CHAPTER ONE INTRODUCTION

1.1 Background of the Study

In both developing and developed nations, Small and Medium Enterprises (SMEs) are pivotal, contributing significantly to national income, employment, exports, and the growth of entrepreneurship (Storey D. J., 1994). In Cameroon, Micro and Small businesses are a major economic force. Enumedi, 2013, indicates that these businesses, representing at least 90% of all enterprises, employ about 70% of the population. Despite their importance, these enterprises face numerous challenges, including limited access to efficient bank financing and failure due to poor management (Koril, 1999; MESPT, 2011; Kyendo, 2010). Small businesses, especially micro ones, are often vulnerable to high-interest money lenders due to their lack of access to affordable credit. Longenecker et al. (2006) identified ineffective financial management as a primary cause of SME failures. Furthermore, Bowen (2009) noted a strong connection between business performance and the level of business management training, particularly in areas like bookkeeping and business finance. Proficient cash management skills are crucial for the performance and longevity of micro and small enterprises. Cash is a key component of current assets, highly liquid and includes both bank and hand-held cash. Cash management involves managing cash inflows and outflows, internal cash flow management, and maintaining appropriate cash balances, as outlined by Ross, Westerfield, and Jordan (1998). Effective management encompasses an entrepreneur’s ability to purchase assets, pay employees, service debts, and control business operations.

Cash is a significant part of current assets in Small and Medium Scale Enterprises, acting as a fundamental resource and means for acquiring other resources (Prempeh, 2016). Efficient cash management is essential to avoid resource idleness or shortages and ensure continuous production. Inefficient cash management can lead to capacity under-utilization and profit loss, exacerbating unemployment issues. Lack of cash management knowledge has led to financial failures in many Kenyan SMEs (Macharia, 2009), with the New York Times (Christensen, 2013) citing a lack of cash cushion as a major failure reason. According to Christensen (2013) and Dubelaar (2000), effective cash control contributes significantly to a firm’s profitability. In developing economies where SMEs employ a large workforce, efficient cash management is vital for significant economic growth. Effective cash management covers various activities, mainly aimed at controlling a company’s cash flow and efficiently managing funds. Soaga (2012) emphasizes finding the optimal cash level for maximal entity performance, while Kinyajui (2016) and Katz & Green (2009) highlight the importance of financial reporting and management in cash management, involving tools like cash flow statements, bank reconciliations, and cash books. Attom (2014) and Abioro (2013) stress the importance of cash management in ensuring smooth business operations. Barrett (1999) and Moyer, Maguigan, and Kretlov (2001) note multiple benefits of effective cash management, from supporting loan applications to reducing cash shortages and enhancing operational efficiency.

Advanced cash management techniques vary based on an enterprise’s size, location, and operation nature (Ondiek et al., 2013; Kesseven, 2006). Lienert (2009) identified four major objectives of modern cash management: ensuring availability of cash for expenditures, minimizing borrowing costs, maximizing returns on idle cash, and managing investment risks. Efficient cash management in manufacturing firms is crucial as it influences organizational performance by affecting production costs and profitability. Effective cash management systems in SMEs, encompassing cash position monitoring, credit control, and bank reconciliation, are essential for enterprise growth and profitability. In Africa, cash management practices have become increasingly sophisticated over the past 15 years (Kwame, 2007), emphasizing prudent budgeting and investment to improve business profitability and market value.

In Cameroon, particularly in Buea, SMEs face challenges like limited access to micro-credits, infrastructure inadequacies, bad debts, and poor financial management practices, impacting their financial performance. This study aims to explore the relationship between cash management and the performance of SMEs in Buea Municipality, addressing issues in cash planning, control, budgeting, and collection observed in these enterprises.

1.2 Problem Statement

Despite balanced annual budgets, SMEs often experience cash mismatches due to the timing and seasonality of cash inflows and expenditures, leading to temporary surpluses or shortfalls (Lienert, 2013). Cash shortage is a persistent issue for firms, and effective cash management is crucial for the survival and growth of micro and small-scale enterprises (Attom, 2014). Inadequate accounting and cash management procedures have been identified as major challenges leading to business closures (Lobel, 2013). Although SMEs play a key role in fostering self-employment and economic growth, many fail within months of establishment (Kimunyi, 2015; Sharu & Guyo, 2015). Studies like Mungai (2013) and Hamza et al. (2015) have shown a positive correlation between cash management practices and financial performance in SMEs. Despite government efforts and increased accessibility to micro-credits, financial performance in SMEs in Buea has been declining, leading to reduced employment, limited expansion, market share loss, and decreased profits (Information from Buea SME owners, 2022). This study investigates whether poor cash management practices contribute to this decline by examining cash planning, budgeting, control, and collection issues in Buea’s SMEs.

1.3 Study Objectives

The main objective is to investigate the effect of cash management on the performance of SMEs in Buea municipality-Cameroon. Specifically, it aims to determine the impact of bank and cash reconciliation, cash position, cash planning, and credit management on SME performance in Buea.

1.4 Study Hypotheses

Hypothesis One: Cash and bank reconciliation may or may not significantly impact SME performance in Buea.

Hypothesis Two: Cash position may or may not affect SME performance in Buea.

Hypothesis Three: Cash planning may or may not significantly influence SME performance in Buea.

Hypothesis Four: Credit management may or may not significantly affect SME performance in Buea.

 1.5 Significance of the Study

This study will be important to the following categories of persons:

1. To the Micro and Small Enterprises Owners

This study is of importance to entrepreneurs in that when one is an entrepreneur, business rewards can only be realized when cash is available to spring operations of businesses as it constitutes the most significant part of current asset. According to Weda (2015), entities fail if they run out of cash and the bank has withdrawn credit. Weda (2015) also brings out the aspect that surprisingly, a business which makes profit on paper (on accrual basis of accounting) can wind up because it lacks sufficient cash flow. It is because of this that entrepreneurs need to have the necessary skills on cash management as explored in this study. As a result, the study findings of this work would help improve the entrepreneurs of Micro and small enterprises operators with an equip knowledge of cash management practices which will enhance the performance of their enterprises as well as helping them in maintaining their liquidity position, manage their finances, profit and losses as well as obtaining knowledge on business management.

1. To the Researcher

The study findings would assist students building up their knowledge as well as their skills in the appreciation of practical cash management in micro and small enterprises. This study also serves as a partial fulfillment of the requirements for the award of a Bachelor of Science (B.Sc.) Degree in Accountancy in the University of Buea.

• To Other Researchers and Academicians

Again, the study will continuously assist in research studies. In developing economy like Cameroon, there are few studies on SMEs and proprietorship as a whole. This study therefore provides a reference point for literature review while conducting studies in the future on entrepreneurship. Apart from supplementing other studies in the similar field, it is a source of further research in other directly and indirectly related topics. As a result more solutions will be found on SMEs problems.

1. To the Government or Policy Makers

Furthermore, policy makers will find this study of big significance. The major policy maker is the government. Cash management knowledge is very vital for policy makers. This study exposes the advantages of cash management in SMEs as well as importance of SMEs to the economy. The information available in this study assists economic planners realize that cash management is a major aspect for small and medium enterprises. As such, subsidies and development projects towards the growth of this sector will be enhanced if the government also has knowledge of how much this industry contributes to economic growth.

1.6 Scope and Limitations of the Study

1.6.1 Scope of Study

This study is aimed at establishing the effects of cash management on the performance of small and medium size enterprises in Buea. The choice of Buea is attributed to the fact that it is the administrative capital of South West region and is one of the major towns in this region. Being the capital town of South West Region, Buea has attracted many businesses, and therefore SMEs. Some of these enterprises include clothing vendors’, book venders’, shoe vendors’, saloons, bakeries, poultry vendors, restaurants, hotels, tomatoes sellers, provision shops, micro institutions just to name the few. The operation of these businesses through employment has contributed tremendously to the booming nature and growth of the area. Due to it hospitality nature, it has therefore let to the cohabitation of other inhabitants who are not indigenes of the area. Furthermore, the study did not consider other factors that may affect the performance of these enterprises but limited itself to the elements of cash management (cash planning, cash budget, cash position and c cash collection).

Geographically, this study is carried out in Buea, the capital of South West Region –Cameroon. The study focuses on selected micro and small enterprises particularly, clothing vendors’, book venders’, shoe vendors’, saloons, bakeries, poultry vendors, restaurants, hotels, tomatoes sellers, provision shops, and micro institutions in the town of Buea. In each of these enterprises, the owners, accountants/ cashiers and other employees will constitute the study target population.

Moreover, the time scope for this study is six months running from January – June 2022 including data collection, analysis and writing of the final report.

1.6.2 Limitations of the Study

The following are the limitations to this research;

• This research work will require so much material and financial sacrifices such as transportation cost to the study area, documentation cost and communication cost.
• Another limitation is time constraint. As this is an academic work done within a given time frame, the researcher finds the time to be a limiting factor to the study due to constraints like accessibility of information, project processing and other courses in school.
• However, time and financial constraints are the most impactful limitation to the study. Despite all limitations and constraints, the research will contain the necessary relevant resource materials and to- date data obtain, analyze and provide in the work