THE INFLUENCE OF FINANCIAL MANAGEMENT ON THE GROWTH OF

SMALL AND MEDIUM SCALE INDUSTRIES

BY

PRINCE AKITI

SMS/BUS/190458

DEPARTMENT OF BUSINESS ADMINISTRATION ,

FACULTY OF ECONOMICS AND MANAGEMENT,

BENSON IDAHOSA UNIVERSITY,

BENIN CITY, NIGERIA

MARCH, 2023

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 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
Small and medium-sized enterprises (SMEs) contribute to the business growth and economic

development of countries; however, the funding of SMEs is fundamental to this growth and

development (Lewandowska, Mateusz, Stopa, & Humenny, 2019; Neagu, 2020). Financing

SMEs in Nigeria is necessary for encouraging enterprise development (Neagu, 2020).

According to Neagu (2020), SMEs are an important part of Nigeria‘s economy and account

for approximately 96% of the country‘s businesses. The focus of this study is based on

sources of financing for SMEs in Nigeria. According to Babatunde and Perera (2017), SMEs

in Nigeria are classified according to the capital involved, revenue, and number of workers.

One of such classification indicates that an SME is an enterprise with an asset base (without

land) of between N5 million and N500 million ($138,888 to $1,388,888), and with a labor

force of between 11 and 300 employees (Babatunde & Perera, 2017). The Small and Medium

Enterprises Credit Guarantee Scheme (SMECGS) in Nigeria adopted this definition

(Lewandowska et al., 2019).

Sufficient capital to stay in business is unavailable to many SMEs in Nigeria, where SMEs

are often forced to close because they are not able to access the necessary funds (Neagu,

2020). Banks find it challenging to cover the high costs of credit associated with lending to

SMEs because of the weak capital base, poor financial records of SMEs, and market

competition (Lewandowska et al., 2019). A gap in literature exists on how SMEs‘ owners can

be adequately prepared to perform the financial management required for business

sustainability in Nigeria (Babatunde & Perera, 2017).

Many factors contribute to the challenges confronting SME owners (Chhabra & Pattanayak,

2018). Effective financial management is one factor. The ability of some SME owners to

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execute effective financial management is insufficient (Karadag, 2015). Many small

businesses struggle to survive because they operate without formal financial accounting

practices (Chhabra & Pattanayak, 2018) or formal structures for management (Reynoso,

Osuna, & Figueroa, 2017). While literature exists on the problems that contribute to the high

failure rate of small businesses (Agwu & Emeti, 2016; Anderson & Ullah, 2016), little of it

relates to comprehensive practices that small business administrators could use to curtail the

problem.

1.2. Statement of the Problem

economy, their growth and development have been impeded by several challenges. One of

the critical challenges is inadequate financial management practices, which can lead to a lack

of financial discipline, poor decision-making and financial instability. Owners of SMEs in

Nigeria have inadequate preparation for financial management, which often leads to business

failure in the first 5 years of operations (Olokoyo, Oyewo, & Babajide, 2014). Ninety-two

percent of SMEs fail in business within the first 5 years as a result of inadequate preparation

of the owners for financial management (Babatunde & Perera, 2017; Karadag, 2017).

Maungal and Garbharra (2014) confirmed that 60% of SMEs are unable to make a profit

from the date of inception to the closing of the business. Previous studies have revealed that

one of the challenges confronting SMEs in Nigeria is the management of finance (Okafor,

2016; Olokoyo et al., 2014). The general problem is that the financial management tasks

required for the effective management of SMEs in Nigeria are not taught explicitly to SMEs‘

owners before they assume responsibilities as leaders of their businesses. The specific

problem is that most SME owners are inadequately prepared to perform the financial

management required for business sustainability in Nigeria (Babatunde & Perera, 2017). It is

against this realization that this study aims to investigate the influence of financial
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management practices on growth of SMEs. These problems make it glaring that there is a

need to carry out a study on the influence of financial management on the growth of small

and medium scale industries.

1.3. Objective of the Study

small and medium scale industries, using Benin City, as a case study. The specific objectives

of the study are;

1. To identify the financial management practices employed by small and medium scale

industries in Benin City, Nigeria.

2. To determine the extent to which financial management practices influence the growth of

small and medium scale industries in Benin City, Nigeria.

3. To identify the factors that hinder effective financial management practices among small

and medium scale industries in Benin City, Nigeria.

4. To recommend strategies to improve financial management practices among small and

medium scale industries in Benin City, Nigeria.

1.4. Research Questions

industries in Benin City, Nigeria.

2. What is the extent to which financial management practices influence the growth of

small and medium scale industries in Benin City, Nigeria.

3. What are the factors that hinder effective financial management practices among small

and medium scale industries in Benin City, Nigeria.

4. What are strategies to improve financial management practices among small and

medium scale industries in Benin City, Nigeria.

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1.5. Scope of the Study
The scope of this study is limited to examining the influence of financial management on the

growth of small and medium scale industries using Benin City as a case study. The study will

cover various sectors of the Nigerian economy, including manufacturing, services, and

agriculture. The study will focus on financial management practices such as budgeting, cash

flow management, financial planning, and financial reporting whilst using the case study.

1.6. Significance of the Study

to sustain their business for profitability. SMEs owners who currently struggle with financial

difficulties such as lack of knowledge concerning sources of funds, handling expenditures,

and financial management may gain insight from the findings of the study. The federal

government of Nigeria, as well as state and local governments, may benefit from the study

findings and apply resulting knowledge in educating would be SME owners to promote

business survival, improve employment, and raise the standard of living among citizens.

Future researchers who may want to extend the body of knowledge on financial management

for SMEs will benefit from the study findings. The study will be significant t positive social

change. Creation of new knowledge through the study findings may have positive

implications for social change by shifting the current paradigm for how SMEs operate a

business to a new paradigm of financial management. The study will also be significant to

society by creating positive awareness of financial business management that may help

business owners manage their funds effectively and expand their businesses to the next

generation, thereby improving the well-being of people living in their society.

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1.7. Definition of Terms
 Cash management: Cash management is the management of cash flows in and out of the

business, which are readily available cash balances of the firm (Ahmad & Abdullah,

2015).

 Financial management: Financial management consists of activities related to record

keeping of the finances of an organization and may include financial planning, budgeting,

reporting, cash flow management, and working capital management (Turyahebwa,

Sunday, & Ssekajugo, 2017).

 Small Business: A small business is a privately operated enterprise that is mainly in the

forms of sole proprietorship and partnership, with operations that reflect the low volume

of trade and involve fewer than 50 employees (Simionescu & Bica, 2014).

 Small business administrator: A small business administrator is a person who is

responsible for a managerial role in a small business, with the chief responsibility of

realizing methods to increase efficiency in the operations of the firm (Kurowska-Pysz,

2014.

 SMEs’ finances: SMEs‘ finances are the various sources of funding available to SMEs‘

business operations. The sources comprise private and external sources (Abdulsaleh &

Worthington, 2016).

 Small and medium-sized enterprises (SMEs): The definitions differ between countries

in regard to the capital base, turnover, and the number of employees (Govori, 2018). The

World Bank describes SMEs as enterprises with a maximum of 300 employees, $15

million in annual income, and $15 million in assets (Govori, 2018). The Federal Ministry

of Industries in Nigeria defined SMEs as businesses with an asset base of between 5

million Naira and 500 million Naira, and a labor force of not more than 300 individuals

(Central Bank of Nigeria, 2014).

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 CHAPTER TWO

2.0. LITERATURE REVIEW

2.1. OVERVIEW OF SMALL AND MEDIUM SCALE INDUSTRIES IN NIGERIA

Small and Medium Scale Enterprises (SMEs) play a crucial role in Nigeria's economic

development, accounting for over 80% of the country's total employment and contributing

about 48% to its Gross Domestic Product (GDP) (Awojobi et al., 2021). According to the

National Bureau of Statistics (NBS), there are about 41.5 million SMEs in Nigeria,

accounting for over 90% of the country's businesses (NBS, 2019).

SMEs in Nigeria operate in various sectors, including agriculture, manufacturing, and

services. The manufacturing sector is one of the largest employers of labor in the SME sector,

accounting for about 45% of total employment in the sector (Ogunsiji & Oluseyi, 2020). The

agricultural sector is also a significant employer, with SMEs in the sector accounting for

about 70% of the sector's employment (Awojobi et al., 2021). The services sector, which

includes businesses such as retail, hospitality, and healthcare, is also a significant contributor

to the SME sector's growth and development.

Despite the critical role played by SMEs in Nigeria's economy, the sector faces several

challenges, including inadequate infrastructure, limited access to finance, and inadequate

skills and knowledge. These challenges have hindered the growth and development of SMEs

in Nigeria and have contributed to the high failure rate of SMEs in the country.

In recent years, the Nigerian government has taken several steps to promote SME growth and

development, including the establishment of the Small and Medium Enterprises Development

Agency of Nigeria (SMEDAN) and the creation of several financing schemes and incentives

for SMEs (Awojobi et al., 2021). However, more needs to be done to address the challenges

facing SMEs and promote sustainable SME growth and development in Nigeria.

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One of the major challenges facing SMEs in Nigeria is the limited access to finance. SMEs

often struggle to access finance from traditional sources such as banks, due to a lack of

collateral and limited credit history. This has led to a significant financing gap for SMEs in

Nigeria, estimated to be over $100 billion (Ogunsiji & Oluseyi, 2020). The Nigerian

government has responded to this challenge by establishing several financing schemes for

SMEs, including the Bank of Industry (BOI) SME loans and the Central Bank of Nigeria

(CBN) Agric-Business/Small and Medium Enterprise Investment Scheme (AGSMEIS).

Another challenge facing SMEs in Nigeria is the inadequate infrastructure. SMEs often face

challenges such as power outages, poor road networks, and inadequate transportation

systems, which can increase their operating costs and limit their ability to expand their

operations. The Nigerian government has recognized the importance of infrastructure

development for SME growth and has taken steps to address this challenge. For example, the

government has launched several infrastructure development projects, such as the National

Integrated Infrastructure Master Plan (NIIMP), aimed at improving the country's

infrastructure and promoting SME growth.

Limited skills and knowledge among SME owners and managers are also a challenge for

SMEs in Nigeria. Many SME owners and managers lack the necessary skills and knowledge

to run their businesses effectively, such as financial management, marketing, and business

planning. The Nigerian government has responded to this challenge by establishing training

and capacity building programs for SMEs, such as the SMEDAN National Enterprise

Development Program (NEDEP), aimed at enhancing the skills and knowledge of SME

owners and managers.

Taiwo et al (2016). recommended that the government of Nigeria should encourage

microfinance banks and other, monetary institution to support the SMEs in Nigeria. Klyton

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and Rutabayiro-Ngoga (2018) examined firm-level determinants of the funding sources and

structure of operational funds of Turkish SMEs (Klyton & Rutabayiro-Ngoga, 2018). Taiwo

et al. (2016) used a cross- sectional data set of 1,278 SMEs for the year 2013. Larger firms

and businesses with international standard quality certification had a lower proportion of

working capital from internal sources (Klyton & Rutabayiro-Ngoga, 2018). Lamboll, Martin

Sanni, Adebayo, Graffham, Kleih, Abayomi, and Westby (2018) examined VC as a source of

financing SMEs in Tunisia. Tunisia created an Investment Company with VC called SICARs.

The motivation for VC financing was because new businesses often found it difficult to

obtain loans from commercial banks (Abe, 2015; Abdulazeez, Suleiman, & Yahaya, 2016).

Lamboll et al. (2018) examined the financial factors that affected the functionality and

profitability of SMEs in Romania, taking into consideration the financial indicators from

2009 to 2012 on investment capital and profitability.

The SMEs contributed significantly to the developments of the SME sector and the economy,

which characterized about 99% of all businesses in Romania, provided around 50% of GDP,

and approximately 65% of employment (Aliyu, Yusuf, & Naiimi, 2017). Kumar and Rao

(2015) examined the funding preferences of SMEs and what influences the financing

decisions of SMEs in India. The inadequate finance faced by SMEs was a result of demand

and supply gap (Kumar & Rao, 2015). There was also a lack of information on the

accessibility to sources of finance and the unwillingness of financial institutions to provide

SMEs with funding (Kumar & Rao, 2015). Kumar and Rao proposed a conceptual framework

that could analyze the financing preferences of SMEs, through incorporating the

fundamentals of capital structure theories elements.

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2.2. FUNDING FOR SMEs

During the last decades, there has been increasing awareness in studies focusing on the SMEs

sector, determined by the acknowledgment that SMEs are powerful engines of economic

development (Klyton & Rutabayiro_Ngoga, 2018). Notwithstanding, not all the researchers

considered the broad diversity in the broad category of SMEs (Klyton & Rutabayiro_Ngoga,

2018). Researchers revealed that size does matter when it comes to accessing finance (Klyton

& Rutabayiro_Ngoga, 2018). Several reasons, such as opaqueness and lack of collateral, led

SMEs to have limited access to funding (Klyton & Rutabayiro_Ngoga, 2018). SMEs

determine their capital structure regardless of their sizes (Lamboll et al., 2018). Academic

exploration reached remarkable inferences that the capital structure of larger firms can apply

to SMEs (Lamboll et al., 2018). The developing countries‘ banking system offers little

financial products to SMEs (Lamboll et al., 2018). Aliyu et al. (2017) noted that securing

credit by SMEs requires borrowers to pledge collateral against the loan.

Pandula (2015) examined the situation of SME financing in Sri Lanka and highlighted some

constraints faced by banks and SMEs. The banking sector faced the limitations of high risk,

high administration costs, and lack of information on the borrower, and poor legal systems to

fall back to in the event of default by borrowers (Ikebuaku & Dimbabo, 2018). On the other

hand, the SME operators faced the lack of collateral, complex application procedures; and the

high cost of finance associated with obtaining loans from the banks (Pandula, 2015). Pandula

recommended financial institutions to develop credit-scoring systems, simplify loan

documentation, promote structured finance tools, and train bank staff who handled the

applications of SME customers (Pandula, 2015). Pandula (2015) also recommended the

introduction of new credit guarantee schemes, setting up of an SME rating agency, and

developing a clusterbased approach to SME lending.

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2.3. FINANCIAL MANAGEMENT

Financial management is a crucial aspect of small and medium scale industries (SMEs) as it

affects their ability to access finance, generate revenue, and sustain their operations. Effective

financial management helps SMEs to improve their profitability, manage their cash flows,

and make sound financial decisions. Several studies have examined the importance of

financial management in SMEs in Nigeria.

Adegbite, Adegbite, and Olokoyo (2019) in their study, investigated the impact of financial

management practices on the growth of SMEs in Nigeria. The study found that effective

financial management practices, such as budgeting, cash flow management, and financial

reporting, positively impacted SME growth and development. Adetula, Oladipupo, and

Akintayo (2020) also examined the role of financial management in the performance of

SMEs in Nigeria. In their study, they found that effective financial management practices,

such as financial planning, budgeting, and financial analysis, were positively correlated with

SME performance.

Alisdair (2018) explains that financial Management (FM) is an on-going process and not

something organisations do on ad hoc basis. This is one field of Finance that handles

financial planning, financial risks management, financial analysis and control, financial

accounting, and financial reporting. Financial planning is about identifying possible

resources, planning organisation‘s budget based on anticipated resources, and allocating this

budget to appropriate, necessary, efficient, and timely expenditure. Financial control, on the

other hand, is about monitoring how the actual inflow and outflow of cash relates to the

budgeted cash flow. Control mechanism comes in when income and expenditures do not go

as planned. For financial reporting this plays a vital role in financial management.

Transparency is of utmost consideration in financial management.

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2.4. SMALL BUSINESS MANAGEMENT AND STRATEGIES

Strategies are mechanisms that owners and administrators of organizations establish to gain a

sustainable competitive advantage (Morris, Schindehutte, Richardson, & Allen, 2015) and

success. Morris et al. (2015) inferred that strategies are plans of actions that influence

behavior within institutional norms and rules. Strategic management is essential for efficient

management of the resources of the firm (Salas, Lewis, & Huxley, 2017). Business strategies

are the alignment of the organization with its environment (Palmer, Wright, & Powers, 2015).

Differently put, the institutional environment has an influence on the strategic choices in an

organization (Palmer et al., 2015). Scholars posited a relationship between strategies and firm

performance (Palmer et al., 2015). Some strategic performance indicators are strategic

direction, strategy implementation, human resources, and community/government relations

(Cook & Wolverton, 2015).

For effective strategies, small business administrators require knowledge and skills in areas

such as marketing, finance, and accounting (Palmer et al., 2015). Moreover, small business

owners need to have an appreciation of their own capabilities to determine effective strategies

for business success (McDowell, Harris, & Geho, 2016; Palmer et al., 2015). Diverse and

unique strategies may exist in various businesses (Sala et al., 2017). Bagnoli and Giachetti

(2015) categorized strategic orientations of businesses as internal and external. Internal

includes management practices such as human resource management and financial

objectives, while external relates to sales growth (McDowell et al., 2016). Though financial

value is an objective of business owners, strategic choices are not solely of economic value

but are also in alignment with institutional logics (Ocasio & Radoynovska, 2016; Parez &

Cambra-Fierro, 2015). Palmer et al. (2015) identified two types of small business strategies:

cost-leadership strategy, which is an approach whereby firms compete on price; and

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differentiation strategy, which reflects a focus on brand. The strategies that small business

owners and managers adopt are sometimes as a result of constraints such as resource

limitation (Parez & Cambra-Fierro, 2015; Weinzimmer, Robinson, & Fink, 2015).

2.5. IMPACT OF SMALL AND MEDIUM SCALE BUSINESS IN DEVELOPING

COUNTRIES AS NIGERIA

Based on the constant growth of small businesses and their economic impact in the

developing countries, policymakers in these countries such as Nigeria are focusing on the

small business sector (Koens & Thomas, 2015). Mendoza (2014) revealed the importance of

global small businesses, with emphasis on the developing countries. Small businesses

influence social and economic development (Karadag, 2015), and are the backbone of the

global economy (Cant, Erdis, & Sephapo, 2014; Clementina, Egwu, & Isu, 2014), as well as

the emphasis on international economic growth (Tijani & Mohammed, 2013). Small

businesses have a significant impact on economic growth (Taneja, Pryor, & Hayek, 2016)

and equitable development in developing economies (Agwu & Emeti, 2014). Extant literature

reflects contributions by small businesses to economic expansion and development of

international countries (Ahmad & Abdullah, 2015; Fernández-Serrano & Romero, 2013).

Another positive impact of small businesses is the potential poverty alleviation of a country

(Bowale & IIesanmi, 2014).

Entrepreneurship is necessary to tackle poverty in developing countries (Bonney, Collins,

Miles, & Verreynne, 2013). Parilla (2013) also conveyed confidence that small business

owners create job opportunities. In developing countries, small businesses are a measure to

combat high poverty levels and unemployment (Ghobakhloo & Tang, 2013). Inal, Ariss, and

Forson (2013) observed the existing perception that small businesses help control the rise of

unemployment. Entrepreneurship is significant to economic development, innovation, and job

13
creation (Subramaniam, Shamsudin, Zin, Ramalu, & Hassan, 2016). The creation of new jobs

by small businesses is positive for the economy (Subramaniam et al., 2016).

2.5.1. SMALL AND MEDIUM SCALE BUSINESS SUCCESS FACTORS

Indicators of the success of small businesses are in two categories, financial and nonfinancial

performance (Rahman, Amran, Ahmad, & Taghizadeh, 2015). There are numerous factors

within these two categories. One such factor is business skills by personnel of a firm (Rambe

& Makhalemele, 2015). The competencies of a staff can impact the performance of the firm

(Rambe & Makhalemele, 2015). Proper financial management is another primary factor

(Rahman et al., 2015), while efficient cash management is also imperative for small

businesses success and growth (Mungal & Garbharran, 2014). Furthermore, the success of

small businesses is reliant on the availability of funding (Cowling, Liu, Ledger, & Zhang,

2015). The success factors of small and medium scale businesses were not only directly

linked to financing. Abilities, competencies, and skills of the owners of the small businesses

are potential determinants of the success of a small and medium scale business (Cowling et

al., 2015). Musimenta et al. (2017) noted strategy alignment with personal competence is a

critical success factor for small businesses.

2.5.2. FACTORS THAT CURTAIL SMALL AND MEDIUM SCALE BUSINESSES

Though there is a positive impact of the small business sector on the global economies

(Massaro, Handley, Bagnoli, & Dumay, 2016), the probability of small business failure is

high (Massaro et al., 2016). The failure rate for small businesses has been significantly high

(Lee & Weng, 2015). Scholars credited various factors for the failure of small businesses.

Financial mismanagement is an area that causes business failure (Cowling et al., 2015). The

lack of innovation is another factor that could affect the success or failure of a small business

(Dunne, Aaron, McDowell, Urban, & Geho, 2016). Other factors that influenced the failure

of small businesses are a tax burden, inability to secure loans, low business asset utilization,

14
and expense management (Rasheed, Shahzad, Canroy, Nadeem, & Siddique, 2017). Lussier

and Corman (2015) identified business plans as a key variable in the survival or failure of

small businesses. Scholars insinuated a business plan is influential on performance (Parks,

Olson, & Bokor, 2015), but the influence could vary according to the size of a firm (Lee,

Jeon, & Na, 2016). Knowledge of a business plan could help someone to determine if the

business is viable (Human, Clark, Baucus, & Eustis, 2015).

Some failure factors for small businesses include undercapitalization, irregular market

research, lack of strategy, inexperience, inadequate documentation, staffing, competitive

environments, and financial challenges (Agwu & Emeti, 2014). Chittenden and Derregia

(2015) lamented financial constraints as a negative factor that hinders small business

progress. Insufficient planning and lack of credibility also contribute to failure factors (Sow,

Basiruddin, Mohammad, & Abdul Rasid, 2018). There is a huge emphasis on financial

management as a problematic factor for small businesses. Poor financial management is

common and an important cause of failure of small businesses (Karadag, 2015). Similarly,

Sow et al. (2018) expressed that poor financial management practice is a prime reason for

small business failure. Another area of finance that propels small business failure includes

limited access to funding, which according to Rasheed et al. (2017) is a reflection of the

difficulty to obtain loans from banks.

There is also the potential issue of monetary theft, which could be detrimental to small

businesses (Kennedy & Benson, 2016). Inefficient administration is another critical cause of

small business failure (Kennedy & Benson, 2016). Active management is a pivotal element

of business (Kennedy & Benson, 2016). A subset of ineffective management is poor

managerial skills, which is a key failure factor (Agwu & Emeti, 2014). Massaro et al. (2016)

confirmed the challenges of the lack of managerial capabilities and human resources in small

15
businesses. The failure rate of small businesses in developing countries is because of

insufficient managerial skills and lack of trained personnel (Karadag, 2015).

2.5.3. SMALL BUSINESS ADMINISTRATORS

Many researchers reported the critical role of small business administration and it is

appropriate to discuss the composition of small business administrators. There is a lack of

basic management in many small businesses (Reynoso, Osuna, & Figueroa, 2014). The

majority of small businesses are owner managed (Mazzarol, 2014), hence the custom for

owners to perform multiple functions in small businesses (Ghobakhloo & Sai, 2013). An

influential role of the proprietor of a small business is to establish the purpose of the firm. An

applicable consideration, in this case, is where a small business owner only would aspire to

generate sufficient profit to meet personal expenses, while an entrepreneurship mindset

would result in more longterm decisions and maybe creating an organizational structure

(Ionitã, 2012). Ultimately, the direction and strategies of the firm are reflection of the owner

(McDowell et al., 2016), which influence the existing practices of the business.

2.5.4. SMALL BUSINESS ADMINISTRATORS’ COMPETENCIES

Many changing factors globally continue to increase the demand for greater skills and

capabilities of management (Griffin & Annulis, 2013). Having a cadre of competent core

employees is imperative for small businesses to survive (Chowdhury, Schulz, Milner, & Van

De Voort, 2014). Managers should have the requisite skills to be able to perform higher than

average, which reflected satisfactory performance (Benjamin, Sharma, Tawiah, Chandok, &

John, 2014). Personal managerial skills and capabilities can be used to develop and grow the

business (Smith & Barrett, 2016). The competencies of administrators‘ influence efficiency

and success of the firm (Jena & Sahoo, 2014).

There remain cases in small businesses where deficiencies in performance exist due to the

limitation of management, particularly as it relates to competence of the owner-manager of

16
the firm (Tauringana & Afrifa, 2013). The absence of managerial skills and competencies has

contributed to the majority of small businesses failing (Mohd & Mohamed, 2013).

Insufficient competence would pose a barrier to improving the success of small businesses,

which could result in dormancy and eventual failure (Yazdanfar, Abbasian, & Hellgren,

2014). There is a need for SME owners to possess a range of abilities, competences, and

skills in the interest of the organizations' survival (Mitchelmore et al., 2014). In addition to

the owners, the competence of the staff can be a success factor for small businesses

(Yazdanfar et al., 2014). Knowledgeable employees add value to their employers‘ business

(Stam, 2013). A skilled and contented staff increases the potential for profits in a small

business, hence the existence of human resource strategies such as empowerment and

employees training (Cook & Chaganti, 2015). Notwithstanding, as a consequence of financial

challenges in small businesses, having skilled and knowledgeable personnel is not always

possible (Musimenta, Nkundebanyanga, Muhwezi, Akankunda, & Nalukenge ,2017).

Consequently, small business owners often attempt to stretch their knowledge and human

capacity by strengthening networks with likeminded and similar personnel (Kuhn, Galloway,

& Collins-Williams, 2016).

2.6. FACTORS INFLUENCING FINANCIAL MANAGEMENT IN SMALL AND

MEDIUM SCALE INDUSTRIES

Several factors influence financial management in small and medium scale industries (SMEs)

in Nigeria. These factors can either positively or negatively impact SMEs' financial

performance, sustainability, and growth. Some of the factors influencing financial

management in SMEs in Nigeria are as follows:

 Business Environment: The business environment in which SMEs operate can

significantly influence their financial management practices. A study by Olarewaju,

Adetiloye, and Ayeni (2019) examined the impact of the business environment on SMEs'

17
 financial management practices in Nigeria. The study found that the business

environment, characterized by factors such as infrastructure, economic policies, and

political stability, significantly influenced SMEs' financial management practices.

 Business Size: The size of a business can also impact its financial management practices.

Small businesses may have limited resources and expertise to implement effective

financial management practices compared to larger businesses. A study by Adegbite and

Owolabi (2020) found that small SMEs in Nigeria were less likely to implement effective

financial management practices than larger SMEs due to resource constraints.

 Financial Literacy: Financial literacy refers to the knowledge and skills required to

manage personal and business finances effectively. A study by Olowe, Adetunji, and

Babajide (2018) found that financial literacy significantly influenced financial decision-

making in SMEs in Nigeria. SMEs' owners and managers with higher financial literacy

were more likely to make sound financial decisions and implement effective financial

management practices.

 Access to Finance: Access to finance is a significant challenge for SMEs in Nigeria,

particularly for small SMEs. Limited access to finance can impact SMEs' ability to

implement effective financial management practices such as financial planning,

budgeting, and financial analysis. A study by Adeleke, Adeleke, and Adegbie (2019)

found that fintech solutions positively impacted SMEs' ability to access finance, thereby

enhancing their financial management practices and overall performance.

 Government Policies and Regulations: Government policies and regulations can impact

SMEs' financial management practices. For instance, tax policies and regulations can be

complex and difficult for SMEs to navigate, leading to non-compliance and financial

penalties. A study by Oke and Akpokodje (2018) found that tax policies had a significant

18
 impact on SMEs' financial management practices, particularly in terms of record keeping

and financial reporting.

 Accounting Systems: The accounting system used by SMEs can also affect their

financial management practices. An effective accounting system enables SMEs to track

their financial transactions, monitor their financial position, and make informed financial

decisions. A study by Adeyemo and Akinbuli (2019) found that SMEs in Nigeria that

used computerized accounting systems had better financial management practices than

those that used manual systems.

 Managerial Skills: The skills and experience of SMEs' owners and managers can also

influence their financial management practices. A study by Adediran, Adeleke, and

Ewuola (2019) found that SMEs' owners and managers with higher levels of education,

training, and experience in financial management were more likely to implement effective

financial management practices.

 Information Technology: Information technology can play a significant role in

enhancing SMEs' financial management practices. For instance, financial management

software can help SMEs to automate financial processes, reduce errors, and improve

financial analysis. A study by Olusegun, Iwu-James, and Ajagbe (2019) found that SMEs

in Nigeria that used financial management software had better financial management

practices than those that did not.

 Cultural Factors: Cultural factors can also impact SMEs' financial management

practices. For instance, attitudes towards risk, debt, and savings can influence SMEs'

financial decisions and practices. A study by Oladipupo, Ogunyomi, and Gbajumo-

Sheriff (2020) found that cultural factors such as trust, reputation, and social capital

influenced SMEs' financial management practices in Nigeria.

19
These factors demonstrate the complexity of financial management in SMEs in Nigeria and

the need for comprehensive strategies to address the challenges and enhance financial

management practices in these businesses. By understanding these factors and developing

effective solutions, policymakers, financial institutions, and SMEs can work together to

improve financial management practices and promote the growth and sustainability of SMEs

in Nigeria.

2.6.1. CASH FLOW MANAGEMENT, GROWTH AND DEVELOPMENT OF

SMALL AND MEDIUM SCALE BUSINESSES

Cash flow is primarily the difference between cash coming into the business and cash going

out of the business during a given time period. Routine cash management reviews must keep

a close eye on debt collection, sales and deliveries, status of invoices, receipt of payments and

depositing of payments. The best cash flow management strategies usually result from

systems that are fully understood by the cash flow manager. Sometimes such systems are

computerised, while others are manual. Cash flow management does not need to be complex

to be effective. It does, however, have to be performed (Holland, 2019).

The cash flow management is a strategy by which an enterprise administers and invests its

cash. It is also seen as control of cash collection. Cash management is an essential tool which

aims at establishing the financial position of the business. It is a set of guidelines established

by management to ensure that the business has optimal cash balance to meet the business

goals (Banker, 2019). Cash needs to be efficiently managed and allocated to meet routine

business objectives. The gap between cash expenses and cash collection enhances liquidity

position, profitability leading to overall business growth over a period of time (Brinchk et al,

2017).

20
Holland (2019) further expounds that there is no magical solution to managing cash flow.

Accordingly, Important, is need to decrease the amount of money that is owed to the

business. Debtors should be made to pay their bills. Overdue accounts receivables can pull

down a business. One way to address this problem is to keep credit current and at a

minimum. Still, there is there is need to cut out excess overhead expenditures. Good spending

discipline should keep unnecessary expenditures to a minimum, but good cash flow

management should help to virtually eliminate excess overhead expenditures. Bad spending

habits are often picked up when cash is plentiful.

There is also need to keep a close eye on inventory. Holland (2019) explains that product

sales and inventory management are complex issues that can be likened to the ―chicken and

egg.‖ A business needs enough inventories to fill orders in a timely manner, but adequate

sales are needed to minimise inventory. Inventory includes finished products held for future

sales as well as raw materials held for future production. Both types of inventory represent

cash that has been spent but that has not generated a return. It is often best to sell inventory

items that are just gathering dust at a discounted price.

Increasing control over cash is an important cash flow management strategy. It is necessary

for to manage the cash to provide maximum value for the business. This can be achieved by

getting better connected to the banks, and pursuing the best cash strategies for the company.

Besides, there is need to gain greater visibility into the sources and uses of your cash. A

complete view of the entire financial value chain is important. The resulting insight can

improve the ability to forecast cash and optimise overall cash management. Sales order

management systems and purchase order management systems both contain critical data on

transactions (Bouhdary, 2019).

21
One of the options to ensure that a business has optimal cash balance to meet the business

goals is through budgeting. According to Shapiro (2021) a budget is an estimate about what

will be needed in monetary terms to do work. The budget is an essential financial

management tool. This is because the budget tells how much money is needed to carry out

activities, forces rigorous thinking through the implications of activity planning and the

budgeting process at times forces rethinking of action plans. Still if used properly, the budget

tells whencertain amounts of money to carry out your activities will be needed, enables

monitoring of income and expenditure and identifies any problems. The budget is a basis for

financial accountability.

Cash flow management demands carrying out of accounting. Accounting is important

because financial information is needed before any economic decision is made. Financial

accounting information focuses on actual events. For the purpose of decision making, the past

is used as a guide to future estimates of the consequences of different alternatives.

Accounting helps in identifying, measuring, recording and communicating economic

information to permit informed judgments and economic decisions (Hoggett, 2015). Financial

capabilities are common reasons for business failure: including low-quality accounting

records, poor cash flow management and using inappropriate sources of finance. Resource

control is also reported to be ‗very important‘ or ‗essential‘ by a larger proportion of self-

employed managers (Feistead et al., 2017).

2.7. RISK MANAGEMENT IN SMALL AND MEDIUM SCALE BUSINESSES

Hess and Cottrell (2016) stated that the presence of business risks continues to be a concern.

Financial risks are also a growing factor in businesses (Virglerová, Kozubíková, & Vojtovic,

2016), particularly in financial management (Belás, Kljucnikov, Vojtovic, & Sobeková-

Májková, 2015). Small business owners encounter many types of external and internal risks

22
that could determine their success (Belás et al., 2015). The economic situation surrounding a

business also impacts its performance (Hess & Cottrell, 2016). Virglerová, Kozubíková, and

Vojtovic (2016) added other critical areas of risk as financial, operational, market, security,

production, and personnel. An additional area of risk that could negatively impact small

businesses is fraud (Hess & Cottrell, 2016). Fraud involves actions such as cash skimming,

false expense claims, cash larceny, and non-cash theft (Kramer, 2015). Business

administrators employ risk management techniques to limit the occurrences or impact of

risks, which varies by entity (Abotsi et al., 2014). Despite businesses being a resourceful and

efficient platform, making provisions for adverse activities is important (Sarmiento,

Hoberman, Jerath, & Jordao, 2016). Risk management mechanisms are critical for financial

challenges (Sarmiento et al., 2016). The administration of financial risk determines the

performance of a firm (Belás et al., 2015). Hess and Cottrell (2016) suggested that

counteractive actions to fraud risks comprise establishing a culture in the business where

ethics matters, encourage reporting by making the process easy, and advocate the trust but

verify‘ approach.

2.8. CONCEPTUAL FRAMEWORK

In creating an institutional theory, Selznick (1948) identified social processes as the prime

standpoint of an organization. Social processes include the rules, norms, routines, and rituals

that influence organizational behavior (Selznick, 1948). According to Selznick,

environmental factors affect the behavior, strategies, governance, structure, and processes of

an organization. Selznick posited that individuals and organizations could independently

determine what structures and practices are in an organization. However, Selznick argued that

many organizations‘ leaders appreciate that the status of legitimacy enhances organizations‘

image and reputation. Accordingly, Selznick stated that managers of new firms typically

23
adopt structures and practices from similar organizations to conform to expectations within

the institution.

I explored three concepts (rules, routines, and knowledge) through the lens of institutional

theory (Selznick, 1948) in SMEs in Nigeria to understand how rules, routines, and knowledge

on financial management had provided sustainability in managing the SME. Understanding

the influence of these concepts as they relate to small business owners‘ adoption of strategies

for effective financial management may be of considerable theoretical and practical value.

Knowledge of financial management could be useful for small business owners (Karadag,

2015) and also might contribute to effective strategies (Froelich, 2015). As Angonese and

Lavarda (2014) noted, having a better understanding of the institutional dynamics of an

organization is helpful when exploring financial management practices. Thus, the

institutional theory was a useful base for this research.

Institutional Theory

Management of accounting research includes formal and informal approaches and

mechanisms used to regulate the behavior of members of an organization (Damavanthi,

Gamage, & Gooneratne, 2017). Formal control encompasses organizational structure, reward

systems, budgeting, standard operating rules and procedures, strategic planning systems, and

operational controls (Krenn, 2016). Informal controls consist of leadership style, culture,

values, and norms (Krenn, 2016). Management control is also viewed through different

perspectives, such as sociological, organizational, and information management viewpoints

(Krenn, 2016). The sociological perspective views management controls as a process that

influences employees of the organization to implement organizational strategies, while the

organizational performance perspective explains management control as a means used by an

organization to achieve determined goals with minimum resources by regulating

24
organizational members (Damavanthi et al., 2017). The information management perspective

views management controls as an information system that links managers and employees of

the organization (Krenn, 2016).

25
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0. Introduction

This chapter presents the research design, study population, sampling procedures that include

sample size and sampling techniques, data sources, data collection methods and instruments,

quality control methods; validity and reliability, data management and processing, data

analysis, ethical consideration, limitations to the study and conclusion.

3.1. Research Design

The research design for this study will be a cross-sectional study design. Cross-sectional

information gathered represents what is going on at a particular point in time. This is

important in collecting qualitative and quantitative data because cross-sectional studies

collect data using questionnaires and interviews (Olsen & Marie, 2014). Quantitative data

focuses on descriptive and inferential statistics. This approach produces results in form of

tables, figures and graphs which are the basis for discussion and conclusions about the

findings. For qualitative data, this is in form of statements by which respondents give

suggestions, opinions or strategies for achieving the results. The analysis of qualitative data

provided will be the basis for in — depth understanding of the relationship between financial

management and the growth of small and medium scale industries in Benin City, Edo State.

3.2. The Study Area

The study will be conducted in Oredo Local Government Area, Benin City, Edo State,

Nigeria. Edo State is an inland state in central southern Nigerian. It is bounded in the north

and east by Kogi State, the South by Delta State and in the west by Ondo State. Just like any

other part of the country, the city of Benin is highly populated by entrepreneurs who have

experience, education, and training relevant to SME financial practice. A large percentage of

26
the people in Benin City are business oriented who have migrated from the other parts of the

state which are mostly rural and largely agrarian to the state capital in search of a better life.

The researcher‘s limited time and funds made Oredo LGA, Benin City the best choice of

location since there is an easy accessibility to respondents in the area.

3.3. Study Population

All research questions address issues that are of great relevance to important groups of

individuals known as a research population. The target population of this study will be Oredo

LGA, in Benin City, Edo State. The accessible population for this study will be businessmen

and women in Oredo LGA, Benin City, Edo State. A subset or portion of the entire

population will be selected for this study. A correct sample size is dependent upon the nature

of the population and purpose of the study.

3.4. Sampling Technique

The researcher adopts simple random sampling and purposive sampling. A simple random

sample is a subset of individuals chosen from a larger set with each individual chosen

randomly and entirely by chance (Burns, 2019). For purposive sampling, this is used because

it helps in selecting typical and useful people that will give relevant data. Purposeful

sampling selects information rich cases for in — depth study (Oso & Onen, 2019). limitation

of this sampling technique is that it may introduce bias in the sample selection process.

3.5. Method of Data Collection

The study will employ two data collection methods. That is the questionnaire and interview

guide;

3.5.1. Questionnaires

The study employs a five-likert scale questionnaire. The study will have one set of

questionnaire that will be constructed strategically to capture all the necessary information

27
from all categories of respondents in respect to the themes of the study. The likert scale will

be used since it is flexible and can be constructed more easily than most other types of

attitude scales (Amin, 2015).

3.5.2. Interview guide

Face to face interviews with the help of an interview guide will be conducted on 20

respondents. These respondents will be sufficient because Creswell John according to Mason

(2010) suggests that 5 to 25 interviewees are satisfactory. This will help in obtaining rich

information in regard to the topic under study. Interviews are used, since they are appropriate

in providing in-depth data required to meet specific objectives, allows clarity in questioning

and quite flexible compared to questionnaires.

3.6. Data Sources

This study uses both primary and secondary data sources that exist on the influence of

financial management on the growth of small and medium scale businesses. The sources are

textbooks, interviews, questionnaires, journals and interest sources among others.

3.7. Validity of Research Instrument

Validity refers to truthfulness of findings, accuracy and quality of instruments used to obtain

data about the phenomenon under study. Content Validity which refers to the extent to which

a measure represents all aspects of a given social concept (Sushil & Verma, 2015) is

measured under this study. The researcher will ensure that the instrument have adequate traits

through consultations with the researcher‘s supervisor and peers.

3.8. Reliability of Research Instrument

Reliability means the extent to which results are consistent over time. If the results of a study

can be reproduced under a similar methodology, then the research instrument is considered to

28
be reliable (Joppe, 2013). Guba & Lincoln (2014) call it credibility, transferability,

dependability, and conformability. The strategies to be used to obtain reliability are; peer

debriefing, prolonged engagement and audit trails. Data will be systematically checked, focus

maintained and there will be identification and connecting of errors (Morse, 2013)

3.9. Method of Data Analysis

The collected data will be analysed depending on the nature of the data. For Qualitative data,

it will be sorted by checking for any errors and analysed as postulated in the research

objectives. Patterns and connections within and between categories will be identified. It is

interpreted by composing explanations and substantiating them using the respondents open

responses. While analysing qualitative data, conclusions will be made on how different

themes/variables are related.

For quantitative data, data collected will be expressed in numeric terms for analysis using

SPSS 17.0 (Statistical Package for Social Scientists). The statistical programme will be used

in the calculation of frequencies and percentages, drawing of frequency tables and figures.

This is well-suited for quantitative description. Analysis and explanations will be made

basing on frequency tables and figures.

3.10. Ethical Consideration

The researcher secured a letter of introduction from the University to proceed with the study

after the proposal had been approved. Permission to collect data will be sought from relevant

authorities. The respondents will be told about the general nature of the study. They will be

assured of confidentiality and their freedom to participate or not. The researcher will observe

extreme confidentiality while handling the responses.

29
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