The Influence Of Financial Management On The Growth Of Small And Medium Scale Industries
The Influence Of Financial Management On The Growth Of Small And Medium Scale Industries
Chapter One
Introduction
1.1 Background of Study
Small and Medium Industries (SMIs) have been widely acknowledged as the springboard for sustainable economic development. According to UNDP (1974), developing countries including Nigeria, have since the 1970s shown increased interest in the promotion of small and medium scale enterprises for three main reasons: the failure of past industrial policies to generate efficient self-sustaining growth; increased emphasis on self-reliant approach to development and the recognition that dynamic and growing SMIs can contribute substantially to a wide range of developmental objectives. These objectives include efficient use of resources, employment creation, mobilization of domestic savings for investments, encouragement, expansion and development of indigenous entrepreneurship and technology as well as income distribution, among others. Consequently, programmes of assistance in the areas of finance, extension and advisory services, training and provision of infrastructure were designed by the government for the development of SMEs to enhance the attainment of these objectives. However, the full potential of the SMIs in the developmental process have not been realized, owing to various constraints.
Financial 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. Financial 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 reporting. Similarly, 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 Kenya 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.
Inefficient 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. Kazooba (2006) argues that though Kenya is among the countries with high startup of SMEs, it also has the highest numbers of non performing SMEs as well high number of closure of SMEs. However, the studies conducted did not show how the components of financial management affect the overall business efficiency of SMEs. A large number of business failures 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). So this study therefore focuses on the influence of financial management on the growth of small and medium scale industries, using Adeyemi oil palm PLC as a case study.
1.2 Statement Of The Problem
Presently, small-scale business enterprises in Nigeria are faced with problems that hamper the growth and development of these enterprises. This support the saying that, the successes of any business whether small, big or mega depends largely on the performance of people which is management, finance and multiple and high tax
To ensure the achievement of this management objective in Small-scale business, this research has been proposed to address the following challenges:
- Management problem caused by poor planning
- Finance problem caused by lack of financial support and poor funding
- Multiple and High Taxes
According to Wanjohi (2009) starting and 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 (Longenecker, 2006). Though it is clear that small and medium scale industries (SMIs) play a critical role in economic development the rate in which newly established SMIs collapsing it is wanting. It is against this realization that the current study aims to investigate the effect of financial management practices on growth of SMIs. These problems make it glaring that there is a need to carry out a study on the influence of financial management on the growth of small and medium scale industries.
1.3 Objectives of the Study
The general objective of this study is to examine the influence of financial management on the growth of small and medium scale industries, using Adeyemi oil palm PLC as a case study.
The specific objectives are:
- To ascertain the influence of investment practices on the growth of Adeyemi oil palm PLC.
- To establish the effect of working capital management practices on the growth of Adeyemi oil palm PLC.
- To determine the effect of financial reporting and analysis practices on the growth of Adeyemi oil palm PLC.
- To find out how financial planning practices influence the problem of lack of funding in Adeyemi oil palm PLC.
- To investigate the influence of accounting information systems on the growth of Adeyemi oil palm PLC.
1.4 Research Questions
The relevant research questions related to this study are:
- What is the influence of investment practices on the growth of Adeyemi oil palm PLC?
- What is the effect of working capital management practices on the growth of Adeyemi oil palm PLC?
- What is the effect of financial reporting and analysis practices on the growth of Adeyemi oil palm PLC?
- How do financial planning practices influence the problem of lack of funding in Adeyemi oil palm PLC?
- What is the influence of accounting information systems on the growth of Adeyemi oil palm PLC?
1.5 Significance of the Study
The findings of this study will enable management of small-scale businesses to appreciate better the need for a proper feasibility study and business plan before starting up a business for easy management. The study will enable the government, private sector and prospective small-scale business entrepreneurs to come up with policies that will improve the management of small-scale business.
The findings from this study are relevant because it elucidates the influence of financial management on the growth of small and medium scale industries. The survival of every business is determined by proper financial management.
This study will enhance the existing body of literature by contemplating the areas of the literature that have not yet been examined or considered and incorporating these factors into the current study. The study will thus form the basis for further studies in the field.
1.6 Scope of the Study
The scope of this study is restricted to examining the influence of financial management on the growth of small and medium scale industries, using Adeyemi oil palm PLC as a case study.
Chapter Five
Conclusion and Recommendation
The study concludes that financial management practices (working capital management practices, investment practices, financial planning practices, accounting information systems and financial reporting and analysis practices) are major determinants of the growth of SMEs in Nigeria. The small and micro enterprises (SME) play an important role in Nigerian Economy. Inefficiencies in financial management result in poor financial performance and eventually lead to failure of SMEs. A high rate failure of failure of SMEs has adverse effects on the economy hence the need for sound financial management practices among Nigerian SMEs. The adoption of financial management practices provide opportunities for the business enterprise to respond to the various challenges within its operating environment. Thus SMEs should embrace strong financial management systems.
Innovation is key to the growth of SMEs and effort should be made to ensure SMEs are in vanguard of innovation for them to be competitive through enhancement of financial management practices through ICT. The ever changing needs of customers once met will enhance customer retention and sustainable growth rate. SMEs should also be encouraged to partner due to the high involvement in technology in order to reap full benefits of technology.
SMEs should be encouraged to recruit staff with the required qualification to match the growth of the SMEs. Commercial banks should have tailor made loan products which are flexible and easy to understand.
SMEs should also be encouraged to diversify their products and move from the traditional practice of not venturing into other products
Further, SMEs should be advised to strengthen and put up policies regarding debtors on how to collect receivables, be able to know when to write off bad debts so as to minimize losses that accrue as a result of none payment. Similarly, efforts should be put by SME owners to ensure that inventory management is improved through setting re-order levels both for minimum and maximum so that the business does not run out of stock as well as tie too much capital in stock which affects the working capital.
The ministries of finance and industrialization should provide a favorable platform for SMEs to access financing that can enable them to run their businesses at a reasonable cost of financing. This is necessary since access to bank loans was found to be difficult for SMEs and end up using only internally generated funds. The interest rates should be favorable; similarly the requirements to accessing such funding should also be reasonable so as not to push SMEs away.
NOA and financial expertise should sensitize the SMEs owners on the relevance of bookkeeping, financial reporting and analysis as well maintaining proper books of analysis. Capacity building should be organized for SMEs owners to help them understand why they should keep updated books so as to know their levels of performance on whether they are making profits or losses.
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