CHAPTER ONE

INTRODUCTION

1.1 Background to the Study 

Financial management is an important element of the management of any business. It is a key part of the management function focusing on the management of a business’ assets. In the long term, the type of assets owned by a business charts out the direction of that business during the life of these assets. A business might not see its long term if it cannot carefully plan and lay out a policy to effectively manage its finances. As a result, ineffective financial management altogether is the main cause of the underlying problems facing most organizations’ financial management (Jindrichovska, 2003).

The success of business institutions is attributed to sound financial practices and management of financial resources alongside creative marketing skills and good start-up idea. The presence of adequate initial start-up financing and good accounting system although vital to the development of effective financial management practices, they are only the starting points in the process of having a sound financial system (Marembo, 2013). The implementation of an effective financial practices system enables the business owners to control and maintain budgetary and future financial forecasting capability.

Many, if not all of those who start a business do not engage themselves in financial matters. This is because they do not have enough knowledge about recording transactions, preparation and analysis of financial statements. Sometimes, they get deeply engrossed in other aspects of business like; managing people, sales purchasing and production to have any interest in carefully managing finances. Such entrepreneurs end up relying on their accountants to run the financial side of their business. Otherwise, they decide to do the management themselves making the business vulnerable to collapse (Atic, 2010).

Financial management is about planning, organizing, directing and controlling the financial activities in a firm. Such activities involve the procurement and utilization of funds of the enterprise. Financial management refers to the application of general management principles to financial resources of the enterprise (Weston and Brigham, 1996).

Financial management practices are the standard operating procedures developed by an entity to assist in executing accounting, financial reporting, budgeting and other financial activities (Wolmorans, 2015). They are the activities performed by the accountant and financial officers in budgeting and asset management and control. The most frequently used financial management practices in organizations entail; profit retention, fixed asset control, capital structure management, liquidity management, cash budgets, fixed assets management, working capital management, financial reporting services and the application of information systems (Marembo, 2013).

Liquidity management is also called capital budgeting and include investment in fixed assets. Investment in current assets is also a part of liquidity management called as working capital decisions. The financial manager of any firm has the responsibility of carefully selecting the best investment alternatives in order to achieve reasonable and stable returns.The finance manager has to concentrate on safety, liquidity and profitability while investing capital. This is also to be done with the aim of wealth maximization (Singh, 2007).

In Europe, despite the sometimes challenging economic conditions, organizations have retained their position as the backbone of the European economy. By 2012, there were some 20.7 million organizations accounting for more than 98 percent of all enterprises. 92.2 per cent of the organizations were the small ones with less than ten employees. These organizations accounted for 67 per cent of total employment (Wymenga et al., 2012).

In the East Asian region, there is the dominance of the organizations sector in all the region economies. Despite the different levels of development in the countries, the broad challenges faced by these East Asians business institutions are similar. Other than financial management challenges, the business institutions face other challenges like globalization, technological innovation, demographic and social change, as well as limited financial support (Chia, Fu and Lee, 2007).

According to Ong’olo and Odhiambo (2013), organizations have the capacity to spur rapid economic growth and create employment opportunities in Bamenda. It is estimated that organizations create about 85 per cent of Bamenda’s employment. However, the sector contributes only about 20 per cent of the total Gross Domestic Product. This means the organization’s subsector is recording dismal performance. For the sector to realize higher success levels, there has to be effective financial management or else the dismal performance and the frequent collapse of business institutions will persist. Business institutions in Bamenda operate in all sectors of the economy, that is, manufacturing, trade and service subsectors. The organizations range from those unregistered, known as Jua Kali Enterprises, to those formally registered small-scale businesses, such as; supermarkets, wholesale shops and transport companies. The capital invested in business institutions varies from as little as ten thousand Bamenda shillings to about 5 million Bamenda shillings. Almost two-thirds of all business institutions in Bamenda are located in the rural areas with only one-third found in the urban areas 9 Central Bureau of Statistics, (2009).                                                                            

1.2 Statement of the Problem                      

Business institutions play an important role in the Bamenda Economy. This sub-sector contributed over 50 per cent of new jobs created in the year 2005 (The Economic Survey, 2006) and contributes about 20% of GDP. Despite their significance, past statistics indicate that three out of five business institutions failed within the first few years of operation (Bamenda National Bureau of Statistics, 2007). According to Ong’olo and Odhiambo (2013) the subsector is still performing dismally.

Simple management mistakes and lack of financial management are some of the issues that easily led to the collapse of business institutions despite improved access to financing (Longenecker, et al, 2006). If interventions regarding how these institutions conduct financial management is not addressed, their collapse will not only threaten job creation and entrepreneurship, but will impede economic growth and development. This research sought to find out how organizations conduct their financial management and how the practices affect their financial performance. This enabled provision of recommendations on remedial measures. To achieve this, the researcher conducted a survey focusing on the effects of financial management practices on the financial performance in BAFCCUL.                                                           

1.3 Research Questions                                                                                                       

The following are the research questions this study sought to answer.

1.3.1 Main Research Question                                                                                                

–What is the effect of financial management on the financial performance in BAFCCUL?

1.3.2 Specific Research Questions                                                                                        

1. i) What are the effects of working capital management on the financial performance in BAFCCUL?
2. ii) What is the contribution of liquidity management towards the financial performance in BAFCCUL?

iii) How does asset management affect the financial performance in BAFCCUL?

1.4 Objectives of the Study                                                                                                  

Based on the research questions, the following research objectives were generated. They are separated into main and specific objectives.

1.4.1 Main Research Objectives                                                                                               

-The main objective of the study is to determine the effect of financial management practices on financial performance.

1.4.2 Specific Research Objectives                                                                                        

1. i) To assess the effect of working capital management on the financial performance in BAFCCUL.
2. ii) To evaluate how liquidity management contribute to financial performance in BAFCCUL.             

iii) To assess the effect of asset management on the financial performance in BAFCCUL.