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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:
1.
Management problem caused by poor planning
2. Finance
problem caused by lack of financial support and poor funding
3. 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:
1. To
ascertain the influence of investment practices on the growth of Adeyemi oil
palm PLC.
2. To
establish the effect of working capital management practices on the growth of
Adeyemi oil palm PLC.
3. To
determine the effect of financial reporting and analysis practices on the
growth of Adeyemi oil palm PLC.
4. To find
out how financial planning practices influence the problem of lack of funding
in Adeyemi oil palm PLC.
5. 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:
1. What is
the influence of investment practices on the growth of Adeyemi oil palm PLC?
2. What is
the effect of working capital management practices on the growth of Adeyemi oil
palm PLC?
3. What is
the effect of financial reporting and analysis practices on the growth of
Adeyemi oil palm PLC?
4. How do
financial planning practices influence the problem of lack of funding in
Adeyemi oil palm PLC?
5. 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.
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