Chapter 1:

Introduction

1.1 Background of the Study

Small and Medium Enterprises (SMEs) play a pivotal role in both developing and developed economies, contributing significantly to national income, employment, exports, and fostering entrepreneurship (Storey D. J. 1994). Cash forms a crucial part of SMEs’ current assets, serving as both a fundamental resource and the means to acquire other resources (Prempeh, 2016). Efficient cash management is essential in SMEs to avoid idle or inadequate resources and ensure continuous production. Inadequate cash management can result in underutilization of capacity, leading to reduced profits and exacerbating unemployment issues. Various studies have highlighted how the lack of knowledge or limited understanding of cash management contributes to the financial struggles of SMEs (Macharia, 2009; Christensen, 2013).

Effective cash management is crucial for an enterprise’s operation and overall profit. It involves controlling cash flow and managing funds efficiently. Components of cash management encompass financial reporting and financial management tools such as the cash flow statement, cash and bank reconciliation, credit control, cash position, cash planning, and cash flow projection (Katz & Green, 2009). The success of enterprises often relies on sound cash management practices (Attom, 2014). Efficient cash flow management is vital for all companies and contributes significantly to their overall performance (Barrett, 1999).

The management of cash is influenced by an enterprise’s size, geographical location, and nature of operations. For instance, SMEs with multiple branches may adopt cash pooling techniques to manage cash across different regions and currencies, minimizing currency risk exposure (Ondiek et al., 2013). The evolution of the business world has significantly shaped modern cash management practices (Kesseven, 2006).

Modern cash management aims to ensure adequate cash for timely payments, to borrow only when necessary, to maximize returns on idle cash, and to manage risks by investing surplus funds productively (Lienert, 2009). Efficient cash management is critical for the production process in manufacturing firms as it impacts production costs and subsequently influences profitability in SMEs.

To manage cash effectively and achieve maximum performance, SMEs need robust cash management practices, including cash position, credit control, cash planning, and bank and cash reconciliation. The success indicators in SMEs involve expansion, profitability, growth, and return on capital employed.

This study seeks to investigate the correlation between cash management and the growth of SMEs in Buea Municipality.

1.2 Statement of the Problem

Cash management is crucial due to discrepancies between payment timings and cash availability. Despite a balanced annual budget, the timing and seasonality of cash inflows and outflows can lead to temporary surpluses or shortfalls (Lienert, 2013). Cash shortage is a chronic challenge for most firms, posing a significant threat to the survival and growth of micro and small-scale enterprises (Attom, 2014). Improper accounts preparation and inadequate cash management procedures are identified as major challenges leading to enterprise closures (Lobel, 2013).

SMEs play a crucial role in self-employment, poverty reduction, and economic growth. However, evidence suggests that many SMEs face high failure rates within the initial months of establishment (Kimunyi, 2015). Challenges, such as poor cash management, contribute to significant failure rates within the first few years of operation (Sharu & Guyo, 2015). Studies have shown a positive relationship between working capital management and financial performance in private hospitals (Mungai, 2013) and indicated poor cash management practices among SMEs in Northern Ghana (Hamza et al., 2015).

This study aims to examine the relationship between cash management practices and the growth of SMEs in Buea Municipality, Cameroon.

1.3 Research Questions

The overarching research question is: “What is the impact of cash management practices on the growth of SMEs in Buea Municipality?” The specific research questions include:

• How does bank and cash reconciliation affect the growth of SMEs in Buea Municipality?
• What is the impact of cash position on the growth of SMEs in Buea Municipality?
• How does cash planning influence the growth of SMEs in Buea Municipality?
• What effect does credit management have on the growth of SMEs in Buea Municipality?

1.4 Objectives of the Study

1.4.1 Main Objective

The primary aim of this study is to assess the impact of cash management practices on the growth of small and medium-sized enterprises within Buea Municipality, Cameroon.

1.4.2 Specific Objectives

The specific objectives are:

• To determine the impact of bank and cash reconciliation on the growth of SMEs in Buea Municipality.
• To assess the effect of cash position on the growth of SMEs in Buea Municipality.
• To examine the influence of cash planning on the growth of SMEs in Buea Municipality.
• To establish the impact of credit management on the growth of SMEs in Buea Municipality.

1.5 Hypotheses of the Study Hypotheses:

1. Cash and bank reconciliation have no significant effect on the growth of small and medium-scale enterprises.
2. Cash position has no effect on the growth of small and medium-scale enterprises.
3. Cash planning has no significant effect on the growth of small and medium-scale enterprises.
4. Credit management has no significant effect on the growth of small and medium-scale enterprises.

1.6 Significance of the Study

This study holds significance for entrepreneurs, serving as a resource to understand the critical role of cash availability in business operations. It also contributes to fulfilling the requirements for a Bachelor of Science (B.Sc.) Degree in Accountancy at the University of Buea. Moreover, it provides a reference point for future research on entrepreneurship and SMEs in developing economies like Cameroon. Policy makers will find this study valuable, as it highlights the importance of cash management in SMEs and emphasizes their significant contribution to economic growth.