IMPACT OF FINANCIAL MANAGEMENT PRACTICES ON PROFITABILITY OF BUSINESS ENTERPRISES. CASE STUDY OF SME OPERATORS IN ILORIN METROPOLIS
TO THE STUDY
Enterprises (SMEs) are seen as a driving force for the promotion of an economy
(Khan and Jawaid, 2004) and they contribute immensely to the economic
development of any country.
OECD (1997), business enterprises play a major role in economic growth and
development, creation of employment and income generation. Business enterprises
in Nigeria contribute enormously to National Gross Domestic Product (GDP) and
employment in the informal sector. It creates employment and leads to the export
of locally manufactured goods and services as well as helping the local
government authorities to generate tax revenues for socio-economic development.
As in most
developing countries, small and medium-scale enterprises form a significant
part of the economic growth. Nevertheless, they face a number of problems,
including access to finance from formal sources, which is often considered to
be the most important problem (MFPED, 2008). Consequently, the growth of the
SME sector directly affects the performance of the nation. In all economies
they constitute the vast majority of business establishments and they are
usually responsible for the majority of employment opportunities created which
account for one third to two thirds of the private sector turnover (Ntsika,
2002). It is estimated that SMEs contribute 56% of private sector employment
and 36% of the Gross Domestic Product (GDP) worldwide (Arianoff, 2010). In many
countries, SMEs have been a major engine of growth in employment and output
over decades. In developing countries they are seen as a major „self-help?
instrument for poverty eradication due to the ease of entry and exit.
or failure of small to medium enterprises (SMEs) is contingent on their
financial viability and one of the most common problems facing such firms is
their ability to secure sufficient cash flow and working capital to remain
management is one of several functional areas of management which is central to
the success of any small business (Meredith, 2006). Financial management is the
management of finances of a business in order to achieve the financial
objectives of the business. McMahon et al. (2008) defines financial management
based on mobilizing and using sources of funds: Financial management is
concerned with raising the funds needed to finance the enterprise’s assets and
activities, the allocation of theses scare funds between competing uses, and
with ensuring that the funds are used effectively and efficiently in achieving
the enterprise?s goal.
management as used in this study is composed of five (5) constructs and these
include; working capital management which is also subdivided into cash
management, receivables management and inventory management. Other constructs
under financial management include; investment, financing, accounting
information systems and financial reporting and analysis. Ross et al (2009)
indicated three kinds of decisions the financial manager of a firm must make in
business; these include the financing decision, and decisions involving
short-term finance and concerned with the net working capital, investment and
financial management may damage business efficiency and this will continuously
affect the growth of the Small and Medium enterprises. However, efficient
financial management is likely to help SMEs to strengthen their business
efficiency and, as a result, these difficulties can partly be overcome, also
regardless of the business enterprise, if the financial decisions are wrong,
profitability of the such enterprises will be adversely affected. Consequently,
a business organization’s profitability could be damaged because of inefficient
financial management. Business Enterprises have often failed due to lack of
knowledge of efficient financial management.
Ang (2002) indicated three main financial decisions including the investment
decisions, financing decisions and dividend decisions. Meredith (2006) asserts
that financial management is concerned with all
areas of management, which involve finance not only the sources, and
uses of finance in the enterprises but also the financial implications of
investment, production, marketing or personnel decisions and the total
performance of the enterprise. However, such areas are not currently well
embraced by SMEs in Nigeria and urgent attention needs to be paid to. Lack of
effective management during SMEs early stages is also a major cause of business
failure for small businesses. Owners tend to manage these businesses themselves
as a measure of reducing operational costs.
management in SMEs is often different to that found in large firms due to the
more dynamic nature of their cash flow cycle, general paucity of working
capital, and their ability to raise finance through debt or equity (Welsh and
White, 1981). SMEs also lack the financial management and accounting systems
available to large firms, as well as the professional staff who manage such
systems. Typically the owner-manager is required to perform these tasks, often,
but not always, with support from a bookkeeper and an accountant. This is a
pattern found throughout the world, both within the advanced economies that
comprise the Organisation for Economic Co-operation and Development (OECD)
group of nations, and the developing economies (OECD, 2010).
business performance has for long remained unexplained most especially in the
third-world countries perspective where the Small and Medium Enterprises occupy
the large part of the economy. However, some studies from developed nations see
(Nguyen, 2001) cite inefficient financial management practices to contribute
immensely to SMEs poor business performance.
research indicates that most small businesses have inadequate financial
structures and activities, this problem causes inconsistent SMEs financial
records and large discrepancies arise in the ways the business enterpise report
their financial positions. For example, many SME in developing countries may
have two or three sets of books for different audiences. Auditing such
financial records can be labor and time intensive, which raises the cost of
loan processing for SMEs, in addition auditing such financial statement can be
studies showed a relationship between working capital management and
profitability of SMEs and other related constructs, these studies are from the
developed nations and had looked mostly at working capital management without
looking deeply on the multiplicative effect of various constructs of financial
management practices, that is working capital management, financing, investing,
financial reporting and accounting
information systems and
how all these
affect profitability and business performance of SMEs.
1.3. OBJECTIVES OF THE STUDY
operating a small business includes a possibility of success as well as
failure. Because of their small size, a simple management mistake is likely to
lead to sure death of a small enterprise hence no opportunity to learn from its
past mistakes. This may be attributed to
lack of planning, improper financing and poor management has been cited as the
main causes of failure of small enterprises.
against this realization that the current study aims to investigate the impact
of financial management practices on profitability of SMEs.
objectives of this study include:
effect of working capital management practices on the profitability of SMEs in
the extent of financial management practices employed by the SMEs and their
effect on growth.
3. Examine how
financial planning practices influence on the profitability of SMEs
the influence of accounting information systems on the profitability of SMEs in
the effect of financial reporting and analysis practices on the profitability
of SMEs in Nigeria.
the relationship between financial management practices and business
performance of SMEs.
1.5. STATEMENT OF HYPOTHESIS
following hypotheses were tested for the research study:
management practices positively influences Business and financial performance.
Capital Management as a financial management practice has a positive relationship
to profitability of business enterprises.
1.6. SIGNIFICANCE OF THE
previous researchers have concentrated on examining, investigating and
describing the behavior of Business Enterprises in practicing financial
management. Their findings are mainly related to exploring and describing the
behavior of business enterprises towards financial management practices and characteristics.
There has been little research examining the impact of financial management
practices on profitability.
management of business enterprises who contribute to 80% of the country’s
economy will find this research work useful so also are the government of the
study will also be of immense benefit to all as it will provide indepth
knowledge on the various aspect of financial management practices which may be
adopted and implemented by management of various business enterprise.
group that will find this study useful is researchers, teachers and students of
financial management sciences. While the topic: “ impact of financial
management practices on profitability of business enterprises” may not be
strange to them, its application to the small scale business organizations will definitely arouse
their interest, which can be in the area of knowledge or adoption of this
research for further study.