Financial Management Practices And Performance Of SMEs In .
Open Journal of Economics and CommerceVolume 1, Issue 4, 2018, PP 8-18ISSN:2638-549XFinancial Management Practices and Performance of SMEs inGhana: The Moderating Role of Firm ageIsaac NketsiahDirectorate of Research, Innovation and Consultancy, University of Cape Coast, Cape Coast, Ghana*Corresponding Author: Isaac Nketsiah, Directorate of Research, InnovationConsultancy,University of Cape Coast, Cape Coast, Ghana, isaac.nketsiah@ucc.edu.ghandABSTRACTThis study examines the moderating effect of firm’s age on therelationship between financial managementpractices of SMEs and their performance in Ghana. This paper relied on a sample of 200 SMEs in theSekondi-Takoradi Metropolis using random sampling without replacement technique (random numbers).The study employed descriptive cross-sectional survey design. Ordinary least square regression analysismodelwas used to test the relationship between financial management practices and SMEs performance. Theresults show that receivable management, cash management, inventory management and asset managementpractices influence SMEs performance. Also, firm’s age has a moderating effect on the relationship betweenfinancial management practice and SMEs performance.This implies thattime (age) enables firms to developorganizational routines to be able to perform their activities with more efficiency and which may better theirperformance.It is recommend that SMEs should incorporate good financial management practices such ascredit management, cash management, inventory management and asset management in their operations.Keywords: Financial management practices, asset management, Ordinary least square, Firm’s age, SMEs,Ghana.INTRODUCTIONThe success or failure of small and mediumenterprises (SMEs) is contingent on theirfinancial viability and one of the most commonproblems facing such firms is their ability tosecure sufficient cash flow and working capitalto remain profitable(Siaw, 2014). Financialmanagement was noted as one of the topproblems facing SMEs as long ago as the BoltonReport in the early 1970s (Bolton, 1971). Thishas been a recurring theme in the small businessliterature since that time (Abor & Quartey,2010; Amoako, 2012). Whilst all firms canencounter problems of financial managementthe challenges facing SMEs are more significantdue to their small size and vulnerability tofluctuations in cash flow (Siaw, 2014).Research has shown a positive relationshipbetween the efficient management of cash flowand working capital, and the firm’s profitability(Yazdanfar & Ohman, 2014). The moreefficiently a firm manages its finance the more itcan boost its profitability. This emphasizesspeeding up the recovery of accounts receivablewhile carefully managing inventory turnover(Enqvist, Graham & Nikkinen, 2014). Theowner-manager needs to ensure that theymonitor their accounts payable and accountsreceivable closely. However, the amount ofliquidity an SME requires may depend on itsage, size, industry, availability of ownermanager’s collateral, and whether it has accessto bank overdraft facilities (Tauringana &Afrifa, 2013).Although, the problem of finance and for thatmatter financial management has been identifiedas one of the major constraints to growth ofsmall businesses (Mensah, 2004; MFPED 2008;Lashitew, 2011; Mina, Lahr & Hughes, 2012;Agyei, 2014), most of the research worksconcentrate on capital structure of SMEs(Marfo-Yiadom, 2002; Abor & Biekpe, 2006;Marfo-Yiadom& Agyei, 2011; Agyei-Mensah,2012; Pieterson, 2012). In Addition, most of theresearches do not establish the associationbetween financial management practices andperformance.Therefore, the problem to be addressed in thisresearch is to examine financial managementpractices and their association with theperformance of SMEs in Sekondi-Takoradi.Sekondi-Takoradi is currently named the oil cityof Ghana due to the discovery of oil incommercial quantity in the region and hasattracted unprecedented migration of people allOpen Journal of Economics and CommerceV1 14 20188
Financial Management Practices and Performance of SMEs in Ghana: The Moderating Role of Firm Ageover the world. Selection was based on the factthat it has a number of industrial units in theWestern Region (GSS, June 2013). Hence, theeconomic activity as a result of variation inbusiness activities will help make meaningfulstatistical inferences.The objectives for this study therefore include, To determine the effect of financialmanagement practices on performance; and To establish the moderating effect of firm’sage on the association between financialmanagement practices and performance inthe SMEs sector in Sekondi-TakoradiHypotheses of the StudyIn order to achieve objectives 1 and 2 thefollowing hypotheses were tested:H01-a There is no association betweenAccount receivable management practices andSMEs performanceH01-b There is no association betweenInventory management practices and SMEsperformanceH01-c There is no association between Cashmanagement practices and SMEs performanceH01-d There is no association between Assetmanagement practices and SMEs performanceH02-e Firm’s age does not have a moderatingeffect on the association between Accountreceivable management practices and SMEsperformanceH02-f Firm’s age does not have a moderatingeffect on the association between Cashmanagement practices and SMEs performanceH02-g Firm’s age does not have a moderatingeffect on the association between Inventorymanagement practices and SMEs performanceH02-h Firm’s age does not have a moderatingeffect on the relationship between Assetmanagement practices and SMEs performanceThe rest of the paper is organised as follows.We review relevant literature in the next section;followed by our methods of data collection andanalysis.We then proceed to present our data results, andfollow this up with discussion of the results.Key findings emerging from our discussion ofthe results occupy the section that follows; andwe end the paper with conclusion andrecommendations.9REVIEW OF RELATED LITERATUREFinancial management is concerned with raisingthe needed funds to finance the firm’s assets andactivities, effective allocation of funds betweencompeting uses, and ensuring that the funds areused effectively and efficiently in order toaccomplish the desired goal of the business(McMahon, Holmes, Hutchinson, & Forsaith(2008).A number of studies have examined therelationship between the financial managementvariables and performance.For instance,Nyamao, Lumumba, Odondo & Otieno (2012)conducted a study to investigate the effects ofworking capital management practices on thefinancial performance of small-scale enterprises(SSEs) in Kisii South District, Kenya. Thestudy, which adopted a cross-sectional surveyresearch design, found that working capitalmanagement practices were low amongst SSEsas majority of them had not adopted formalworkingcapitalmanagementroutines.Similarly, their financial performance was on alow average. The study concluded that workingcapital management practices influence thefinancial performance of small scale enterprise.The study relied on primary qualitative data tomeasure the working capital managementpractices, but the present study measuresfinancial management using five constructs suchas account receivable management, cashmanagement, inventory management, accountpayable management and asset managementbased on primary quantitative data.Likewise, Debasish, Joydeep and Prasenjit(2001) also investigate the association betweenthe liquidity and profitability of Indian PrivateSector enterprises as a case of Aluminumproducing industry. They identified that there isa very high degree of positive correlationbetween liquidity and profitability of selectedcompanies. They also observed that liquidityvariables jointly influence profitability of theselected companies. According to Pedro andPedro (2008), provision of trade credit has effecton the level of investment in assets andconsequently impact on the profitability andliquidity of the firm. They argue that provisionof trade credits has positive effect on sales as itimproves the sales of the firm. However, overinvestment in accounts receivables canadversely affect the operations of firm.Additionally, in 2003, Deloof investigated therelationshipbetweenworkingcapitalmanagement and corporate profitability for aOpen Journal of Economics and CommerceV1 14 2018
Financial Management Practices and Performance of SMEs in Ghana: The Moderating Role of Firm Agesample of 1,009 large Belgian non-financialfirms for the period 1992-1996. He reports anegative relationship between profitability thatwas measured by gross operating income andcash conversion cycle as well number of e, Delo of (2003) argues thatshortening the inventory conversion periodcould lead to an increase in stock out costs ofinventory which results in losing salesopportunities and consequently leads to poorperformance. This study focuses on SMEs.In another study, Dimitrios (2008) investigatesthe effect of inventory management on firmperformance. He reports that too muchinventory could demand more physical space,increase the possibility of inventories damage,deterioration and losses and consequently, couldlead to financial problems. Additionally,Dimitrios (2008) argues that holding largeamount of inventory frequently is an indicationof inefficient and careless management practicesand procedures. However, keeping too littleinventories might also lead to the interruption ofoperation in manufacturing, increase thepossibility sale loss and consequently lower theprofitability of the firms. However, Panigrahi(2013) posits that there can be an unexpectedrelationship, where the correlation betweeninventory conversion period and sales can bepositive. Panigrahi (2013) indicates thatdecrease in inventory conversion period canresult into decrease in sales and vice versa. Thisunexpectedrelationshipshowstheineffectiveness of managers to increase saleslevel because of decrease in inventoryconversion period.Similarly, Lazaridis and Dimitrios (2005)investigate the relation between working capitalmanagement and corporate profitability of listedcompany in the Athens Stock Exchange. Usinga sample of 131 listed companies for period of2001-2004, the result from regression analysisindicated that there was a statistical significantpositive relationship between profitability,measured through gross operating profit, and thecash conversion cycle. From those results, theyargue that managers could create value forshareholders or profit can be created byhandling correctly the cash conversion cycle andkeeping each of the different components ofworking capital (accounts receivables, accountspayables, inventory) to an optimum level.In another study to examine cash managementand growth of small scale businesses inNtungamo market in Kampala, Arihoona (2011)used a sample size of 38 businesses. Theregression analysis showed that there is apositive significant relationship between cashmanagement and growth of small scalebusinesses. Arihoona observed that poor cashmanagement practices constrains businessoperations and some customers who are notsatisfied with the services run away signifyingpoor performance and hence retards the growthof the business. From the foregoing literature, itis observed that a single study examining theeffect of FM practices on SMEs performance inSekondi-Takoradi metropolis is missing. Hence,the need to fill such research gap.Firm’s Age and PerformanceThe amount of time that a business has been inoperation affects its ability to grow (Hui et al.2013; Mann & Sager, 2007). Age of a businessis associated with the firm's risk of failure,which implies that younger firms are at a higherrisk of failure than older ones. Age couldactually help firms become more efficient(Martins, Ligthelm & Wijk, 2003). Hall (1995)argues that older firms would have more time tolearn about their costs, and so will have moreaccurate estimates of their costs. Hui et al.(2013) examines the impact of firm age and sizeon the relationship among organizationalinnovation, learning, and performance amongAsian Food Manufacturing Companies. Using asample of 168 food manufacturing companies,the regression analysis revealed that firm ageand size are two moderators which control therelationship among organizational innovation,learning, and performance. The findingsapparently demonstrate that age enables firms todevelop organizational routines to be able toperform their activities with more efficiency andbetter performance.The literature review revealed that attemptshave been made to address the issue of financialmanagement among SMEs. However, most ofthe research works concentrate on capitalstructure (Marfo-Yiadom, 2002; Abor &Biekpe, 2006; Marfo-Yiadom& Agyei, 2011;Agyei-Mensah, 2012; Pieterson, 2012; Nketsiah,2015) and most of the researches also do notestablish the relationship between financialmanagement practices and performance.Furthermore, none has investigated all the fivefinancial management practices (accountreceivable management, cash management,inventory management, account payableOpen Journal of Economics and CommerceV1 14 201810
Financial Management Practices and Performance of SMEs in Ghana: The Moderating Role of Firm Agemanagement and asset management) in onestudy.Measuring PerformancePerformance measures could include traditionalaccounting measures such as sales growth,market share, and profitability. In addition,factors such as overall satisfaction andnonfinancial goals of the owners are also veryimportant in evaluating performance, especiallyamong SMEs. This is consistent with the viewof Wanjoi (2008) that both financial and nonfinancial measures should be used to assessorganisational performance. Panigrahi (2013)posits that one of the indicators used todetermine the performance of an enterprise is itsturnover/ sales volume. In this study, salesvolume was used because the SMEs sampled donot keep records of assets and liabilities in orderto use other performance measures such asReturn on Asset and or Return on Equity. Thesurvey revealed that weekly turnover rangedfrom about two hundred Ghana cedis (GHS 200)to Eight Thousand Ghana cedis (GHS 8,000).Assuming a 52- week year cycle, it means salesvolume / turnover ranged from ten thousand andfour hundred Ghana cedis (GHS 10, 400) to fourhundred and sixteen thousand Ghana cedis(GHS 416,000). This confirms the small andmedium nature of the businesses surveyedaccording to Mensah (2004). However, it isworth noting that, the estimation of sales isusually a problem when no proper records arekept. Marfo-Yiadom and Agyei, (2011) andNketsiah (2018) reported in a study of traders inGhana that many traders gave figures frommemory. The record keeping is generally poorand thus one can only rely on the recentmemories of the traders to estimate the level ofsales.Conceptual Framework of The StudyFigure 1 is the conceptual frameworkillustrating the relationship between FMpractices and firm’s age as moderating variablebetween FM practices and performance.Researcher’s Construct, (2017)METHODOLOGYto predict or estimate the behaviour of variables(McCartney et. al. 2006).Empirical ModelIn order to analyse the association betweenfinancialmanagementpracticesandperformance of SMEs; and to test themoderating effect of firm’s age on theassociation between financial managementpractices and SMEs performance, multiplelinear regression model is adopted. It waspreferred because it reveals statisticalrelationships between variables and can be used11Profitability α β1.INVENTORYMGT ɛThis regression analysis model is adopted fromthe works of Deloof (2003), Padachi (2006) andShin and Soenen (1998). However, Wambugu(2013) included other working capital variablessuch as account payable, cash and accountreceivables as well as growth in sales andgrowth in total assets as intervening variables tothe model. That is,Open Journal of Economics and CommerceV1 14 2018
Financial Management Practices and Performance of SMEs in Ghana: The Moderating Role of Firm AgeProfitabilityὶ (Return on asset) 𝛼 β1.CASHCONCYCὶ β2.INVHOLDPERὶ β3.ACCRECPERὶ β4.ACCPAYPERὶ β5.APPROACHWCὶ β6.GWTSALESὶ β7.GWTASSETὶ ɛὶFollowing the works of Wambugu (2013),Padachi (2006), Deloof (2003) and ShinProfitabilityὶ&Soenen (1998), this study builds up on theirmodels to include other financial managementpractice such as asset management (ASSETMGT). In addition, a moderating variable suchas firm’s age is also included in the model. Themodel thus becomes: 𝛼 β1.ASSETMGTὶ β2.ACRECMGTὶ β3.ACCPAYMGTὶ β4.CASHMGTὶ β5.INVMGTὶ β6.FIRMAGEὶ (β7.FINRECKEEPὶ .FIRMAGEὶ) (β8.ASSETMGTὶ.FIRMAGEὶ) (β9.ACRECMGT ὶ .FIRMAGEὶ) (β10. ACCPAYMGT ὶ.FIRMAGEὶ) (β11.CASHMGTὶ .FIRMAGEὶ) (β12.INVMGTὶ .FIRMAGEὶ) ɛὶTable 1. Definition of Variables and Expected SignsVariableProfitability(Sales YMGTASSETMGTDefinitionThe amount realised from the sale of goods or rendering of servicesby owner mangers of SMEs in the normal operations of business in aspecific period.Number of years the firm has been in existence.The practice of maintaining and monitoring the history of financialactivities by owner managers of SMEs.Management of credit owner/ manager of SMEs grant its customerswhen goods are sold or services are renderedManaging cash on hand in order to ensure a firm’s financial stabilityand solvencyActivities employed by owner/ manager of SMEs in maintaining thestock of any item or resource used in an organisation in order toprovide uninterrupted production, sales, and/or customer-serviceInvolves how owner managers of SMEs manage monies owed tosuppliers for products and services purchased on credit.Involves how owner managers of SMEs invest their short-term fundsin order to help the businesses stay afloat financially.Target Population, Sampling technique andSample sizeOnly registered SMEs in the database of NBSSIin the Sekondi-Takoradi metropolis were usedin the study. The list of registered SMEs dataobtained from the NBSS I numbered SevenHundred and Sixty-two (762).The names, phone numbers and exact locationaladdresses of registered enterprises in theSekondi-Takoradi metropolis were given to theresearcher by the NBSSI. A random samplingwithout replacement (table of random numbersSee Appendix A) was used to select 200enterprises. Based on a table provided byBartlett, Kotrlik and Higgins (2001) ondetermining minimum returned sample size fora given population size for continuous andcategorical data, the minimum sample size of apopulation of about 800 registered SMEsrequires a sample of about 166 registeredSMEs(See Appendix B-The table includessample sizes for both continuous andcategorical data assuming alpha levels of .10,.05, or .01. The margins of error used in thetable were .03 for continuous data and .05 forExpected ositivePositivecategorical data). However, since the list ofregistered SMEs data obtained from the NBSSI,as at July, 2017, totalled Seven hundred andsixty-two (762), the researcher randomlyselected 200 registered SMEs to cater for nonresponse rate.The 200 registered SMEsselected is sufficient sample size accounting forabout 26.2% of the total population of SMEsthat have registered with NBSSI in themetropolis. This is consistent with Cresswell,(2003) and Sekaran, (2003).Data Collection ProcedureThe main data for this study was primary datawhich was collected through a self-administeredquestionnaire. The data collection process beganwith a meeting with the management of theSekondi-Takoradi office of NBSSI to brief theregional manager about the issues relating to thedata collection and to seek approval to approachthe SMEs registered with his outfit. After theapproval, a meeting was held between theresearcher and research assistants who are staffof NBSSI who were engaged to und
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