CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Small and Medium Enterprises are important to almost all economies in the world, especially to those in developing countries and within that broad category and to those with major employment and  income  distribution  challenges. Working capital management is also important  because  of  its  effects  on  the  firm’s  profitability  and risk,  and  consequently  its  value  (Smith,  1980).  For instance high inventory  levels reduces  the  cost  of  possible  interruptions  in  the  production  process  or  of  loss  of business  due  to  the  scarcity  of  products,  reduces 

supply  costs,  and  protects  against price  fluctuations,  among  other  advantages  (Blinder & Manccini,1991). Consequently, granting trade credit favors the firm’s sales in various ways (Brennan et al, 1988; Petersen & Rajan, 1997; Emery, 1987; Smith, 1987; Smith, 1999). However, firms that invest heavily in inventory and trade  credit  can  suffer  reduced  profitability.  Thus, the  greater  the  investment  in current  assets,  the  lower  the  risk,  but  also  the  lower  the  profitability  obtained. Decisions about how much to invest in the customer and inventory accounts, and how  much credit to accept from suppliers, are reflected in the firm’s cash conversion cycle, which represents the average number of days between the date when the firm must  start  paying  its  suppliers  and  the  date  when  it  begins  to  collect  payments  from  its customers (Shin & Soenen, 1998; Deloof,2003).

The small scale enterprises (SMEs) play an important role in the Cameroonian Economy. According  to  the  Economic  Survey  2006,  the  sector contributed  over  50  percent of new jobs created in the year 2005. Despite their significance, Kenya National Bureau of Statistics, 2007 indicate that three out of five businesses fail within the first few months of operation as cited by Bowen et al (2009) due to several challenges.

Because of their small size, a simple management  mistake is likely to lead to closure of  a  small  enterprise  as  there  is  no  chance  for  management   to  learn  from  its  past mistakes.  Lack  of  planning,  improper  financing  and  poor  management  have  been cited  as  the  main  causes  of  failure  of  small  enterprises  (Longenecker  et  al.,  2006).

Lack of credit has also been identified as one of the most serious constraints facing SMEs  thus  hindering  their  development   (Oketch,  2000;  Tomecko  &Dondo,  1992; Kiiru,  1991).In  addition  to  these,  education  is  also  one  of  the  factors  that  impact positively on growth of firms (King & McGrath, 2002).

As  with  many  developing  countries,  there  is  limited  research  and  scholarly  studies  about  the  SME  sector  in  Cameroon.  The  1999  National  Baseline  Survey  conducted  by  Central  Bureau  of  Statistics,  ICEG  and  K-Rep  Holdings  provided  comprehensive  picture of SMEs in Kenya. Mead (1998) observes that the health of the economy as a whole has a strong relationship with the health and nature of small scale enterprise sector. Given this scenario, an understanding of the dynamics of SMEs is necessary not only for the development of support programs for SMEs, but also for the growth of  the  economy  as  a  whole.  Given  the  importance  of  these  small  businesses  to  the Cameroonian economy and the informal way in which they are managed, there is need to  conduct  an  enquiry  to  investigate  effect  of  working  capital  management  on  the performance, especially of SMEs in Buea municipality.

Most researchers have focused their analysis on larger firms although  some few have offered studies on SME’s in service, manufacturing, finance and agricultural industry. For instance Mathuva, (2010) focused on the influence of working capital management on corporate profitability of firms listed at the Nairobi Securities Exchange. Gakure et al,(2012)  on  the  other  hand  analyzed  the  relationship between  working  capital  management  and  performance  of  15  manufacturing  firms listed at the Nairobi Securities Exchange for a period of five years from 2006 to 2010. Omesa et al,(2013)  examined  the  relationships  between Working Capital Management and Corporate Performance of 20 manufacturing firms listed  on  the  Nairobi  securities exchange  for  5  years  from  2007 -2011  was  selected. Finally, Nyabwanga et al, (2012).  However,  these studies provide no evidence on the relationship between working capital  management and  performance  of  SMEs  in  Buea  during  the  period 2016-2022

In this context, the objective of the current work is to assess  the impact  of working capital management practices on performance for a panel made up of 300 accountants and  book  keepers  in  SMES located in Buea  during  the  period 2016-2022 Performance is  the  end  result  of  the  whole  organization’s  systems  in  relation  to its objective. Ittner and Larcker (2000) suggested that financial data have limitations as a  measure of company performance. The two note that other measures, such as quality, may be better at forecasting, but can be difficult to implement. This study focuses on financial measures of profitability, liquidity and growth. Profitability can be measured by  ratios  such  as  Return  on  Investment  (ROI),  Return  on  Equity  (ROE),Return  on Assets  (ROA)  while  the  Optimal  Growth  is   measured  by  total  shareholder  return creation and profitability perspective  ( Handschuh et al. ,2011)

This work contributes to the literature in two ways. First, no previous evidence exists for the case of SMEs in Buea. The second contribution is that, unlike the  previous  studies  the  study  aims  at analyzing  the  impact  of  working capital management on the performance of SMEs in trading in the area of study.

1.2 Problem Statement

Small and Medium Enterprises are major pillars of economic development in Cameroon and other developing countries.  According to the Economic Survey of Kenya (2006), the sector contributed over 50 percent of new jobs created in the year 2005. However the National Bureau of statistics 2007 reported that three out of  five of  these businesses fail due to lack of planning, financing and poor management , lack of credit and  the  level  of  education  of  entrepreneurs  (Bowen  Michael  et  al,  2009,  Oketch, 2000,  King & McGrath,2002).  Although the problem of finance has been identified as one of the major constraints to performance of SMEs, existing literature does not specify the impact of working capital management which is one of the major aspects of finance, on the performance of  SMEs. 

Despite the significant contribution of SMEs to most economies in African including Cameroon, the potentials of the SMEs have not been fully benefited and this poses challenge to all stakeholders in the economy (Kisaame, 2002). However, as SMEs are seen as the driving force for the promotion of an economy, they are faced with challenges and constraints that include poor performance as cited (Turyahebwa et al., 2013). SMEs in Cameroon face unique problems, which affect their performance in terms of profitability and growth and hence diminish their ability to

contribute effectively to sustainable development (Kazimoto, 2016).

The acute poor performance experienced by SMEs, is a result of poor Working Capital Management practices (Shaskia, 2012). A large number of business failures in Cameroon have been attributed to inability of financial managers to plan and control properly the current assets and current liabilities of their respective firms (Mbaguta, 2002). Owners tend to manage these businesses themselves as a measure of reducing operational costs (Kazooba, 2006). Indeed, in some cases these problems are so challenging that SMEs are unable to address them at all, which in turn threatens their survival, growth and competitiveness. In other cases, it is the inappropriate handling of these obstacles that causes SMEs to fail. However, if the situation is not addressed, then the SME’s contribution to the Cameroonian economy is likely to be affected, and the need to examine the effect of Working Capital on financial performance SMEs in Buea, provides a strong motivation for carrying out this research in detail to fill this gap.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of working capital on the performance of SME’s in Buea?

1.3.2 Specific Research Questions

1. To what extent does cash management affect the performance of SMEs in Buea?
2. To what extent does trade credit management affect the performance of SMEs in Buea?

iii.  To what extent does Inventory management affect the performance of SMEs in Buea?

1.4 Research Objectives

1.4.1 Main Research Objective

The purpose of the study is to assess the effect of working capital on the performance of SMEs in Buea.

1.4.2 Specific Research Objectives

The study seeks to achieve the following specific objectives:

1. To determine the effect of cash management on the performance of SMEs in Buea.
2. To examine the effect of trade credit management on the performance of SMEs in Buea.

iii.  To analyze the effect of Inventory management on the performance of SMEs in Buea.