80 pages. Liquidity Management Strategies and Financial Performance of Micro and Small Enterprises in Buea, Cameroon.

CHAPTER ONE

Background To The Study

understanding Liquidity Management

Liquidity management strategies are methods and practices employed by businesses to ensure they have enough cash flow to meet their short-term obligations and operate effectively.There is a worldwide consensus that the action of Micro and small enterprises contribute to high rates of economic growth, economic and social development as well as poverty reduction. Micro and small enterprise does not have any unique definition. This is due to the diverse and flexible nature of the sector that overcomes any minute categorization. Therefore, micro and small enterprises definition are based on the following features such as the yearly sales, turnover, labour, and size of the loan, capital, and non-current assets.

Most enterprises usually make use of these features to define micro and small enterprises. For instance, in Canada, it is defined based on the number of workers and total sales. While South Korea defines it on the capital or assets. European Commission’s defines micro and small enterprises as those enterprises that employ less than ten workers, having an annual turnover not more than 2 million Euros with a yearly position statement not exceeding two million Euros. Micro and small businesses mean privately own business in which the owner practices a close control policy.

The definition and characteristics of Micro and Small businesses have been seen in different perspective in the World today. For example in the United State (US), it refers to own independent enterprises that employ less than 50 workers with a revenue of less than $10 million practicing a close control (New world finance, 2010). These businesses in the US have been able to employ close to half of the Labour force. Equally, Babson (2016) states that MSEs have been accounted for more than 60% of the private sector in the US.

They have also been characterized by lower revenue and profitability, short-term employees, small market areas, located in limited areas (Ingram, 2006). Equally, micro and small businesses are those with an annual capital base of less than two million Naira. On the other hand, micro businesses are those which are privately owned and operate with less than five employees

and have less than no influence on its producing industry. Also, the central bank of Nigeria equally defined micro businesses as those with assets of less than one thousand Naira. This e perception Of MSEs is not different from that of Cameroon. However, the Ministry of Commerce in Cameroon defined micro businesses as those with an asset of fewer than one million CFAs less than five employees (CMC).

Also, micro small business does not only include the means of involving in business activities he went forward by saying that, it equally includes the fact of someone staying home catering for children in the absence of their parent, and those who also involve in service deliveries such as those who own restaurants, shoe vendors, tailors, saloons, cloth vendor just to name the few are also forms of micro and small businesses. Micro and small like those in the advanced World.

Whereas in the advanced developed world small-scale enterprises are well organized and coordinated than in the less developed countries this is as a result of the praises they do receive from the government for their importance at the national level.Micro and Small Enterprises (MSE) plays important role in the economic growth and sustainable development of every nation. It’s as a result of this that the government of Cameroon has been cultivating small business growth in recent years through initiatives such as One-stop business registration centres. It also plans to open a bank to lend to small-business owners.

A two-year tax exemption for new business owners to allow entrepreneurs to invest in their ideas to achieve the goals of Cameroon Vision 2035, furthermore, the banking sector has recently improved its financial Services to the SMEs. Micro And Small businesses already contribute significantly to Cameroon’s economy. According to Enumedi, (2013), at least 90% of enterprises in Cameroon are micro and small businesses And employ nearly 70% of the population.

Given all these credits to (MSE), the enterprises have however been facing numerous problems including lack of efficient access to finances from the banks and other lending institutions and collapsing of the MSEs due to mismanagement (Koril, 1999; MESPT, 2011; Kyendo, 2010), since small business (especially micro) are generally poor, and there are no facilities for cheap credit, they fall into the clutches of moneylenders who charges a high rate of interest.

Equally, Longenecker et al. (2006) observed that, poor financial management has been posted as the main cause of failure on the MSEs. Also, Bowen (2009) stated that there is a strong link between the performance of businesses and the level of training in business management especially in book keeping and business finance. Management, especially in business finance record keeping.

The knowledge and skills of effective cash management are one of the major factors that contribute (immensely) positively to the performance and sustainability of micro and small enterprises. Cash is seen as one of the components of current assets which tend to be highly liquid and can either be cash at bank and the cash in hand. Cash management is concerned with the management of cash into and out of business, management of cash flows within the firm as well as the management of the balances of cash kept that is been handle by the entrepreneur at a point of time by funding deficit or investing surplus cash.

Managing cash is all about the entrepreneur ability to buy assets, pay workers, service as well controlling operation of the business. Cash is regarded as the backbone of every business. Ross, Wester field, and Jordan (1998) stipulate that small businesses, in particular, must pay attention to the timing of flows to ensure that cash is available to meet their financing needs effectively plan for unforeseen (precautionary) contingencies in the future.Equally, Moyer, Maguigan, and Kretlow (2001) assert that effective cash management is

specifically vital for the following reasons. Firstly, it helps in preparation of financial statement plan to support the application for bank loans. Secondly, it decreases the problem of cash shortage; it equally enables firms to keep track of its cash resources which are used in stock and account debtors. Finally, it encourages the operation of less amount of cash resources by entrepreneurs.This is as a result of an inadequate access to capital as well as the high cost. The financial performance of selected micro and small enterprises in Buea.

In Africa, cash management implementation is becoming more sophisticated. It has been 15 years since the original cash management handbook was written. Equally, a work by Kwame (2007) that was centred on the fact that, the putting in place of a cash balance policy ensures prudent cash budgeting and investment of surplus of cash.

Therefore, reducing the time cash is tied up in the operating cycle improves business profitability and market value as well as business performance. Proper management of cash will enable the owners of micro and small enterprises to meet up with cash disbursement, minimizing funds committed to cash balance as well as to meet up with optimum cash balance. The various ways through which an enterprise can manage cash includes; planning, control, budgeting and collection of cash.

However, the perception of cash management is not different in Cameroon. In Buea, there exist many micro and small businesses. Some of these enterprises includes clothing vendors’ book vendors, shoe vendors, saloons, bakeries, poultry vendors, restaurants, hotels, tomatoes sellers, provision shops, electronic shops, micro institutions, just to name the few. The operations of these businesses through employment have 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.

These enterprises are however facing some challenges. Some of the problems encountered by these Businesses include absence to get micro credits, inadequate Infrastructures, bad debts challenges as well the absences of good record keeping and bank accounts problem. Also, poor financial performance was equally seen as an issue to these micro and small enterprises. It was therefore because of this that i decided to carry out a study in these enterprises. More deeply with the willingness to investigate the reasons behind the issue with their financial performance..

So, it was observed that, they equally encountered issues with their cash planning, control budgeting, and collection as it was noticed by these MSEs in the Buea municipality. In essence, it is against this background that this study was set to find out engagement in cash management by MSEs Owners and accountants/ cashiers in Buea municipality, the activity which is key to the success of their business.

Statement Of The Problem

Irrespective of the effort made by the government of Cameroon through the ministry of small and medium sized enterprises as well as chamber of commerce to support the growth of MSEs sector by creating and enabling good business environment through appropriate legal and regulatory procedures.

And in spite the fact that banks have recently made micro-credit accessible to MSEs. There is no indication that the sector is growing. For the past decade in the South West region specifically in Buea, the financial performance of some micro and small enterprise has been dropping drastically (Information from the owners of micro and small enterprises Buea, 2017).

This has been the alternate reason why some of them have reduced their employment capacity, send away most of their workers, inability to have other branches elsewhere, less diversification, drop down in their market share, and decrease in profit, inadequate cash as well as a reduction in the return on capital employed. So I have been wondering why the situation is the way it is and I started looking for what could have been the reasons for this poor financial performance.

Furthermore, from a discussion with the General Manager of CFCE (Centre of Formalities and Creation of Enterprises) in Buea, I discover that, according to him, this poor performance observed in these micro and small enterprises are as result of the poor cash management practices in these enterprises. In fact, these enterprises face a lot of challenges with their cash management practices. For instance, in the cash planning, they are facing problems like,

Having a very vague estimation of the amount of cash they will have in the next month, did not have a proper plan for their expected cash inflows and outflows. For the cash budgeting, the problem observed is that they fail to practice sound cash forecasting to know when they will experience the peaks and slump of the business cycle. As it was found out by Mong (2011:33-34) that, only 28% of the small businesses drew up cash budget.

With the case of cash control, these owners cited that, they don’t have good safeguarding cash procedures as well as sound recordkeeping procedures and equally at times fails to issues receipts on their invoices issued. On the part of cash collection, 

I noticed that these micro and small enterprises face issues of bad debt as well as debtors’ payment period. As it is asserted that, sound receivable timing helps for businesses success. It’s therefore out of this poor background that I seeks to ascertain whether this poor financial performance observed in these micro and small enterprises is being resulted in the poor cash management practices among them.

XAF 5,000 – Purchase Checkout Added to cart