CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Small and Medium-sized Enterprises (SMEs) are the backbone of economic development, driving innovation, employment, and poverty reduction across the globe. However, despite their critical role, many SMEs struggle with financial performance, leading to high failure rates, particularly within their first five years of operation. Financial performance is a critical aspect of any business, and its importance has been emphasized in the literature for decades. SMEs are recognized for their flexibility, adaptability, and ability to innovate, making them essential for economic development and sustainability. The global economy therefore, depends on SMEs as its backbone. Any quest to improve the number and stability of SMEs in the economy would have a direct effect on improving the livelihoods of millions of people. With a majority of businesses in the world operating as SMEs implies that there is stiff competition for the businesses to remain profitable. However, they face major challenges worldwide especially financial sustainability and expansion.  Technological disruption has introduced both opportunities and challenges for SME financial performance. While digital transformation has enabled cost reductions and market expansion for some enterprises (Deliotte, 2023), many SMEs struggle with the financial burden of technology adoption. A study by the International Finance Corporation (2022) found that only 15% of SMEs in emerging markets have successfully digitized their financial operations, creating significant performance disparities between tech-enabled and traditional businesses.

The impact of globalization on financial performance has been significant, with businesses facing increased competition from international markets (WTO, 2016). This has forced companies to rethink their strategies and adapt to new market realities. The rapid pace of technological change has also created new opportunities and challenges for businesses, requiring them to innovate and stay ahead of the curve (OECD, 2018). As a result, businesses must be agile and responsive to changing market conditions in order to maintain strong financial performance. They need to be able to quickly respond to shifts in consumer demand, changes in government policies, and advancements in technology. In today’s fast-paced business environment, companies that fail to adapt risk being left behind. To stay competitive, businesses must be proactive and forward-thinking, anticipating changes in the market and adjusting their strategies accordingly. This requires a high degree of flexibility and a willingness to take calculated risks. Companies that are able to navigate these challenges successfully will be well-positioned to achieve strong financial performance and sustain themselves over time. In contrast, those that fail to adapt may struggle to remain competitive and achieve their financial goals. The ability to adapt to changing market conditions is therefore critical to a company’s financial success. By being agile and responsive, businesses can capitalize on new opportunities and mitigate potential risks. This enables them to stay ahead of the competition and achieve their financial objectives. In a rapidly changing business environment, adaptability is key to financial performance.

Globally, businesses face numerous challenges that impact their financial performance, including economic downturns, intense competition, and changing market conditions (Beck & Demirguc-Kunt, 2006). The financial performance of businesses has been a subject of interest for researchers and policymakers, who seek to identify strategies that can improve financial outcomes. According to a report by the International Monetary Fund (IMF), financial performance is a key driver of economic growth and development (IMF, 2019). Furthermore, the global economy has experienced various financial crises, including the 2008 global financial crisis, which had a significant impact on businesses worldwide (Claessens et al., 2010). The 2008 financial crisis, for instance, exposed the vulnerability of SMEs to cash flow disruptions, with many failing due to declining sales and tightened credit markets (OECD, 2009). More recently, the COVID-19 pandemic further exacerbated financial instability, as SMEs worldwide struggled with reduced revenues, supply chain disruptions, and liquidity shortages (World Bank, 2021). These crises have highlighted the importance of financial performance and the need for businesses to develop strategies to mitigate financial risks.

The importance of SMEs in the global economy cannot be overstated. They contribute significantly to GDP, create jobs, and provide opportunities for entrepreneurship and innovation. According to the World Bank, SMEs account for approximately 90% of businesses and 50% of employment globally.  In Europe, SMEs account for up to 99.8% of all its firms. It also accounts for 66% of its employment.  Despite their importance, SMEs face unique challenges that affect their survival and success.  Historically, SMEs have faced financial constraints due to limited access to capital, high operational costs, and inefficient financial management. In developed economies, studies have shown that even well-established SMEs experience financial distress during economic downturns (Beck & D. Kunt, 2006).In developed countries, businesses have access to advanced financial systems and infrastructure, which can facilitate financial performance (La Porta et al., 1998). However, even in developed countries, businesses face challenges that impact their financial performance, such as intense competition and changing market conditions. According to a report by the Organization for Economic Co-operation and Development (OECD), financial performance is a key indicator of business success in developed countries (OECD, 2020). Despite these challenges, research indicates that SMEs with strong financial management systems—such as proper bookkeeping, cost control, and access to diversified funding—tend to perform better (Berger & Udell, 2006). However, in developing economies, structural barriers such as limited banking infrastructure, high interest rates, and weak regulatory support continue to hinder SME financial sustainability.   

SMEs operating in Africa face many challenges that deter their growth (Nikolić, Dhamo, Schulte, Mihajlović & Kume, 2015). This is supported by Kamunge et al. (2014) and Beck, Asili, Luc and Vojislav (2006) who observed that beside their positive role to development, SMEs face many obstacles that restrict their long term survival. The rate of business failure is alarming with only a few businesses surviving a few months to one year (Kenya National Bureau of Statistics, 2007). According to Adcorp (2014), the mortality rate of SMEs among African countries remains very high with five out of seven new businesses failing in their first year. For instance, in Uganda, one third on new business start-ups not going beyond one year of operation while in South Africa, the failure is between 50% and 95% depending on the industry (Willemse, 2010). A study by Yeboah (2015) also revealed that 75% of SMEs in South Africa do not become established businesses making the country to have the highest failure rate in the world. Chad has also been named as a country with failure of 65% and one of the most difficult countries to do business due to unfavorable regulatory frameworks (World Bank, 2012). African SMEs face unique challenges, including limited access to finance, poor infrastructure, and inadequate financial management practices (Beck & Demirguc-Kunt, 2006). According to a report by the World Bank, financial inclusion is a critical factor in promoting financial performance in developing countries (World Bank, 2018). Moreover, the financial performance of businesses in developing countries is often affected by factors such as corruption, political instability, and inadequate regulatory frameworks (Fosu, 2013). These factors can create uncertainty and risk for businesses, making it difficult for them to achieve strong financial performance.

SMEs in Africa contribute significantly to GDP and employment, yet their financial performance remains inconsistent. Studies reveal that more than 50% of African SMEs fail within their first three years, primarily due to poor financial planning and lack of access to affordable credit (African Development Bank, 2019). Country-specific studies reveal varying dimensions of the problem. In Nigeria, Adeyemi and Oboh (2021) found that 65% of SME failures were attributable to poor financial planning and uncontrolled expenses. South African research by Fatoki (2014) highlighted how late payments from clients create cash flow crises for SMEs. East African studies (Ngugi et al., 2018) demonstrated that SMEs’ overreliance on short-term financing undermines long-term financial stability.

A key issue across the continent is the informal nature of many SMEs, which limits their ability to secure formal financing. Without structured financial systems, these businesses struggle to manage debt, control expenses, and reinvest profits effectively. Additionally, macroeconomic instability such as inflation and currency fluctuations further strains SME finances, particularly in import-dependent economies (FSD Africa, 2020). Furthermore, the financial performance of African businesses is often affected by factors such as inadequate financial infrastructure, limited access to financial services, and high levels of informality (World Bank, 2020). These factors can limit the ability of businesses to access finance, manage risk, and achieve strong financial performance.

Cameroon, a country in Central Africa, has a growing SME sector that contributes significantly to the country’s economy. These SMEs play a vital role in the Cameroon’s economy, contributing significantly to economic growth, job creation, and poverty reduction (MINPMEESA, 2020). According to the Ministry of Small and Medium-Sized Enterprises, Social Economy and Handicrafts (MINPMEESA) (2020), SMEs account for approximately 90% of businesses in Cameroon and provide employment opportunities for about 70% of the country’s workforce. SMEs in Cameroon operate in various sectors, including agriculture, trade, and services, and play a vital role in economic growth and employment (National Institute of Statistics, 2020).

Cameroon’s SME sector, which constitutes over 90% of businesses, faces severe financial performance challenges (INS, 2022). The Cameroonian government has implemented various initiatives to support the growth and development of SMEs, including providing access to finance and business training (MINPME, 2019). Despite government initiatives to promote entrepreneurship, many SMEs remain financially fragile due to:  Poor financial record-keeping, leading to mismanagement of revenues and expenses (Tchankam, 2018), Limited access to formal credit, forcing reliance on high-interest informal loans (Nkwi & Ndenge, 2020), Economic shocks, such as the 2016-2017 Anglophone crisis and the COVID-19 pandemic, which disrupted business operations and reduced profitability (World Bank, 2021). Research by Fomba et al. (2020) found that Cameroonian SMEs often lack financial literacy, making it difficult to implement sound financial strategies. Additionally, rural SMEs—such as those in Bambili—face even greater hurdles due to limited banking services and weaker institutional support.

In the Northwest region of Cameroon, Bambili is a locality with a growing population of entrepreneurs and SMEs. These SMEs operate in various sectors, including agriculture, manufacturing, trade and services and play a vital role in the local economy. However, these SMEs face challenges that deter their growth and profitability. The Anglophone crisis have as well crumbled many of these businesses with some closing up totally and other struggling to achieve stable financial sustainability.

1.2 The Statement of the Problem

Thriving small and medium-sized enterprises (SMEs) are the backbone of a healthy economy, driving growth, innovation, and job creation. In a perfect world, SMEs in Bambili would exhibit strong financial performance, characterized by high profitability, efficient use of resources, and sustainable growth. They would have access to adequate financial resources, enabling them to invest in new projects, expand their operations, and respond to changing market conditions. This would lead to increased competitiveness, job creation, and economic growth. SMEs would be able to capitalize on new business opportunities, develop new products and services, and expand into new markets. They would be agile and responsive to changing market conditions, able to adapt quickly to new trends and technologies. In this ideal situation, SMEs would be the driving force behind Bambili’s economic development.

However, the reality on the ground in Bambili paints a different picture, with many SMEs struggling to achieve strong financial performance. Many SMEs in Bambili experience low profitability, inefficient use of resources, and unsustainable growth, which limits their ability to invest in new projects, expand their operations, and respond to changing market conditions. This poor financial performance hinders their ability to reach their full potential and contribute to the economy. The financial performance of SMEs in Bambili is a critical issue that needs to be addressed in order to promote economic growth and job creation. Without strong financial performance, SMEs in Bambili risk failing to achieve their goals and making a meaningful contribution to the local economy.

To unlock the potential of SMEs in Bambili and improve their financial performance, this study aims to investigate the factors influencing financial performance in SMEs. By gaining a deeper understanding of these factors, SMEs in Bambili can take steps to improve their financial sustainability and competitiveness. SMEs in Bambili will be able to identify areas for improvement and develop effective strategies to enhance their financial performance. This will enable them to better navigate the challenges they face and achieve their full potential. Ultimately, the goal is to promote economic growth and job creation in Bambili through a thriving SME sector. SMEs in Bambili will be able to make informed decisions and take proactive steps to improve their financial performance

1.2.1. Main Research Question

What is the effect of cash management practices on the financial performance of SMEs in Bambili, Cameroon?

 1.2.2 Specific Research Questions

a). What is the effect of accounts receivable management on the financial performance of SMEs in Bambili, Cameroon?

b). How does cash flow forecasting impact the financial performance of SMEs in Bambili, Cameroon?

c). what is the effect of cash conversion cycle on the financial performance of SMEs in Bambili, Cameroon?

1.3 Objectives of the Study

1.3.1 Main Objective

To examine the effect of cash management practices on the Financial Performance of SMEs in Bambili, Cameroon

1.3.2 Specific Objectives are to;

a). Ascertain the effect of accounts receivable management on financial performance of SMEs.

b). Assess the effect of cash flow forecasting on the financial performance of SMEs.

c). Investigate the impact of cash conversion cycle on the financial performance of SMEs.