THE IMPACT OF FINANCIAL MANAGEMENT BEST PRACTICES ON SME PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

Purpose Statement

This quantitative survey-based study aims to examine the effect of financial management best practices on the performance of small and medium-sized businesses. It specifically sought to assess the relationship that exist between working capital management (a component of financial management) and profitability. It analyzes the influence of working capital management on corporate debt; and its impact on value creation.

Background of the Study

The administration of the company's finances serves as the foundation for all major decisions. This is because financial management practice is applicable to any market, industry, and company, making it one of the most essential responsibilities of corporate executives and directors (O’Neill et al., 2016). Financial management practice impacts every facet of a company, from small and medium-sized businesses to large global corporations, and determines a firm’s financial sustainability, which affects both the present and future prosperity of the company (Brigham, & Ehrhardt, 2004; Brown & Moles, 2014). If top management wants a company to thrive, they need to pay close attention to the necessity of financial management and find ways to implement and sustain its practice (Aparicio et al., 2016).

Yang & Ping (2019), observed that financial management refers to the specific process of managing an organization's money in order to accomplish the goals of the business; the senior management oversees it, most often, the chief financial officers (CFOs) or vice presidents of finance, among others. It involves planning, directing, monitoring, and regulating the organization's financial resources in order to arrive at financially responsible judgments (Kiptoo et al., 2017). In essence, the goal is to modify managerial practices so that they are more compatible with the financial structure of a company. Conversely, improper financial management practices have been shown to be a major cause of business failure (Yensu et al., 2016). According to Solomon (2017), lots of businesses fail after sometime due to improper financial management practices result in financial difficulties, mismanagement of cash, and a lack of long-term funds to cover operational costs and capital expenditures. Oluoch (2016), added that businesses with well-aligned financial management systems are productive and efficient.

As part of management skill, effective financial management practice of small and Medium Enterprises (SMEs) can boost capacity flexibility, delivery speed, and degree of product variety when they establish higher degrees of operational processes. These businesses can also increase market share, productivity, customer happiness, and safety. Additionally, market oriented strategies can increase earnings. Adopting human resource management strategies like internal promotions and competitive pay can improve a company's capacity to recruit, hire, and retain staff with better knowledge, skills, and motivation (Nwagu & Enofe, 2021). Consequently, the adoption of management accounting procedures such as budgeting for cost control, product profitability analysis, and strategic planning can give significant information for linking operations to the firm's aims and goals (Neumann, 2021).

Manuylenko & Shebzukhova (2021), observed that financial management practice is the mechanisms that an organization puts in place to ensure that its resources are managed in an effective and efficient manner in order to achieve the organization's goals. Kasim et al. (2015) assert that financial management encompasses the acquisition of capital required to fund a company's assets and operations, allocation of available capital among various competing uses, and assurance of efficient and effective utilisation of capital to advance the company's objectives.

In addition to working capital, investments, finance, accounting information systems, financial reporting, and analysis, Kieu (2004), widened the scope of financial management to incorporate cash, receivables, and inventory management, cash flow, fixed asset, and profit planning; short-term and long-term financing, and intermediate financing. Kamande (2015) posits that the financial performance of entrepreneurship is directly impacted by financial management practises.

In order for SMEs to maintain its operations and fulfill its goals and objectives, it must manage its financial practices effectively and prudently. Consequently, financial management contributes to the enhancement of corporate organizations' profitability by the application of efficient financial control instruments, such as budgeting control, ratio analysis, and CVP analysis (Inuwa, 2014). The success of a business depends on the capital budget decisions it makes (Hamza et al., 2014).

According to John &  Willie (2021), the capital budgeting decisions that owners or managers of SMEs must make to ensure their financial stability are among the most essential. This is based on the fact that capital budgeting decisions usually involve substantial capital expenditures for the acquisition of fixed assets. Olawale and Garwe (2010) indicate that the deployment of sophisticated investment evaluation techniques such as NPV and IRR approaches has a positive impact on the profitability of firms.

Financial management is therefore, one of numerous managerial functional areas crucial to the success of SMEs (Hnatenko et al., 2020). Financial difficulties, incorrect fund management, and a lack of long-term cash to pay operational costs and capital spending have been demonstrated to be significant contributors to the failure of SMEs (Gbandi & Amissah, 2014). The inclusion of financial management methods is intended to enhance financial performance. When SMEs' financial management systems are well-aligned, they are productive and efficient (Etuk et al., 2014). Integration of financial management approaches improves the financial performance by ensuring rapid coordination of the numerous business activities and correction of defects (Etikan, 2016). The financial performance of an SME is directly influenced by financial management practices such as financial analysis and forecasting, budget controls, cash management procedures, and financing decisions. Small and medium-sized enterprises with well-managed financial management systems report improved financial returns (NSE, 2018). The significance of financial management practices cannot be understated due to the fact that the majority of organizational challenges can be prevented by employing solid financial management procedures (Uluyol, 2013). Particularly, working capital ensures that SMEs can make their payments each day.

Accounting and budgeting ensure the firm's commercial operations are transparent and accountable (Di Vaio, 2019). Risk management ensures that a company is prepared for adverse events (Egbuna & Agali, 2013), whereas capital structure management ensures that all financial activities are coordinated (Uluyol, 2013). All of these are designed to improve the financial performance of SMEs when properly implemented into their everyday operations.

However, additional costs may be incurred in putting these financial management principles into operation, burdening the company and reducing returns (Abaniset al., 2013). Financial management methods' effects on SME are moderated by additional characteristics such firm size, amount of risk, capital intensity, leverage, and industry factors. Thus, when developing the organization's financial management processes, these elements should be taken into account (Crespo et al., 2019). If a company cannot carefully plan and draw out a policy to efficiently manage its finances, it may not see the long term (Cole, 2018). As a result, the main factor contributing to the fundamental issues SMEs face is inefficient financial management. The financial management system includes the processes that govern how the department manages its sales, expenses, assets, liabilities, and contingencies. It also comprises its risk management methods and financial and operational performance control, including budget performance and internal and external reporting for these responsibilities. Business organizations are expected to expand and develop by passing from one stage to the next, from small firms to the organization with many employees.

Financial management practices (FMP) are the methods used by firms to manage their assets in a way that leads to growth and maximizes owner profits (Yensu, Konadu-Yiadom, & Awatey, 2016). FMP shows that entrepreneurs (or their representatives) are capable of organizing, directing, and supervising all financial-related activities inside the organization. One of the actions that defines financial management is the necessity to acquire and employ the entity's financial resources (Atems & Shand, 2018).

Despite the impact that financial management methods have made, as evidenced by our ongoing discussion, many SMEs in Nigeria have been observed to struggle with managing their finances effectively, and their mortality rate is still very high, even in industrialized nations ( Okunlola et al., 2019; Oladimeji & Aladejebi, 2020). Due to this, there is increased exposure to market risk, rivalry, and poor management, all of which have a negative impact on financial performance. Thus, financial management practices, the subject of this dissertation, is a knowledge that ensures the use of corporate development ideas to guarantee that a firm's financial resources are being used effectively.

​​​​​​​Rationale of the study

SMEs account for 48% of Nigeria's GDP, 96% of all enterprises, or more than 17.4 million businesses, 50% of all industrial jobs, and approximately 90% of all manufacturing-related activities as well as 84% of all jobs in Nigeria (PWC, 2018). A total of 54,502,500 persons are employed in the SME sector, representing 84.02% of Nigeria total labor force (NBS, 2021). Since 2017, however, at least 1.9 million SMEs have gone into extinction due to the country's dismal economic conditions (NBS, 2021). Nigeria, the largest economy in West Africa, has an average startup failure rate of 61% from 2010 to 2018. (Punch, 2022). Continue to exist are obstacles to the progress and advancement of the sector. Among the several challenges facing the SME sector in Nigeria, inadequate financial management practices is the dominant factor (CBN, 2019; Bunmi, 2020, NBS, 2021). Ekanem (2010), explained that the inability of SMEs in Nigeria to preserve receivables demonstrates their weak financial management practices.

According to Okafor and Onebunne (2015), the profit and survival of SMEs in Nigeria are at an all-time low due to inadequate financial management practices. Maungal and Garbharra (2014), revealed that 60% of SMEs in Nigeria are unable to generate a profit from the date of inception to the date of closure while 92% of SMEs fail during the first five years due to inadequate preparedness of the owners for financial management (Babatunde & Perera, 2017; Karadag, 2017). This failure of SMEs in their first five years of operation has been related to a lack of financial management understanding and practice (Olokoyo, Oyewo, & Babajide, 2014). Financial management duties essential for the effective management of SMEs in Nigeria are not taught to and implemented by SMEs' owners as they acquire leadership roles (Olokoyo et al., 2014;  Kamande, 2015; Okafor, 2016; Kambi, & Ali, 2016; Karadag, 2017).

All of these findings indicate that the majority of SME owners in Nigeria are unprepared to implement the financial management techniques necessary for business survival (Babatunde & Perera, 2017). It is on this premise that this thesis seeks to examine the impact of financial management practices on SME performance in Nigeria and to contribute to recent knowledge on financial management practices.

Research Aims, Questions and Objectives

1. Aim

The objective of this dissertation is to examine the influence of financial management strategies on the performance of Small and Medium Enterprises (SMEs) in Nigeria. Financial management practice in this study will be measured using working capital management.

Questions

The following sub-questions will be answered in this study to further buttress SME performance.

1. What is the impact of working capital management practices on the profitability of small and medium-sized enterprises (SMEs)?

2. What is the impact of working capital management practices on debt management?

3. What is the influence of working capital management practices on the creation of value in small and medium-sized enterprises (SMEs)?

1.3.2 Research Objectives

1. To determine the influence of financial management practices on SMEs profit.

2. To examine the influence of financial management practices on SMEs debt.

3. To establish the relationship between financial management practices and SMEs value creation.

​​​​​​​Research Hypotheses

H01: There is no relationship between working capital management practice and SME profit.

H02: There is no relationship between working capital management practice and SME debt.

H03: There is no relationship between working capital management practice and SME value creation.

​​​​​​​Contribution to Knowledge

The findings will benefit the government of Nigeria, especially the Small and Medium Enterprises Development Agency, a body responsible for industrialization formulating policies to cushion SMEs against financial crisis arising from poor financial management practices. The study findings may be adopted by SME in Abuja, Nigeria, in designing interventions to enhance the growth and development of their businesses. The study would also contribute to the existing body of knowledge on the extant literature on financial management practices of SMEs.

1.5. Overview of Research Methodology

This research employs a quantitative approach to evaluate the influence of financial management, specifically working capital management, on the operational effectiveness of small and medium-sized businesses.

 This approach is used because it uses measurable or observed data to investigate questions regarding the sample population (Ahmad et al., 2019). This strategy explains how to acquire data in numerical form to explain a problem or phenomena (Apuke, 2017). Quantitative research is frequently concise, scientific, and applicable. When used effectively, this approach enables researchers to extrapolate findings from the test group to larger, more general populations (Bryman, 1988).

 1.6. Thesis Structure

This study is presented in five distinct but interrelated chapters. In the first chapter, the business problem, objectives, research questions, and justification for the study are covered. The second chapter reviews the scholarly opinions and empirical findings. It is divided into conceptual, theoretical, and empirical sections. In the third chapter, the systematic methods and approaches adopted to providing fact-based answers are provided. Chapter four of the study conducts an analysis of the data collected through the use of descriptive statistical techniques and Pearson correlation analysis. In contrast, chapter five presents a comprehensive summary of the research, a fact-based conclusion, and possible recommendations for installing effective financial management best practices necessary for driving entrepreneurship growth in Nigeria.