UGANDA MARTYRS UNIVERSITY

EFFECTS OF CASH MANAGEMENT PRACTICES ON THE FINANCIAL

PERFORMACES OF SMEs,

A CASE OF NYENDO MUKUNGWE DIVISION.

BY

NAME: NAKYEJJWE JACQUELINE

REG NO: 2021-B022-33003

A RESEARCH PROPOSAL SUBMITTED TO THE FACULTY OF BUSINESS

ADMINSTRATION AND MANAGEMENT IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF A BACHELORS DEGREE IN BUSINESS

ADMINISTRATION AND MANAGEMENT OF UGANDA MARTYRS UNIVERSITY.

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DEDICATION

This research proposal is dedicated to my loving parents Mr and Mrs MUGABI JOHN,

whose unwavering love, encouragement, and support have shaped my journey as a budding

researcher. Your constant belief in my abilities has been the driving force behind my

aspirations, and I am eternally grateful for the profound impact you have had on my life.

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ACKNOWLEDGEMENT

I would like to express my sincere appreciation and gratitude to all those who have

contributed to the development of this research proposal. Without their support, guidance,

and assistance, this endeavour would not have been possible.

First and foremost, I would like to extend my heartfelt gratitude to my supervisor, MADAM

NAMIRIMO LILLIAN and other Lecturers in the faculty of business administration and

management. Your expertise, invaluable insights, and unwavering support throughout the

entire process have been instrumental in shaping the direction and quality of this proposal.

Your guidance has been a constant source of inspiration and motivation, and I am truly

grateful for the opportunity to work under your supervision.

My gratitude extends to my colleagues and friends who have provided valuable feedback,

discussions, and moral support throughout this research journey. Their encouragement,

constructive criticism, and collaborative spirit have played a vital role in refining the ideas

presented in this proposal.

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CONTENTS

DEDICATION...........................................................................................................................i

ACKNOWLEDGEMENT.......................................................................................................ii

ABSTRACT..............................................................................................................................v

CHAPTER ONE.......................................................................................................................1

1.1Introduction.....................................................................................................................1

1.2 Background of the study................................................................................................1

1.3 STATEMENT OF THE PROBLEM............................................................................3

1.4 OBJECTIVES OF THE STUDY..................................................................................4

General Objective.....................................................................................................................4

1.5 Specific objective............................................................................................................4

1.6 Research questions.........................................................................................................5

1.7 Scope of the study...............................................................................................................5

1.7.1 Content scope...........................................................................................................5

1.7.2 Geographical scope..................................................................................................5

1.7.3 Time scope................................................................................................................5

1.8 Justification.....................................................................................................................6

1.9 Significance of the study................................................................................................6

1.10 Conceptual framework................................................................................................7

1.11 Definition of key concepts............................................................................................8

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 1.12 Conclusion...................................................................................................................10

LITERATURE REVIEW......................................................................................................10

2.1 Introduction..................................................................................................................10

2.2 Theoretical Review.......................................................................................................11

2.2.1 Cash Management Theory....................................................................................11

2.1.3 Free Cash Flow Theory.........................................................................................12

2.3 Conceptual review........................................................................................................13

2.3.2 Cash Management and financial performance...................................................13

2.4Actual Review................................................................................................................14

2.4.1Cash planning and financial performance of SMEs............................................14

2.4.2Cash control and financial performance of SMEs...............................................18

2.4.3 Cash disbursements and performance of SMEs.................................................21

2.5 Dependent Variables....................................................................................................25

2.5.1 Returns on investment...........................................................................................25

2.5.2 Sales Turn over......................................................................................................26

2.5.3 Profitability.............................................................................................................26

2.6 Moderating Variables.............................................................................................27

2.6.1 Work Experience...................................................................................................27

2.6.2 Record Keeping......................................................................................................28

2.6.3Gaps identified in the literature review................................................................29

2.7 conclusion......................................................................................................................30

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CHAPTER THREE...............................................................................................................31

METHODOLOGY.................................................................................................................31

3.1 INTRODUCTION........................................................................................................31

3.2 RESEARCH DESIGN..................................................................................................31

3.3 AREA OF STUDY........................................................................................................32

3.4 STUDY POPULATION...............................................................................................32

3.5 SAMPLE SIZE.............................................................................................................32

3.6 SAMPLING TECHNIQUES.......................................................................................33

3.6.1 Purposive Sampling Technique................................................................................33

3.6.2 Simple Random Sampling........................................................................................34

3.7 DATA COLLECTION METHODS...........................................................................34

3.7.1 Questionnaire Method...............................................................................................34

3.7.2 Interviews...................................................................................................................35

3.7.3 Data Collection Tools................................................................................................35

3.7.3.1 Questionnaires.....................................................................................................35

3.7.3.2 Interview Guide...................................................................................................36

3.7.4 Data Collection Sources.........................................................................................36

3.7.4.1 Primary data Sources.........................................................................................36

3.7.4.2 Secondary Data Sources.....................................................................................36

3.8 DATA MANAGEMENT AND ANALYSIS...............................................................37

3.8.1 Measurement of Variables....................................................................................37

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 3.8.2 Data analysis...........................................................................................................38

3.8.2.1 Quantitative Data Analysis................................................................................38

3.8.2.2 Qualitative data analysis....................................................................................38

3.9 VALIDITY AND RELIABILITY...............................................................................38

3.9.1 Validity....................................................................................................................38

3.9.2 Reliability................................................................................................................39

Table 3.3: Reliability of the Questionnaire..........................................................................39

3.10 Ethical Considerations...............................................................................................40

3.11 Limitations..................................................................................................................40

3.12 Conclusion...................................................................................................................41

REFERENCES.......................................................................................................................42

QUESTIONNAIRRE.............................................................................................................47

INTERVIEW GUIDE............................................................................................................53

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ABSTRACT
This research study investigates the effects of cash management practices and financial

performance of small and medium-sized enterprises (SMEs) in Nyendo Mukungwe Division.

The dimensions of cash management examined in this study include cash planning, cash

control, and cash disbursement. The purpose of this research is to gain a deeper

understanding of how effective cash management practices impact the financial performance

of SMEs in this specific region.

The research employs a mixed-methods approach, combining quantitative data analysis and

qualitative interviews with SME owners, employees, suppliers and customers. A structured

questionnaire is designed to collect data on cash management practices, financial

performance indicators, and other relevant organizational characteristics. Additionally, semi-

structured interviews are conducted to gain insights into the perceptions and experiences of

SMEs regarding cash management and its impact on financial performance.

The findings of this study will contribute to the existing literature by providing empirical

evidence on the effects of cash management and financial performance in the context of

SMEs in Nyendo Mukungwe Division. The research aims to determine whether effective

cash planning, control, and disbursement practices are associated with improved financial

performance indicators such as profitability, liquidity, and solvency.

By understanding the specific challenges and opportunities related to cash management in

this particular region, the study aims to generate practical recommendations and strategies

that can help SMEs enhance their cash management practices and ultimately improve their

financial performance. The research outcomes will be beneficial to SME owners, managers,

policymakers, and financial institutions, providing them with valuable insights to support

decision-making processes and develop tailored intervention

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CHAPTER ONE
1.1Introduction
This chapter presented the introduction, background of the study, problem statement,

objectives of the study, research questions, scope of the study, significance and the

conceptual framework to show the dependent and independent variables. Cash management

means a company's ability to allocate its funds efficiently in an effort to cover operating

expenses, make investments, repay shareholders and maintain adequate reserves. The Cash

Management is concerned with the planning, control and budgeting of cash in such a way that

firm's liquidity is maintained. In other words, it is concerned with managing the cash flows

within and outside the firm and making decisions with respect to the investment of surplus

cash or raising the cash from outside for financing the deficit. The objective of cash

management is to have adequate control over the cash position, so as to avoid the risk of

insolvency and use the excessive cash in some profitable way. The cash is the most

significant and highly liquid asset the firm holds hence proved to be significant as it is used to

pay the firm's obligations and helps in the expansion of business operations, Collis & Hussey

(2013).

1.2 Background of the study

Globally, organizations have strict cash management controls to monitor their inflows and

outflows while retaining a sufficient amount in order to take advantage of attractive

investments or handle unforeseen liabilities. Efficient management of cash prevents loss of

money due to theft or error in processing transactions. Numerous best practices are adopted

to enhance management of company's funds. This involves shortening of cash collection

periods and processes, regular follow ups for collections, negotiation of favourable terms

with suppliers, allowing delay in payment periods, and preparation of cash flow forecasts.

Businesses also use technology to speed up cash collection process for example e-banking

and e-payments. They must do all of this while maintaining adequate amount of funds to

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meet daily operations. Therefore, in today's global economy, exploring opportunities outside

established markets are essential to continued growth. That is why strategic cash management

and enhanced visibility for making faster and smarter business decisions is vital to success,

Ehrhardt, & Brigham, (2016). These measures are being considered an important tool in

ensuring that funds are available to meet recurrent expenditure (Katz, (2009).) However,

despite the above interventions, small and medium enterprises have continued to perform

poorly because of lack or limited knowledge on cash management (Macharia, 2009). Lack of

cash cushion as one of the major reasons SMEs fail (Christensen, 2013) 31.34% lack prior

experience in managing small and medium businesses which has prompted poor financial

performance. Globally, in Europe, (Yiwei et al, 2011), examined the average cost of

deficiency, 32% are performing poorly due to poor cash management, furthermore, technical

inefficiency is at 42.9% due to limited awareness on technology and this results into

mismanagement of cash. In Malaysia, the average efficiency of company’s financial

performance is 7.17%, implying that 92.83% are inefficient and under poor financial status.

(Dahmen, 2014). In Uganda as companies struggle for competitive advantages amidst

increasingly fierce competition, effective management of working capital is sometimes

overlooked as a critical success factor. Every shilling unnecessarily locked up in working

capital weighs down performance. Once unlocked, however, these shillings are freed up for

investment and value creation for shareholders. Sound cash management strategies can be the

difference between success and failure for a growing business. The emerging company may

have a limited track record, often making outside funds scarce and expensive. With

aggressive management of the company's working capital components, capital may be

accumulated, reducing reliance on outside funds and increasing profitability. By measuring

cash flow, businesses can implement plans to maximize inventory turns, accelerate accounts

receivable collections and optimize payables, essentially allowing you to focus on collecting

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cash faster and parting with it more slowly, Uganda Investment Authority (2011) hence

Effective cash flow management in small and medium enterprises is one of the key factors

for continued profitability and success. Profitability is the primary goal of all business

ventures (Smith, 1980). It is measured by difference between income and expenses, if income

is higher than expenses then the business enterprise is said to be profitable (Pandey, 1999).

Without profitability, the business will not survive in the long run. Therefore poor cash

management translates directly into strains on a company's profitability leading to eventual

collapse.

The study is to be carried out in the geographical boundaries of Nyendo Mukungwe division

in Masaka district

1.3 STATEMENT OF THE PROBLEM

The inability to control cash is one of the major problems facing small and medium

enterprises. This has been a reason for the poor performance in terms of profit maximisation

of up to 60% of the surveyed enterprises as well as the continued collapse of others

(Manalastas 2010). Cash management should be a regime practice so that the enterprises can

keep truck of their cash and know the timing between profits seen on the income statement

and the cash flowing in and out of the firm. Attom, (2014) asserts that the success of any

business venture is determined on how the management has planned and controlled its cash

flows that is inflows and outflows.

In Nyendo, most of the small and medium business owners don’t perform many cash

management practices simply because they feel they are not necessary and are very time

consuming yet in a developing country like Uganda, cash management is the lifeline of every

small and medium business. According to Alfred (2007) as cited by Akinyomi (2014), the

importance of cash management in any organisation comprises of the following examples,

assists in planning towards reducing cash expenses, achieving liquidity and increasing cash

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receipts to ensure the business is liquid and properly managed. The business becomes

insolvent when it fails to meet its debt timeously, consequently, businesses need to manage

their costs effectively and efficiently hence proper cash management prevents bankruptcy

thereby increasing profitability and sustainability of businesses (Mbroh 2012)

A study by Bradley Univ. from the University of Tennessee Research, as indicated in Univ.

(2014), revealed that just 47% of SMEs still operated after four years, it also investigated the

major cause for their failure and 46% indicated that it was the business owner’s

incompetence, therefore reference to SMEs in Nyendo Mukungwe division, the specific

pitfalls are lack of planning and budgeting, no knowledge in financing and lack of experience

in record keeping as well as poor collection and control of debtor’s payments hence the

owners are not performing the basic cash management practices in their businesses largely

due to lack of knowledge and skills to perform the task. This research will therefore target to

investigate the effects of cash management on financial performance of Small and Medium

enterprises in Nyendo Mukungwe division.

1.4 OBJECTIVES OF THE STUDY

This research will be guided by the following general and specific objectives.

General Objective

To establish the effect of cash management practices on the financial performance of Small

and Medium Enterprises.

1.5 Specific objective

I. To establish the impact of cash planning on financial performance of small and

medium enterprises?

II. To assess the relevance of cash control on the financial performance of Small and

Medium Enterprises?

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III. To establish the relationship between cash disbursement and profitability in Small and

Medium Enterprises.

1.6 Research questions

 Examine the impact of cash planning on financial performance of small and medium

enterprises.

 What is the relevance of cash control on the financial performance of small and

medium enterprises?

 What is the relationship between cash disbursement and profitability in small and

medium enterprises?

1.7 Scope of the study

1.7.1 Content scope
The study was based on an assessment of the effects of Cash Management practices on

Financial Performance of small and medium enterprises a case of Nyendo Mukungwe

Division. The independent variable under this study was Cash Management practices which

under this study limited itself to cash planning, cash control and cash disbursement. The

dependent variable was financial performance which under this study limited itself to returns

on investment, sales turn over and profitability.

1.7.2 Geographical scope

This research covered the geographical boundaries of Nyendo Mukungwe Division. This is

because the researcher has been living in this area for more than three (3) years, it will be

easy for the researcher to obtain relevant information at a low cost.

1.7.3 Time scope

The researcher focused on the effects of cash management on the financial performance of

small and medium enterprises in Nyendo Mukungwe Division. This research was limited to a

period of one year from 2023 to 2024, that period is enough for the researcher to find out the

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different effects of cash management practices on financial performance of small and

medium enterprises in Nyendo Mukungwe Division.

1.8 Justification
Cash is the lifeline of any business and a business needs to generate cash from its activities so

that it can meet its expenses and have enough that’s remaining to repay the investors and for

the growth of the business. A company can fudge its earnings but its cash flow provides an

idea about its real health and thus cash management is a vital aspect as regards to the

performance of the company. Cash management involves the efficient control and

disbursement of the cash thus it’s concerned with the management of cash inflow and outflow

of the business. Cash management practices have the paramount importance for all the

activities of a business concern to survive and for its smooth running, thus, the findings of the

research will help scholars and researchers to develop new ideas , techniques and methods as

regards to cash management practices.

The research will be an opportunity in its effort to examine the effects of cash management

practices on the financial performance of SMEs amidst the various efforts employed for the

organisational performance in the long run.

1.9 Significance of the study

The research will help SMEs to improve on their cash management practices, cash control,

cash disbursement and other financial reports provided by accountants, know how cash flows

are managed so as to improve on their performance and know the effects of cash management

on their financial performance.

This research will as well provide crucial information to small and medium business

enterprises in Nyendo Mukungwe division mostly to the entrepreneurs on the manner in

which it will take full advantage of the usage of the different cash management practices to

enhance performance.

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The findings of this research will enable managers, accountants, credit officers and all those

at the different levels in the cash department of different organisations to focus much on cash

management activities that strongly influence and affect the realisation of profits to the

organisation and satisfaction of stakeholders.

The research will help the researcher to fulfil one of the requirements that will lead her to the

reward of Bachelor’s Degree in Business Administration and Management of Uganda

Martyrs University.

1.10 Conceptual framework

Conceptual frame work is a proposed casual linkage among a set of variables believed to be

related to a particular problem.

The Conceptual framework illustration below explains the relationship between the variables

of the study, cash management practices (Independent Variable) and financial performance

(Dependent Variable).

Cash Management practices (IV) Financial Performance

Cash planning (DV)

Cash control
Returns on investment
Cash disbursement
Sales turnover

Profitability

Work experience

Record keeping

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(Source: adopted from Zietlow et al; (2007) and gitman (2009) and modified by the

researcher (2023)

From the conceptual flame work above, cash management practices (Independent Variable)

determined by its dimensions cash planning, cash control and cash disbursement will in the

long run lead to increase in return on investment, sales turn over and profitability. In an

intervening way, cash management can equally lead to financial performance through

management expertise and record keeping of the individuals in cash management department.

1.11 Definition of key concepts

Cash

The term cash refers to actual currency in the bank and at hand, does not include the value of

inventory, accounts receivable or other such items that may be converted into cash.

Cash management practices

Cash management is the concentration, safeguard and investment of the available money.

Cash management practices refer to the strategies and techniques employed by individuals,

businesses, and financial institutions to effectively manage their cash flow, liquidity, and

working capital. These practices aim to optimize the use, investment, and allocation of

available funds to meet financial obligations, maximize returns, and minimize costs and risks

associated with cash management

Performance

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The word performance refers to the accomplishment of a given task measured against present

standards of accuracy, completeness, cost and speed (Financial performance Analysis

conceptual Framework, 2012, p, 49)

Financial Performance

Is a general measure of an entity's overall financial health over a given period of time and can

be used to compare similar entities across the same industry or to compare industries or

sectors in aggregation. The measure of financial performance is profitability. The methods

used to measure profitability are return on equity, sales, return on assets and net profit. Net

profit margin is the major tool used to assess financial performance.

Profitability

This is the difference between the revenue generated and the costs incurred to produce the

same revenue during a given accounting period. SMEs should aim at increasing sales revenue

and reduce costs incurred so that they achieve the desired levels of profitability

Small and medium enterprises

These refer to enterprises atleast six employees and atmost a hundred employees depending

on the capital a business entrepreneur owns in his enterprise.

Record keeping can as well be known as record management referring to the organisational

function devoted to the management of information in an organisation throughout its life

cycle from the time of creation to its eventual disposition. Some of the information include

financial dealings, data ledgers and journals, cash transactions, documentations etc.

Cash Planning. This is a technique to plan for and control the use of Cash. This plan helps

the enterprises to their forecast future cash flows and cash demands.

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Cash disbursement refers to the process of paying out cash or other forms of payment to

vendors, suppliers, employees, or other parties for goods or services provided. This process is

an important aspect of managing a company's finances as it ensures that all financial

obligations are met on time.For finance managers, cash disbursement is a key tool for

managing the company's cash flow by tracking the amount of cash going in and out of the

company thus can determine how much money is available to invest in new projects, pay off

debts, or distribute to shareholders.

1.12 Conclusion
In conclusion, Cash management is a necessity for every SME to achieve its set objective.

This is because of the positive correlation (r=0.859) between cash management and financial

performance whereby 73.7% of performance of SMEs is attributed to cash management. It

does not only avoid insolvency, but also increasing cash collection rates, selecting

appropriate short-term investment and increasing cash both at hand and bank thus improve in

the enterprises’ general performance.

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 CHAPTER TWO

LITERATURE REVIEW
2.1 Introduction
Small and Medium Enterprises (SMEs) play a vital role in the economic development of any

country, and their financial performance is critical for their sustainability and growth. Cash

management is a crucial aspect of financial performance of SMEs, which involves managing

the inflow and outflow of cash to ensure liquidity, meet financial obligations, and invest in

profitable ventures. This chapter presents relevant information and findings from other

scholars and authors as referenced respectively. More highlights and contextual facts are

presented on cash management and financial performance of SMEs on which the study

researcher depends to assess the effects of cash management on the financial performance of

SMEs in Nyendo Mukungwe division, focusing on the dimensions of cash planning, cash

control, and cash budgeting.

2.2 Theoretical Review

A theoretical review is a type of literature review that focuses on critically analysing and

synthesizing existing theories, concepts, and models related to a particular research topic. It

involves a comprehensive examination of the theoretical underpinnings of a research area and

aims to provide a conceptual framework that can guide further research. According to Grant

and Booth (2009), "theoretical reviews are designed to identify, analyse, and evaluate

relevant theory in a particular field of study"

2.2.1 Cash Management Theory

The purpose of cash management is to determine and achieve the appropriate level and

structure of cash, and marketable securities, consistent with the nature of the business's

operations and objectives as cited in William Baumol, 1952. Baumol was the first person to

provide a formal model of cash management. As Erkki (2004) asserts, this model applied the

economic order quantity (EOQ) to cash. Brokerage fees and clerical work form order costs

11
while foregone interest and cash out costs form the costs of holding cash. Baumol’s model is

however probably the simplest, most striped down and sensible model for determining the

optimal cash position (as cited in Ross, 1990). (as cited in Lockyer, 1973) on the other hand

modified Baumol’s model to incorporate overdraft facilities. According to Lockyer’s

approach the total annual cash policy cost attributable to the use of overdraft facilities is

given by the sum of total annual cash transfer cost, total annual overdraft cost and the total

annual holding cost. As Erkki (2004) asserts, Lockyer’s model is critiqued for assuming

overdraft facilities, which are not automatic especially for firms with poor credit rating. The

model also assumes disbursements are even over the planning period. As Erkki (2004)

asserts, the cyclical nature of cash is recognized (as cited in Archer, 1966) who reasons that

apart from providing a cash balance for transactional purposes, a cash balance should be

provided for precautionary purposes, especially for seasonal activities that are unpredictable.

In Archer’s approach, costs related to overdraft facilities and capital costs of precautionary

balances are compared to determine the optimum. Archer’s approach is advantageous for it

recognizes the cyclical nature of net cash flows of many firm. According to Gibbs, the

determination of optimal cash balance involves a combination of investment and financial

decisions. In Gibbs approach, cases where demand for money is of a cyclical nature a

combination of short and long term borrowing should be used to avoid the use of long term

funds to cover peaks arising from idle cash balance, during periods of low cash demand.

Gibbs contends that, the determination of the amount of buffer money to hold is seen as an

investment decision. Gibbs approach emphasizes holding costs, costs of short and costs of

long-term borrowing and the costs of investment in marketable securities, (Erkki, 2004). In

order to do this, a variety of activities need to be undertaken, because of the integrative nature

of cash to the operation of the firm. Since most of the Business operations revolve around

advancement of cash then it is imperative for a considerable minimum level of cash to be

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maintained. How a firm manages cash will definitely have implications on its liquidity. The

theory therefore is of essence on the bases of the policy the firm may have in place with

regard to cash retention so as to avoid illiquidity.

2.1.3 Free Cash Flow Theory

As Huseyin (2011) asserts, managers have an incentive to hoard cash to increase the amount

of assets under their control and to gain discretionary power over the firm investment

decision, (as cited in Jensen, 1986). Having cash available to invest, the manager does not

need to raise external funds and to provide capital markets detailed information about the

firm’s investment projects (Huseyin, 2011). Hence, managers could undertake investments

that have a negative impact on shareholders wealth. Managers of firms with poor investment

opportunities are expected to hold more cash to ensure the availability of funds to invest in

growth projects, even if the NPV of these projects is negative(Huseyin,2011). This would

lead to destruction of shareholder value and, even if the firm has a large investment

programme and a low market-to-book ratio. Thus, using the market-to-book ratio as a proxy,

it is likely that the relation between investment opportunity set and cash holdings will be

negative. This is critical in management of liquidity in the firm and ensuring there is a

balance between meeting the current obligation to mitigate liquidity short fall and investing

in the interest of shareholders wealth maximization (Huseyin, 2011).

2.3 Conceptual review

2.3.2 Cash Management practices and financial performance
Cash management practices refers to the process of managing a firm's cash flows in order to

ensure that the firm has adequate liquidity to meet its obligations as they become due (Gupta

& Sharma, 2019). According to Gupta and Sharma (2019), cash management practices

involves activities such as cash control, cash planning, cash budgeting and cash

disbursement.

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Cash planning is the process of forecasting cash inflows and outflows to determine the cash

requirements of a business over a given period. Cash control involves monitoring and

regulating cash inflows and outflows to ensure that cash is used effectively and efficiently.

Cash budgeting involves developing a plan for cash inflows and outflows based on the cash

requirements of a business, including expenses, investments, and other financial obligations.

Hamza et. al. (2015) points out that even though preparation of cash budgets is a detailed

process, it brings out the realization of the objective of ensuring there is enough cash to

operate the entity throughout for better financial performance. Studies have shown that

effective cash management is essential for the financial performance of SMEs. For instance,

according to Abugri and Nyuur (2019), effective cash planning helps SMEs to meet their

financial obligations and avoid liquidity problems, which can lead to bankruptcy.

Additionally, effective cash control ensures that cash is used efficiently, reducing wasteful

spending and improving profitability. According to Owojori and Asaolu (2019), cash

budgeting helps SMEs to prioritize their financial obligations and invest in profitable

ventures, which can lead to increased profitability and growth. "Effective cash flow

management allows a company to pay its bills on time, invest in growth opportunities, and

maintain the financial health of the business" (Accounting Tools, 2022)... Proper cash

disbursement management is important for maintaining accurate financial records and

ensuring that a company has sufficient funds to meet its financial obligations. The importance

of the cash management can be understood in terms of the uncertainty involved in the cash

flows. Sometimes the cash inflows are more than the outflows or sometimes the cash

outflows are more. Thus, a firm has to manage cash affairs in a way such that the cash

balance is maintained at its minimum level while the surplus cash is invested in the profitable

opportunities, (Euromoney Cash Management Survey 2016). Its level of performance of a

business over a specified period of time, expressed in terms of overall profits and losses

14
during that time. Evaluating the financial performance of a business allows decision-makers

to judge the results of business strategies and activities in objective monetary terms. Any of

many different mathematical measures to evaluate how well a company is using its resources

to make a profit. Common examples of financial performance include operating income,

earnings before interest and taxes and net asset value. It is important to note that no one

measure of financial performance should be taken on its own. Rather, a thorough assessment

of a company's performance should take into account many different measures (Farlex,

2012).

2.4Actual Review
2.4.1Cash planning and financial performance of SMEs.
This refers to the technique of planning and controlling of the use of cash in enterprise. The

"cash poor" position of the firm can be corrected if it's cash needs are planned in advance

Thus cash planning can help to anticipate the future cash flows and needs of the firm and

reduces the probability of idle cash balances which brings about poor performance and cash

deficits which can cause failure. Cash planning may be done daily, weekly or on monthly

basis to ensure balanced receipts and cash disbursement (Chandra, 2004). The cash flow

statement is a report on the cash your business has available right now and shows cash

receipts and cash disbursement (in and out) of money in your business which is one of the

tools used to assess performance of an enterprise. It’s a snapshot in time of cash available

from your business minus any receivables or payables. It includes the operating activities

section, financing activities section and investing activities section (Denise, 2007). A firm's

cash flow is the movement of cash in and out of the firm in the form of payments to suppliers

and collections from customers. Cash flows typically arise from three sources: operations,

investing, and financing (Rosemary, 2009). All businesses will in any period, have both cash

receipts exceeded disbursements with the net balance either as a surplus if receipts exceed

disbursements or as a deficit if receipts are less than the disbursements. To ensure that the

15
cash receipts and disbursements are synchronized and zero net balance is realized, the

manager should design measures namely to; accelerate the cash receipts into the firm and

delay the disbursement of cash out of the firm. 28 The net effect of these two actions if taken

simultaneously is coming close to zero net cash balances Cash collections should be speed up

while cash disbursement are tightly controlled. Not that delay of disbursement should lead to

ethical problems of the business. The various collections and disbursement methods by which

a firm can improve its cash management efficiency contribute to profitability. They exercise a

joint impact on the overall efficiency of cash management. The idea is to collect accounts

receivables as soon as possible, but pay accounts payables as late as is consistent to with

maintaining the firm’s credit standing with suppliers (Van Horne, 2002). Cash planning and

control that presents expected cash inflow and outflow for a designated time period. Cash

planning helps management keep cash balances in reasonable relationship to its needs. It aids

in avoiding idle cash and possible cash shortages. The cash budget typically consists of four

major sections: receipts section, which is the beginning cash balance, cash collections from

customers, and other receipts; disbursement section comprised of all cash payments made by

purpose; cash surplus or deficit section showing the difference between cash receipts and

cash payments; and financing section providing a detailed account of the borrowings and

repayments expected during the period (Hausman, 2006). Cash flow plans can apply to all

forms of payments. Any consumer can benefit from keeping cash reserves on hand to earn

interest instead of paying them out as soon as possible. The larger the amount of the payment,

the more critical this issue becomes, as a proportionately larger amount of potential interest is

at stake. Credit is at the heart of SMEs transactions. SMEs like any other businesses extend

credit to customers and make purchases on credit. However, sometimes customers fall behind

on their payments and companies find themselves with uncollected debt, which reduces cash

flow. An up- 29 to-date credit policy helps a company proactively manage its outstanding

16
invoices. The key components of a credit policy are goals and responsibilities, credit analysis

and collections. Most business-to-business companies extend credit to their customers. It is

often a crucial tool for attracting customers. How the business manages that process is a

fundamental part of cash flow management. People who owe business money, debtors, are a

vital part of cash inflow and poorly managed credit can mean delays in converting sales to

cash or, more seriously, trading with customers who are unable or unwilling to pay. The

enterprise’s credit policy is important. It should not be arrived at by default. The board should

determine the enterprise’s credit criteria, which credit rating agency to use, which is

responsible for checking prospective and existing customer creditworthiness, the enterprise’s

standard payment terms, the procedure for authorizing any exemption (Financial Review,

Vol. 9, pp. 79-88). The policy should be written down and kept up to date with current

creditworthiness of specific customers, especially ones with large lines of credit or that

increase their orders, plus warnings or notes of current poor experience. The policy should be

disseminated to all sales staff, the financial controller and the board. According to Gitman

(2002) start the credit decision making process when first meeting with new prospective

customers or clients by the business. If necessary, consider allowing small orders to get

underway quickly. This may be a reasonable level of risk and may ensure that new business

is not lost. In a sales negotiation it is professional, not `anti-selling’, to be upfront about terms

for payment. Use an `Account Application Form’ that includes a paragraph for the buyer to

sign, agreeing to comply with the stated payment terms and conditions of sale. On a

`welcome letter’ restate the terms and conditions. The `Order Confirmation’ forms can stress

your terms and 30 conditions. Invoices should show the payment terms boldly on the front

and re-state the date the payment is due. It’s worth bearing in mind that lax credit decisions

are often exploited by fraudsters. The famous `long fraud’ involves a customer making a

series of small purchases which are paid for in full. Gradually, the supplier gains confidence

17
and extends more and more credit. The fraudster then places a very large order, and

disappears with the goods. But it needn’t be fraud: a company with its own problems might

attempt to trade out of trouble and go bust leaving you with massive unpaid invoices

(Gitman, 2002). According to CIMA, a full credit report on a limited company will cost in

the region of £ 100 from a rating agency and include financial results, payment experience of

other suppliers, county court judgments, registered lending and a recommended credit rating.

The agency will provide a full description to accompany the score, and you should choose

one that delivers reports immediately on request, and online. The Register of County Court

Judgments (CCJs), maintained by Registry Trust Ltd on behalf of the court service, contains

details of almost all money judgments from the county courts of England and Wales for the

previous six years. Any individual, organization or company can carry out a search of the

Register (by post, in person or by email) for a small fee. Some of the biggest, most respected

companies in the UK have county court judgments against them, so it’s not the only factor to

consider. The Companies Act Cap 110 requires public limited companies of which SMEs are

inclusive and their large private subsidiaries to state in days the average time taken to pay

their suppliers and to publish this figure in their director’s report. This information provides

small suppliers with a broad indication of when they can expect to be paid. Finally, visiting

customer premises yields valuable intelligence. It is a useful way to roughly assess general

efficiency, professionalism and morale. If the company seems well run and efficient, you may

be justified in extending a good line of credit. If the situation feels bad, if the premises are in

poor repair, people look nervous or overworked or there’s a lack of activity, be more cautious

(Hausman, 2006). Hausman (2006) further argues that a great way of assessing a business is

to offer a cash-up-front discount for goods and services. A well run, cash rich business will

often take the discount, particularly if their finance function is sharp enough to calculate the

benefit of the discount versus the value of credit. Companies that are struggling will always

18
take the credit option; allowing you to vet them more thoroughly as described above.

According to Robert C. Feenstra (2003) cash-up-front discounts are beneficial for both

buyers and sellers. Buyers can save money by taking advantage of the discount, while sellers

can reduce their transaction costs and receive immediate payment. He also notes that cash-up-

front discounts can help to reduce the risk of default or delayed payments and its a useful

pricing strategy with various benefits.

2.4.2Cash control and financial performance of SMEs.

Cash management aims at keeping the investment in cash as low as possible while still

keeping the firm operating efficiently and effectively. Once cash budget has been approved,

and appropriate net cash flow established, the financial manager should ensure that there does

not exist a significant variation between projected cash flows and actual cash flows. To do

this, , , the financial manager has a lot of techniques to control the collections and

disbursements of cash. Cash control is critical for the financial performance of SMEs as it

allows businesses to better manage their cash flow, which is a key indicator of financial

health (Bressler, 2019).

According to Bressler (2019), it is imperative that proper records on transactions are kept as a

proof against fraudulent manipulation and thus steps to cut them out, resulting in improved

profitability. Efficient cash management should, therefore, be governed by a reliable control

system. Pandey (2010) divided cash management in the modern corporation into two simple

rules: (i) Speed up cash collection (Cash Inflow) - minimize collection float, (ii) Slow down

cash disbursement (Cash Outflow) - maximize disbursement float". 8 Ross et al. op cit also

reiterated that the aim of cash management in cash collection is to accelerate collections and

delay the time between the time consumer pays their bills and the time the cheques are paid.

The rule therefore is to accelerate collections and delay disbursement. According to ACCA

(2018) cash control is a technique used to plan and control the use of cash. It I involves

19
preparation of forecasts of cash receipts and payments by having accurate and up-to-date cash

flow information so as to give out an idea of the future financial requirements. Therefore the

management of the school needs to determine the schedules of monthly disbursements and

collection schedules of creditors. with efficient cash planning system, the financial needs of

the school will be met, with reduced possibility of the cash balances which lowers ·the

school’s profitability and cash deficits which can lead to school's failure. He further notes that

a cash budget is the most significant device used to plan for and control cash receipts and

payments. A cash budget is a summary statement of the financial projected time period. This

information helps the financial manager to determine the future cash needs of the firm, plan

for the financing of these needs and exercise control over cash and liquidity of the

organization (Kakuru 2013). The researcher is wondering whether SMEs are limited for

inflows and outflows of cash. According to Aksoy (2005), no matter what type of business

you own, it is critical to manage your cash flow properly. Without proper cash flow

management techniques you could find yourself running short of cash just when you need it

the most. That could leave you unable to pay suppliers, develop the marketing plan you need

or even pay your employees. Fortunately, there are a number of techniques companies can

use to maximize cash flow management and keep the business running smoothly. Accounts

Receivable; Many companies are too passive when it comes to collecting on overdue

invoices. The money customers owe you plays a big role in your monthly cash flow, so it is

imp01tant to develop a solid technique for tracking who owes your firm money, how much

they owe and when the payment was due. Make sure· your accounts receivable staff is taking

a proactive approach to collecting on those unpaid bills and ask for a weekly report showing

the total amount outstanding, along with an explanation of why those payments have not been

received (Damodaran, 2002). Damodaran (2002) also noted that building an accounts

receivable database is one of the best ways to keep track of what you are owed. Once the

20
tables have been created and the database has been designed, all your accounts receivable

clerks need to do is press a button to open a query showing the details of each outstanding

invoice. Track Expenses: Whether you are running a business or a household, it is imp01tant

to get a handle on expenses. Many business owners are so busy with day-to-day operations

that they lose sight of the big picture. Getting a handle on the expenses associated with

running your business is one of the best ways to manage and maximize your cash. Start by

building a detailed report of every expense for the past month. Break each expense down into

its appropriate category, i.e. rent, utilities, office supplies, etc., then analyze each category

and look for ways to cut back. For instance, companies can save money on office supplies by

contracting with a specific vendor and negotiating lower prices, rather than running to the

office supply store down the street (Deloof, 2003). According to Gitman (2008), cash

disbursement is a function of accounts payable; it includes all outlays of cash by the firm

during a given financial period. The objective of cash disbursement is to control payments

and minimize the firm's cost associated with making payment. Vanhorne (2004), defends the

idea put forward by Ross (2000), which says that the objective of cash disbursement is to

delay payment as long as it is legally and practically possible. In pursuing this objective the

firm should not compromise its relationships with suppliers as this may withdraw trade credit.

According to McLaney (2006), negotiating a reduction in cash outflows may be done in order

to postpone or reduce payments. This will be done by taking longer credit from suppliers.

However, if the credit period allowed is already generous, creditors might be very reluctant to

extent credit even further and any such extension of credit would have to be negotiated

carefully. There would be a serious risk of having further supplies refused. The rationale for

such a move is to have complete control of the cash and to provide greater investment

oppo1iunities with larger sums of money available as surplus, (B01t, 2004). Given the

context of a company, cash disbursements are controlled through a policy of delaying

21
payments to suppliers. However, failures to meet financial obligations by the company on

time, owing to cash shortages mean loss of further supplies from injured suppliers. This is

extremely damaging since some products would be vital to continuing business operations.

2.4.3 Cash disbursements and performance of SMEs

According to Appuhami and Suntornpithug (2013), cash disbursement is the process of

paying out funds from a company's account for various expenses such as wages, inventory,

and rent. The efficient management of cash disbursement can improve an SME's financial

performance by reducing the cost of capital and ensuring timely payments to suppliers and

other stakeholders. (Malmi, 2001). The combination of the collection and disbursement of

funds ensure availability of funds. This can be done by playing a float and the use of drafts

which are used to delay the time the firm actually has to have funds on deposits at its bank

(Chandra, 2004). Another aspect of cash management knows the optimal cash balance. There

are a number of methods that try to determine the optimal cash balance, which should be

targeted so that costs are minimized and yet adequate liquidity exists to ensure bills are paid

on time. One of the first steps in managing the cash balance is measuring liquidity. There are

numerous ways to measure this, including: cash to total assets ratio, current ratio (current

assets divided by current liabilities), quick ratio (current assets less inventory, divided by

current liabilities), and the net liquid balance (cash plus marketable securities less short-term

notes payable). The higher the number generated by the liquidity measure, the greater the

liquidity and vice versa. There is a trade-off, however, between liquidity and profitability that

discourages firms from having excessive liquidity. Cash outflow is, naturally, what you pay

out: purchasing finished goods for re-sale, purchasing raw materials to manufacture a final

product, paying wages, paying operating expenses (such as rent, advertising and R&D),

purchasing fixed assets, paying the interest and principal on loans and taxes. One of the

primary responsibilities of finance managers is to maintain a sound liquidity position of the

22
firm so that dues may be settled in time. The cash manager should determine the appropriate

amount of cash balance. If the firm maintains small cash balance, its liquidity position is

weakened and cannot meet the due obligations but higher profitability can be attained if by

investing released funds in profitable opportunities. Thus a firm should maintain optimum

cash balances neither too small nor too large, (Tung et al, 2020) whether they work in a small

business or a vast institution, financial managers need to know how much cash to keep on

hand. Cash earns no returns for the business owners and businesses that accumulate as much

cash may fail because it earns no returns to the stockholders thus cash should be obtained for

its own sake and should be considered as the “grease” that enables the machinery of the firm

to run and Cash management is the process of controlling how much of this grease is needed

and where to apply it (Gallagher et al., 2007) Whenever the cash balance reaches the

maximum level the difference between maximum and minimum levels should be invested in

marketable securities. When the balance falls to zero, marketable securities should be sold

and proceeds transferred to working cash balances. Excess cash should normally be invested

in marketable securities which can conveniently and promptly be converted into cash to meet

its variables cash requirement and future contingencies (Erik, 2007). A company may

temporarily have excess cash that is not needed for use in its current operations. This is often

the case when a company has seasonal operating cycles. Instead of letting cash remain idle in

a checking account or cash till most companies invest their cash in temporary investments in

order to earn interest, dividends, realize capital gains on market price from the debt and

equity markets. Companies may also invest in the debt and equity of another company as a

long term investment. Long term investments may be held for interest returns, dividends, and

capital gains but such investments have strategic purposes such as reduction of costs in case

of take over opportunity, replacement of management, expansion, and integration of the

business (Carl et al., 2009). For an enterprise’s short term investments there are several

23
options available including different bank accounts, which is the most liquid option. The

most common ones are regular transactions accounts, fixed-interest accounts and corporate

group accounts. There are several different transactions accounts which are foremost used for

the enterprise’s receivables and payables and can also be connected with a credit. The

corporate group account is an account where all the groups’ 25 subsidiary accounts can be

seen (Sanna and Sandra, 2009).There are also more specific accounts which can be tailored

for the company. Disbursement the cash conversion period measures the amount of time it

takes to convert your product or service into cash inflows. Cash flow surpluses and shortages:

How you deal with cash flow surpluses and shortages is a crucial part of the cash equation.

Unused surpluses simply sitting in a current account suggest your business has suffered a

failure of planning, and in many cases shareholders will consider it a failure of management

to put their money to work. Worse, if your cash flow forecast has identified an upcoming

shortage of cash and you fail to fill that gap, the result could be in solvency. Petersen (2010)

says Projecting expenses and costs over a period of time are critical. An accounts payable

(AP) ageing schedule may help to determine the business’ cash outflows for certain expenses

in the near future which helps to monitor the business’ performance. This will give a good

estimate of the cash outflows necessary to pay the bills and expenses on time. The cash

outflows for every business can be classified into one of four possible categories: costs of

goods sold (payments to suppliers), operating expenses (wages, rents, taxes and so on), major

purchases (new plant or premises, for example) and debt payments (interest and principal –

plus payment of dividends to shareholders). Projected outgoings, operating expenses include

payroll and payroll taxes, utilities, rent, insurance and repairs and maintenance and, like the

cost of goods sold, can be fixed or variable. Rent, for example, is likely to be the same

amount each month, and you’ll probably have plenty of notice of any change. However,

payroll, goods in or utilities may vary in line with your sales projections and have a seasonal

24
aspect (Soenen, 2005). Soenen (2005) says purchasing new assets for the company tends to

occur when the business is expanding or when machinery needs replacing. Cash outflow in

this area is generally large and irregular. Examples of fixed asset expenditure would be on

new company cars, computers, vans and machinery. In a situation where banks are reluctant

to provide additional funding, it makes sense to delay some of your major investments. It is

critical to have a purchasing policy in place that will ensure no significant expenses are made

without being approved. A `No Purchase Order, No Pay’ policy can be implemented if not

already in place. Also, management accounting techniques like Activity Based Costing

(ABC) will help you identify overheads or expenses that can be eliminated if your company

is going through a rough time. Projecting for debt payments is the easiest category to predict

when preparing the cash flow budget. Mortgage payments and lease hire payments will

follow the schedule agreed with the lender. Only payment against an overdraft, for example,

will be variable by nature. Smith (2008) explains that if a cash flow gap, where the balance is

negative at any time is predicted early enough, the business can take cash flow management

steps to ensure that it is closed, or at least narrowed, in order to keep the business going.

These steps might include: increase sales – by lowering prices, or increasing marketing or

utilization rates (although this could worsen the gap if your cash flow management is already

poor), increase margins – by cutting costs and/or raising prices (although you need to be

mindful of putting off customers or squeezing suppliers), tighten cash processes – such as

collections or inventory management, decrease anticipated cash outflows – by cutting back

on inventory purchases or cutting operating expenses such as wages, postpone a major

purchase, sell assets (but not those core assets essential 27 to the business unless you can

arrange a sale-and-leaseback deal for example, property), roll over a debt repayment (much

tougher in a credit crunch), and seek outside sources of cash, such as a short term loan

25
2.5 Dependent Variables
2.5.1 Returns on investment
According to Gitman & McDaniel, 2008, return on investment is a measure of the efficiency

of an investment. It calculates the rate of return on a particular investment, relative to the

investment's cost. According to a study by Deloitte (2017), companies with effective cash

management practices can achieve returns on investment that are up to 60% higher than those

with poor cash management practices. This is because effective cash management allows

companies to free up cash that can be invested in growth opportunities, such as expanding

operations, launching new products, or investing in marketing initiatives. Another study by

the Association of Chartered Certified Accountants (ACCA) (2019) found that companies

that prioritize cash management and invest in improving their cash conversion cycle (CCC)

can achieve returns on investment that are up to 20% higher than those that do not. The CCC

refers to the length of time it takes for a company to convert its investments in inventory and

accounts receivable into cash. A study by the National Bureau of Economic Research

(NBER) (2017) found that companies that implement effective cash management practices

can achieve higher returns on investment than those that do not. The study found that

companies that hold excess cash on their balance sheets tend to achieve lower returns on

investment than those that actively manage their cash. Therefor effective cash management

can have a significant positive impact on returns on investment for SMEs. By prioritizing

cash management and implementing best practices, SMEs can improve their financial

performance and achieve higher returns on investment.

2.5.2 Sales Turn over

Sales turnover measures the total amount of revenue generated by a business through its core

operations over a specified period of time. It is calculated by multiplying the average

inventory by the number of times inventory is sold in a given period. According to a study

conducted by Abdel-Maksoud, Mahmoud, and Hassanein (2019), sales turnover has a

26
significant impact on the financial performance of SMEs in Egypt. The study found that

SMEs with high sales turnover tend to have better financial performance in terms of

profitability, liquidity, and solvency ratios. The authors attribute this to the fact that high

sales turnover leads to higher cash flows, which in turn allows the business to meet its

financial obligations and invest in growth opportunities. There is a positive correlation

between sales turnover and the financial performance of SMEs therefor these SMEs should

focus on increasing their sales turnover through marketing efforts and improving their

product quality to enhance their financial performance (Al Mamun and Parvez, 2020). A

study by Lee and Hong (2018) found that sales turnover is positively associated with the

financial performance of SMEs. The study, analysed data from 295 Korean SMEs, revealed

that higher sales turnover was linked to greater profitability, as well as increased return on

assets and return on equity thus SMEs with higher sales turnover are better able to generate

profits and grow their businesses.

2.5.3 Profitability
Profitability is the difference between the revenue generated and the costs incurred to

produce the same revenue during a given accounting period. SMEs should aim at increasing

sales revenue and reduce costs incurred so that they achieve the desired levels of profitability.

(Hosfstrand, 2010) points out that profitability is measured by the income statement which is

a listing of income and expenses during a period of time for the entire business. He stress that

accounting profit provides a firm with an intermediate view of the viability of the business

while economic profitability provides you with a long term perspective of the business A

study by Mazzarol et al. (2019) found that profitability is positively associated with SMEs'

growth. The study revealed that profitable SMEs were more likely to experience growth in

terms of revenue, employment, and market share. The authors suggest that profitability is a

critical factor in SMEs' ability to invest in new products and markets, which can drive growth

27
and long-term success. There have been various factors influencing profitability. For example

return on sales reveals how much a company earns in relation to its sales, return on assets

determines an organization's ability to make use of its assets and return on equity reveals

what return investors take for their investments (Tangen, 2003). According to Malik,

Waseem and Kifayat (2011), there is a strong positive relationship between profitability and

accounts receivable, profitability and cash and profitability and inventory. However, there is

a negative relationship between accounts payable and profitability. The authors indicated that

if there is an increase in cash, credit sales and inventory, the profitability of the business will

increase.

2.6 Moderating Variables

2.6.1 Work Experience
Work experience refers to an individual's accumulated knowledge, skills, and expertise

gained through employment and related activities. It encompasses both formal and informal

learning experiences, including on-the-job training, mentorship, and professional

development opportunities. In small and medium-sized enterprises (SMEs), work experience

is particularly relevant for owners and managers who must navigate the complexities of

running a business. As the study by Muhammad et al. (2021) suggests, work experience can

moderate the relationship between cash management practices and SMEs' financial

performance since SMEs with more experienced owners or managers are better able to

implement and benefit from effective cash management practices than those with less

experienced owners or managers., highlighting the importance of experienced managers in

effective business operations. A study by Chua et al. (2018) explored the moderating effect of

owner-manager experience on the relationship between cash management and SMEs'

financial performance in Malaysia and revealed that owner-manager experience positively

moderated the relationship between cash management and financial performance. This means

that SMEs with more experienced owner-managers were more likely to have a better

28
financial performance when they effectively managed their cash so SMEs should prioritize

hiring experienced managers or developing their owner-managers' skills to improve their cash

management practices and overall financial performance. Work experience enhances the

positive impact of cash management on financial performance, plays a crucial role in

improving the financial performance of SMEs whereby, experienced managers who

effectively manage their cash flow tend to have better financial performance than those with

less experienced managers (Hussain and Al-Malki, 2018) .

2.6.2 Record Keeping

Record keeping in cash management refers to the process of creating and maintaining

accurate and timely financial records that track the flow of cash into and out of a business.

Effective record keeping allows small and medium-sized enterprises (SMEs) to monitor their

cash flow, identify financial risks, and make informed decisions. A study by Kargi and Kargi

(2018) investigated the impact of record keeping on the financial performance of SMEs in

Turkey and found out that effective record keeping practices were positively associated with

financial performance of SMEs since those that maintained accurate financial records were

better equipped to monitor their cash flow, identify financial risks, and make informed

decisions that improve their financial performance. The International Finance Corporation

(IFC) recommends that SMEs should maintain accurate financial records and also

recommends that SMEs should use technology to automate their record-keeping processes

and reduce errors. SMEs should invest in record-keeping systems, train their staff on record-

keeping practices, and regularly review their financial records to monitor their cash flow and

identify financial risks (Wanjohi, Ngugi, and Kimani, 2021). A study by Kibirige and

Mutambatsere (2020) investigated the moderating effect of record-keeping on the relationship

between cash management and financial performance of SMEs in Uganda and indicated that

SMEs that maintain proper records of their financial transactions tend to have better financial

29
performance, even with poor cash management practices. On the other hand, SMEs with poor

record-keeping practices tend to experience poor financial performance, even with good cash

management practices. The study's results suggest that maintaining proper records of

financial transactions can be a crucial factor in improving the financial performance of SMEs.

SMEs should ensure that they have adequate record-keeping practices to facilitate effective

cash management, which, in turn, can improve their financial performance.

2.6.3Gaps identified in the literature review

Lack of focus on specific dimensions of cash management. Although the study considers cash

planning, cash control, and cash disbursement as the dimensions of cash management, there

are other relevant dimensions that should be explored in the literature review. For instance,

the literature could be expanded to consider other dimensions such as cash forecasting, cash

budgeting, and cash monitoring to provide a more comprehensive understanding of cash

management practices.

Insufficient research on the relationship between cash management and financial

performance. The research focuses on the effects of cash management on the financial

performances of SMEs, it doesn’t consider the relationship between cash management and

financial performance, and the literature review could benefit from a more thorough

investigation of this relationship, especially in the context of SMEs.

Limited consideration of dependent variables: The study uses returns on investment, sales

turnover, and profitability as the dependent variables. However, there are other relevant

measures of financial performance that could be considered in the literature review, such as

cash flow, liquidity, and debt management. It would be useful to justify the choice of

dependent variables and explain why other measures of financial performance were not

included.

30
Limited research on moderating variables: The study considers work experience and record

keeping as moderating variables. However, there may be other relevant moderating variables

that could be explored, such as firm size, industry type, and access to finance. It would be

useful to explain why these moderating variables were not included and how the study

intends to address any potential limitations arising from their exclusion.

2.7 conclusion
In conclusion therefore, this chapter will direct the researcher in review of the available

literature about the effects of cash management practices and financial performance of SMEs

and also help in guiding the researcher as she will go to field to collect all the related data in

order to come up with clear recommendations.

CHAPTER THREE

METHODOLOGY
3.1 INTRODUCTION
This section presents the research design, area of study, population of the study,

determination of the sample size, sampling technique, data collection methods and

procedures, quality control, measurement of variables, analysis and presentation, ethical

issues and study limitation.

3.2 RESEARCH DESIGN

Creswell (2015) defines a research design as a detailed plan of how research objectives/goals

would be achieved. The Study used a Cross Sectional Research Design to triangulate both

Qualitative and Quantitative approaches to establish the effects of cash management practices

31
and financial performance of SMEs in Nyendo Mukungwe Division. According to Bryman

and Bell (2003), triangulation occurs when more than one research strategy and data tools are

used in a study of social phenomena. Triangulation can be undertaken within a single

research strategy by using multiple sources of data or across research strategies where one of

the approaches is insufficient to reveal all that is required to be known about a phenomenon

under study (Carter, 2012).

Quantitative approach allows quantification of responses in numerals from the large sample

while qualitative approach will allow expressing of responses in explanatory from small

sample. Cross Sectional Research Design allows immediate reporting of data collected from

the field to establish the effects of Cash Management practices (cash planning, cash control,

and cash disbursement) and financial performance (returns on investment, sales turnover, and

profitability).

Qualitative data will also be collected so as to capture views and opinions of respondents

with regard to the effect of cash management on financial performance. The triangulation of

the above two approaches will subsequently help to generate both quality and quantity

information about the subject under

3.3 AREA OF STUDY.

The study will be carried out within the SMEs located in Nyendo Mukungwe Division in

Masaka City. The area of Masaka City is highly concentrated with many Small and Medium

enterprises providing products and services to the local community and the general public.

3.4 STUDY POPULATION

Population is the specific parameter about which information is desired and it may include a

set of people, services, elements, and events, group of things or households that are being

investigated (Kothari, 2009). This section will include a collection of study units for which

samples of interest will possibly be determined. The study population will consist of a cross

32
section of owners, employees, customers and suppliers. This category will consist of a total

number of 300 people, however, a representative sample will be selected from these as it will

not be possible to cover the entire population and these will be able to provide a better

understanding regarding the effects of cash management practices and financial performance

of SMEs in Nyendo Mukungwe in Masaka City.

3.5 SAMPLE SIZE

A sample is the part of the target population selected for representation in the study (Kothari,

2009). From the target population of 300 respondents, a sample size of 271 will be selected

and this is supported by Krejcie and Morgan (1970) who assert that where a total population

is 300, a sample size of 271 or more is sufficient to yield reliable data and to guard against

non-responses. Furthermore, Krejcie and Morgan (1970) advise that each sub-group be

treated as a population and then use a table to determine the recommended sample size for

each sub-group.

Table 3.1: showing the different categories with their population size and sample size

Categories Population size Sample size Sampling Technique

Owners 55 47 Purposive sampling

Employees 90 87 Purposive sampling

Customers 120 107 Simple random sampling

Suppliers 35 30 Simple random sampling

Total 300 271

Source: Primary Data, 2023 and Krecjie and Morgan (1970) Table.

From the table above, it can be seen that target population will be 300 respondents distributed

as indicated, the table also shows that the sample size of 271 will be selected and the

33
techniques that will be used included Purposive Sampling for key informants and Simple

Random Sampling for employees, customers and suppliers.

3.6 SAMPLING TECHNIQUES

According to Sekaran, (2003) sampling is the process of choosing the research units of the

target population, which will be included in the study. This entailed Purposive Sampling and

Simple Random Sampling.

3.6.1 Purposive Sampling Technique

According to Lawrence et al (2013) purposive sampling is a sampling technique that allows a

researcher to use cases that have required information with respect to the objectives of the

study. Purposive sampling is a sampling method where some elements of the population have

no chance of selection and is based on knowledge of the population and the objectives of the

research (Connaway & Powel, 2010). Purposive Sampling Technique under non-probability

sampling will be used to select owners of different SMEs and their employees. The rationale

for using Purposive Sampling will be that only a certain proportion of the total number of

respondents will likely have most of the features of Cash management and this enabled the

researcher select the respondents who would have knowledge about the subject matter.

3.6.2 Simple Random Sampling

Simple random sampling techniques are flexible and give equal chances to respondents to be

samples (Amin, 2005). For the other categories of respondents, simple random sampling will

be employed so as to enable equal representation of the population since it will be used for

taking on proprietors that are readily available.

Each element of the frame thus had an equal probability of selection; the frame will not be

subdivided or partitioned. This minimized bias and simplified analysis of results. In

particular, the variance between individual results within the sample is a good indicator of

34
variance in the overall population, which made it relatively easy to estimate the accuracy of

results. This method will be used to sample the various customers and suppliers.

3.7 DATA COLLECTION METHODS

Qualitative and Quantitative methods of data collection will be employed during the study.

Questionnaire survey method will be used to pool quantitative statistics while the interview

will be employed to gather qualitative information.

3.7.1 Questionnaire Method

Primary data will be collected through a self-administered closed-ended questionnaire. The

questionnaire will contain structured questions relating to Cash Management practices and

Financial Performance of SMEs. The Questionnaire will be designed on the premise that it

imposes the lowest possible response burden. The Questionnaire will be administered to the

respondents after getting official permission from the respective authorities. This consists of

four sections: Section A for demographic data on Cash Management practices (Independent

variable), Section B for collection of data on Financial Performance (Dependent variable) and

Section C for collection of data on work force and record keeping (Moderating variables).

The Responses to Non-Demographic Questions will be anchored using Likert Scale range

include; 1(Strongly Disagree) 2(Disagree) 3(Neutral) 4(Agree) 5(Strongly Agree). A

questionnaire survey will be used because it will provide a standard way of soliciting

information from the Respondents using uniform questions (Bryman& Bell, 2011). The

questionnaires will be dropped and picked late upon respondent’s consent. This tool will be

suitable to collect data from the large sample Small and Medium Enterprises in Nyendo

Mukungwe Division due to its convenience. In analyzing the responses from the likert scale

of the questionnaire, means and standard deviation will be generated through the SPSS

package which will obtain an appropriate scale to interpret the mean

35
3.7.2 Interviews
An interview is a conversation between two people (the interviewer and the interviewee)

where questions are asked by the interviewer to obtain information from the interviewee

(Oslo and Omen, 2008). This method of data collection involves the researcher and the

respondent to meet physically where the respondent answers the asked questions. Interviews

are easily adaptable and effective since they encourage probing for deeper information on

part of the researcher. The interviews will be structured and will comprise a set of issues on

which the researcher wishes to draw data and the same questions will be posed to the

respondents using a guide to conduct the interview. The researcher will interview the owners,

employees, customers and suppliers.

3.7.3 Data Collection Tools

3.7.3.1 Questionnaires
A questionnaire is a pre-formulated written set of questions to which the respondents record

their answers usually within rather closely defining alternatives Radhakrishnaet. al. (2012).

The questionnaires will be close ended designed in appropriate structured questions.

Structured questions will be preferred because they will provide standardized set of questions

that represent varying degrees of agreement. The researcher will analyse the respondent’s

information for the relevant study objectives. This tool will be used because it will give a

great degree of assurance to the anonymity and confidence of the research respondents.

Questions will be designed using Likert scale ranging from 1 (strongly disagree) to 5

(strongly agree) for easy measurements of variables (Jackson, 2009).

3.7.3.2 Interview Guide

According to Abhuja (2001), interview guide as data collections tool is set of structured

questions in which questions are asked and the answers are recorded by the interviewer.

Interviews will be administered to owners, employees, customers and suppliers, as it will be

36
deemed necessary by the researcher. These respondents will be interviewed because the

researcher believes that they have adequate information that is needed for the study.

Interviews will be used in order to obtain detailed information on the study variables.

3.7.4 Data Collection Sources

The study employed Primary Data and Secondary Sources in this study in order to come up

with the appropriate information to the Question under investigation.

3.7.4.1 Primary data Sources

Primary data will be collected through the Administration of Questionnaires and Interview

Guide to the Employees. Taherdoost, (2016) describes Primary Data as those which are

collected afresh and for the first time, and thus happen to be original in character. Primary

data will be collected through the administration of Questionnaires and Interview Guides and

distributed to be filled by the respondents. Research assistants will be engaged to administer

and follow up on the Questionnaires.

3.7.4.2 Secondary Data Sources

Kothari, (2004), defines secondary data as data which has already been collected by someone

else and which has already been passed through the statistical process. They are publications

written by authors who were not direct observers or participants in the events described, but

are merely reporting on the work that someone else did. Under secondary data sources such

as government reports and publications, trade association journals and staff reports will be

used for extraction of data. This method will be used because it will enable a researcher to

come up with more data that will be used to corroborate findings obtained through primary

means.

3.8 DATA MANAGEMENT AND ANALYSIS

3.8.1 Measurement of Variables
Cash Management practices as an independent variable will be measured in terms of Cash

planning, Cash control and cash disbursement while Financial Performance will be measured

37
by Returns on investment, sales turn over and profitability. The Moderating Variable will be

measured by working experience and record keeping. Variables will be measured on Likert

nominal scale of (1-Strongly Disagree), (2-Diagree), (3-Not Sure), (2-Agree) and (1-Strongly

Agree) as they will be used to obtain the extent to which respondents agree or disagree with

the measurement parameter of the variable. The measurement scale of 1 to 5 on every

statement simply measures the strength of the respondents’ opinion on the given statement.

Table 3.2: Interpretation of Mean range on the Likert Scale

Response Scale Interpretation

Strongly Disagree 1 Very Low

Disagree 2 Low

Not sure 3 Moderate

Agree 4 High

Strongly agree 5 Very High

3.8.2 Data analysis

Data analysis is the process of inspecting, cleansing, transforming, and modelling raw data to

discover meaningful patterns, draw conclusions, and support decision-making. It involves

using various techniques and tools to analyse data sets, uncover insights, and derive

actionable information (Pang-Ning Tan and Michael Steinbach, 2005). Initially data will be

entered into MS Excel computer program for cleaning. The data will be imported to SPSS

version 23 statistical software for analysis.

38
3.8.2.1 Quantitative Data Analysis
Data will be analysed using statistical packages, which yield descriptive and inferential

statistics the researcher will base on to come up with tables. The data from questionnaires

will be analysed using descriptive and inferential statistics generated by the Statistical

Package for Social Scientists (SPSS) version 20. The descriptive statistics include

frequencies, percentages, means and standard deviation. The inferential statistics involve

running the correlation to ascertain the relationship between Cash management practices and

Financial Performance of SMEs in Nyendo Mukungwe Division.

3.8.2.2 Qualitative data analysis

Data from interviews will be analysed through content analysis and generation of emerging

themes from the qualitative data and triangulating it with the literature review in the second

chapter to illuminate the real situation under study. The data will be presented in simple, easy

to understand statistical representations in form statements to add on to the findings from the

questionnaires.

3.9 VALIDITY AND RELIABILITY

3.9.1 Validity
This is how relevant and accurate the data collection instrument is Saratakos (2005). In other

words, validity is the accuracy and meaningfulness of inferences, which are based on the

research results. Pre-testing will be done to ensure that the data collection instruments are

valid. They will be pre-tested to see that they actually measure what was meant to measure.

The validity of the questionnaires will be checked by my supervisor and will be measured

using the content validity index (CVI) using the formula provided by Amin (2005) as

follows: -

CVI = Number of items rated as relevant

Total number of items in the questionnaire

39
A content validity index (CVI) is an indication of the degree to which the instrument

corresponds to the concept it was designed to measure. It is an indication of the degree to

which the instrument corresponds to the concept it is designed to measure. This will confirm

the dimensions of the concepts under study which will be operationally define to ensure

appropriateness of results.

3.9.2 Reliability
The consistency of a measure of research tools for collecting relevant data is referred to as

reliability. Stability, internal reliability, and inter-observer consistency are to be the focus of

this research study's reliability, which includes determining whether the measure is reliable

Bryman and Bell, (2007). Cronbach’s alpha will be frequently utilized to measure the level of

consistency of the data collected. Mugenda and Mugenda, (2003) stresses that a coefficient of

0.70 or more suggests that there's a tall degree of unwavering quality of the information, and

that’s what the analyst aims to concur.

Table 3.3: Reliability of the Questionnaire

Variables Description Number of Cronbach coefficient

items Alpha

Independent Cash planning 7 .912

variables Cash control 7 .855

Cash disbursement 7 0.871

Dependent variable Financial Performance 7 0.918

Average Cronbach coefficient Alpha value (3.556/4)= 0.889

Source: Primary data, (2022)

40
3.10 Ethical Considerations
The researcher will ensure that the following ethical considerations will be observed. The

researcher will get the permission of the people who will be studied through an introductory

letter from Uganda Martyrs University (Faculty of Business Administration and

Management) that will be well expressed and approved. Objectivity during the research will

be emphasized by the researcher so as to eliminate personal biases and opinions. Anonymity

of the respondents will be taken care of during the study so as to avoid cases of victimization

for example Questionnaires will be coded to guarantee anonymity as none of the respondents

will be named at any time during the research or in the subsequent study Consent and

confidentiality of the respondents will be respected and protected in that the researcher will

seek for their consent before revealing information collected from them.

3.11 Limitations
The study may be limited by the sample size. Many of the workers have laid off due to the

economic crisis in the country and many businesses in Nyendo Mukungwe Division have

temporarily closed because of the high operational costs, this will limit responses from

targeted respondents. However the researcher will make sure that responses will be got from

majority of the targeted respondents.

The researcher will face the time constraint factor due to the deadline set for submission by

the university. The researcher will cooperate with the supervisor to ensure steady progress.

There will be many incidents of delay in getting the required information due to the

reluctance of some respondents to complete the questionnaires promptly because of the busy

schedule of the respondents who will be working at the field during the study time which will

make it difficult to get them to respond in a timely manner. In this case patience will be

ensured and direct involvement untill completion of the study.

41
Language barrier mighty be a challenge because some respondents cannot properly interpret

the questionnaire most especially those who didn’t go far with academics for example school

drop outs and certificate holders who are not well versed with English. This will be solved by

reading and interpreting the different questions in the questionnaire and interview guide to

them.

3.12 Conclusion
This chapter states the methodology that will be used for the study, how the data will be

gathered, handled, and analyzed from the field. The chapter also presents the research design

as a cross sectional research design with an in-depth description of the area of the study, the

sample size, sampling technique. It also presents the ethical issues in the study and also the

limitations and the means and ways how to they will be overcame.

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RESEARCH TOOLS

47
QUESTIONNAIRRE
Dear Respondent;

My name is NAKYEJJWE JACQUELINE and I am conducting a research as part of the

requirements for the award of a Bachelor’s degree in Business Administration and

Management at Uganda Martyrs University. The title of the research is: EFFECTS OF

CASH MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF

SMEs. A CASE OF NYENDO MUKUNGWE DIVISION. You have been selected to

participate in this study due to the importance of the information you have about the topic.

The information you provide will be used only for purposes of this study and will be treated

with utmost confidentiality.

Thank You for your cooperation accorded to me.

(Please fill in the questionnaire in block capital, and tick the appropriate answer provided)

Section A: Background of the respondent.

Sex: Female male

Age: 20-30 31-45 46-55 Above

Level of education:

Certificate level Diploma Degree Masters Others specify

Length of operation IN Nyendo Mukungwe Division:

Below 5 years

5 years

5-10years

Above 15 years

48
Business categories:

Entertainment Joints and Bars

Retail and Wholesale

Medical centres

Others

Instruction

For the questions below, tick the number that best indicate your opinion on the question using

the following scale.

SCALE 1 2 3 4 5

Strongly Disagree Disagree Neutral Agree Strongly Agree

SECTION B: Cash planning and financial performance of SMEs

NO. STATEMENT 1 2 3 4 5

1 SMEs in Nyendo Mukungwe Division frequently review and update

their cash flow forecasts to be able to predict inflows and out flows of

cash in their business.

2 SMEs in Nyendo Mukungwe Division have different systems that

monitor and manage their cash balances across different accounts

3 Business owners in Nyendo Mukungwe Division communicate cash

planning and management practices to their employees and ensures that

they understand how their actions impact business cash flows.

49
4 Delayed payments, inaccurate forecasting and lack of financial planning

are the major challenges facing SMEs in Nyendo Mukungwe Division.

5 There is an established relationship between financial institutions and

SMEs in Nyendo Mukungwe Division to easy access to credit when

needed.

6 There are developed contingency plans to manage unexpected events

that may impact cash flows for example sudden drop in sales among

SMEs in this division.

There is evaluation and adjustments in SMEs’ cash planning and

management practices that are based on performance and external

7
factors like change in economy in Nyendo Mukungwe Division

SECTION C: Cash control and financial performance of SMEs

NO. STATEMENT 1 2 3 4 5

1 There are various internal controls employed in SMEs of Nyendo Mukungwe

Division that ensure accuracy and completeness of cash transactions.

2 SMEs in Nyendo Mukungwe division use measures like conducting regular

audits, utilising technological advancements and monitoring transactions to

detect and prevent fraud.

3 SMEs in Nyendo Mukungwe Division mostly use manual invoicing and

payment to handle their accounts receivables and accounts payables

effectively.

50
4 SMEs in Nyendo Mukungwe Division frequently reconcile their bank accounts

and cash registers to ensure accuracy and completeness of their financial

records.

5 SMEs in Nyendo Mukungwe Division are aware of the costs associated with

their businesses and have financial advisors that assist with cash management

strategies. .

6 SMEs in Nyendo Mukungwe Division have established budgets for their

businesses.

SMEs in Nyendo Mukungwe Division have developed a succession plan for

their businesses to ensure their long-term financial viability.

7

SECTION D: Cash disbursement and financial performance of SMEs

51
NO. STATEMENT 1 2 3 4 5

1 SMEs in Nyendo Mukungwe Division encounter challenges such as

insufficient funds, fraud and delayed consumer payments in managing

their cash disbursement.

2 Conducting regular inventory reviews and using forecasting tools are the

used strategies by SMEs in this division to manage their inventory levels

and minimize cash tied up in inventory.

3 Adopting digital payment method, improved cash flow forecasting and

budgeting among SMEs in this division is a strong stimulus to

improving the efficiency and effectiveness of cash disbursement

processes.

4 Using profit margins, cash flow and returns on investment are the most

efficient measures for the impact of cash disbursements on financial

performance of SMEs in this division.

5 SMEs in this division frequently review their invoices, reconcile their

bank statements and verify their payments to ensure accuracy of their

cash disbursements.

6 Inventory purchases and utility payments are the primary reasons for

disbursing cash by SMEs in this division.

7 SMEs in this division use cash buffer and exploring financing options to

balance the need for cash disbursement with maintaining healthy cash

reserves for unexpected expenses and investment opportunities.

52
SECTION E: Financial performance of SMEs

NO. STATEMENT 1 2 3 4 5

1 Our business performs to our expected standards

2 The business enterprises in this division have a favourable return on

assets

3 SMEs have a favourable growth rate in this division.

4 Our return on equity has been good for the past 5 years

5 There is a high operating profit margin in the SMEs in this division

6 There is a high level of investment in these business enterprises

7 The revenue is higher than the costs of operation

SECTION F: MODERATING VARIABLES

NO. STATEMENT 1 2 3 4 5

53
 1 Employees work experience in managing cash and financial resources

highly moderates the relationship between cash management practices

and financial performance in every SME in this division

2 SMEs in Nyendo Mukungwe Division always keep financial records of

their cash inflows and outflows

3 Incentives such as free or low cost accounting software is provided by

the government to SMEs in this division to improve record keeping

practices.

4 SMEs in this division mostly use Manual bookkeeping and QuickBooks

software as their record keeping tools.

5 The government is supportive of SMEs in providing training and

education programs to improve their skills and work experience in

managing cash and financial resources.

6 Experience in managing cash and financial resources are always used by

SMEs in this division to identify and respond to financial risks and

opportunities.

7 Work machinery is maintained and repaired to avoid loss breakdowns.

Thank you for your cooperation

54
INTERVIEW GUIDE
Cash Planning

I. How do you plan and forecast your SME’s cash inflows and outflows?

…………………………………………………………………………………………

………………………………………………………………………………………….

II. What tools or methods do you use to develop your cash flow projections and budgets?

…………………………………………………………………………………………

………………………………………………………………………………………...

III. How frequently do you review and update your cash flow projections and budget?

And how do you incorporate changes to your business operations into your cash flow

forecasts?

…………………………………………………………………………………………

…………………………………………………………………………………………

Cash Control

I. What steps do you take to ensure that your cash inflows and outflows are accurately

recorded and accounted for?

…………………………………………………………………………………………

…………………………………………………………….............................................

II. How do you prevent or manage situations where cash is lost or stolen?

…………………………………………………………………………………………

………………………………………………………………………………………….

III. How do you monitor and manage your company's accounts receivable and accounts

payable to ensure that they do not negatively impact your cash flow?

…………………………………………………………………………………………

………………………………………………………………………………………….

55
Cash Disbursement

I. What is your process for approving and disbursing payments to vendors and

suppliers?

…………………………………………………………………………………………

…………………………………………………………………………………………

II. How do you prioritize your vendor payments when managing your cash flow?

…………………………………………………………………………………………

………………………………………………………………………………………….

III. How do you manage your company's inventory levels to minimize the amount of cash

tied up in inventory?

………………………………………………………………………………………......

..........................................................................................................................................

Thanks for your participation, May the Almighty God Reward you abundantly.

56