control has no statistical significant effect on the financial performance of small and medium enterprises in Bamenda city.