CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
The study was aimed at analyzing the relationship between CFM and the performance of
small businesses in Burao, Somaliland. This chapter describes the related literature about
the study. The literature review is organized into conceptual review, theoretical review,
empirical review. The reviewed literature is largely obtained from the vast reliable Internet
resources from accredited scholars and researchers

2.2 Conceptual Review

2.2.1 Cash Flow Management

Effective CFM is crucial for any business, but especially for SBs operating in
challenging environments like Burao. CFM has become a critical element of many firms’
operational strategies (Fisher, 1998; Quinn, 2011). A firm’s cash flow policies, which
manage working capital in the form of cash receivables from customers, inventory holdings,
and cash payments to suppliers, are widely linked to improved firm financial performance
(Richards & Laughlin, 1980; Stewart, 1995). While industry has broadly accepted effective
cash flow management as a performance improvement mechanism, the preponderance of
academic investigations into the link between CF and performance examines the issue from
a static, benchmarking perspective (Ebben & Johnson, 2011; Farris & Hutchinson 2002,
2003; Moss & Stine, 1993) (Manikas, 2013).

CFM is the nucleus of a business entity for short and long-term survival
(Munusamy, 2010); concerned with both the short term and long- term financial objectives
(Evans, 2012); and determined by examining the CF statement (Statt and Truman, 2003).
According to Aminu, (2012) CFM brings together actions concerned with cash payment,
collection management and liquidity management, which involves acquisition and disposal
of treasury assets and their subsequent monitoring, a strategy for investing surpluses of cash
for maximum profitability and financing deficits at minimum costs. Aminu (2012) and
Evans (2012) outlined the objectives of managing cash flow as accelerating cash inflows
wherever possible, delaying cash outflows until they come due, investing surplus cash to
earn a rate of return, borrowing cash at the best possible terms, maintaining an optimal level
of cash that is neither excessive nor deficient. They noted that CFM makes a business hold
the right amount of cash since holding too much cash, makes the business loses the
opportunity to earn a return on idle cash and holding too little cash, makes it run the risk of
not making timely payments to suppliers, banks, and other parties.

Cash flow management is about having visibility over incoming profits and outgoing
expenses. You use this information to inform decision-making and project your
organization’s development. SMBs and entrepreneurs need to master it because it influences
every aspect of the business. Consider how your monetary choices affect staff morale, from
wage increases to embarking on product innovation because of consistently high profit
margins. (Partida, 2023)

Practicing cash flow management is about more than knowing your present financial
circumstances. You use it for forecasting. The more familiar you become with your
immediate cash flow and trends, the better you will be at creating sustainable progress by
predicting the future. You become more attuned to what financial choices best serve your
current needs while satisfying your employees, customers and stakeholders. (Partida, 2023)

According to Horner (2001), CFM ensures that a firm identifies in time what needs
to be done to a void a liquid crisis and improves its CF. The performance objectives of CF
adequacy are that an enterprise must generate sufficient cash through operating, investing,
and financing activities, (Needle et al, 2007). CFM relates strongly to financial performance
of SMEs because the success or failure of SMEs has to some extent, been fundamentally
associated with the net outflow and inflow cash elements from a number of business
activities (Bernstein & Wild, 1999). Effective CFM is so critical to business survival
providing services or products. No matter how effective a business negotiates with
customers and suppliers, poor business practices can put its cash flow at risk (CIMA, 2005).
If SMEs owners’ do not consider cash flow, their businesses will not flourish (all Business:
(Gilbert Uwonda, 2013).

2.2.2 Budgeting
Budgeting is a crucial exercise without which a firm or business cannot achieve
much (Babalola, 2008). Almost every enterprise, regardless of size, complexity or sector,
relies heavily on budgets and budgetary systems to achieve strategic goals (Suberu, 2010).
Study of Babalola (2008) shows that both public and private budget is a pivotal means of
translating the overall aim and objectives of an organization into detailed packages of
actions and determine the sources and uses of funds in order to allow performance
evaluation of the people who are entrusted with the resources. Budgeting is one of the most
successful and useful management accounting techniques that can reap handsome rewards if
properly understood and implemented (Suberu, 2010).It facilitates effective utilization of
available funds, improve decision making, and provide a bench mark to measure
organization performance. The success and importance of budgeting relates to the
identification of organizational goals, allocation of responsibilities for achieving these goals,
and consequently its execution (Drake & Fabozzi, 2010), (John Kuria Kamau, 2017).

Budgeting has been identified as a management accounting tool that enhances

financial performance and improves efficiency (Davila and Foster, 2007). The term budget
is common to most business enterprise due to its role in achieving corporate objectives.
Budgeting is a key to the survival of any business from the point of formation to the point of
implementation. Budget keeps track of organizational performance, goal communication
and also enables planning and control mechanisms to be effectively pursued in an
organization. Responsibility center in any organization is guided by the budgetary allocation
which spells out the vision or the expectations of every unit. It ensures that set targets are
achieved within a reasonable time frame. Budget is instrumental to performance evaluation,
formation and implementation of strategies, operational monitoring and control mechanism
and so on. (Ekholm and Wallin, 2000; Merchant and Van der Stede, 2003). A budget
fundamentally provides a linkage between the organizational goals and performance
towards the goals and espouses any limitation in form of evaluation. It communicates both
targets and performance to the management and predisposes any favourable performance
and punishes slack (Etim, 2017).

2.2.3 Performance of Small Businesses

A “performance” may be defined as all the activity of a given participant on a given
occasion which serves to influence in any way any of the other participants. Individual
performance is a core concept within work and organizational psychology. During the past
10 or 15 years, researchers have made progress in clarifying and extending the performance
concept (Campbell, 1990). Business performance is a broad term encompassing how
effectively a company is achieving its goals. Ultimately, good business performance
depends on your perspective; investors might prioritize financial brilliance, while employees
might value operational agility and sustainability.
2.3 Theoretical Review
Baumol-Tobin model: This model explains the trade-off between holding cash
(reducing transaction cost) and investing in earning assets (generating returns) (Baumol,
1952). In a limited financial environment, understanding this trade-off becomes crucial for
small businesses to optimize their cash holding.

Miller-Orr model: This model focuses on managing inventory and accounts payable
to minimize the cash conversation cycle (Orr, 1966). Efficient inventory management and
timely payment negotiations can significantly improve CF for SMEs.

Resource-based view (RBV): This view posits that unique resource and capabilities drive
competitive advantage (Barney, 1991). Effective CFM can be considered a valuable
resource, enabling SMEs to invest in growth, adapt to market change, and weather financial
setbacks.

Liquidity: The ability to meet short-term obligations is crucial for survival.

Current ratio and quick ratio are standard liquidity measures that can be relevant for SMEs.

Solvency: Long-term financial health is assessed through the debt-to-equity ratio and
other solvency measures. While important, solvency may not be a primary concern for
young businesses focusing in short-term survival.

2.4 Empirical Review

Gilbert Uwonda (2013) studied CFM utilization by SMEs. The research adapted a
cross-sectional exploratory study. Data from a sample of 120-service sector SMEs were
collected and analyzed. The study highlighted limitations in utilization of CF in SMEs
especially in areas like CF projection; tax planning; and budgetary control; determination
and interpreting financial statements. Further, utilization of redundant fixed assets, inability
to offer cash and early discounts, failure to prepare bank reconciliation and poor credit
policies were other concerns for SMEs. For SMEs to reach their potentials, they must design
business plan, prepare CF projections and cash budgeting; ensure budgetary control, internal
control system and control their spending habits; and improve on their credit policies.

Marco Van Gelderen (2000) researched about strategies, uncertainty and

performance of SB startups. This was done using a longitudinal data set. Personal strategies
are operationalized by a behavioral measure of the manners in which SB founders deal with
situations. The results suggest a dynamic process between strategy and performance.
Business owners that perform poorly employ a Reactive Strategy, with poor performance
leading to increased use of reactive behavior. High performing business owners start out
focusing on the most crucial issues (Critical Point Strategy), with high performance leading
to a more top-down (Complete Planning) approach. These relations are controlled for
characteristics of the environment of the firm. Strategy use is dependent upon the type and
level of environmental uncertainty. Complete Planning strategy is used less frequently in a
fast-changing environment and more often in a complex environment. Use of Opportunistic
Strategy is negatively related to the complexity of the environment, while the Reactive
Strategy is used more frequently in a non-munificent environment.

John Kuria Kamau (2017) studied the effect of budgeting process on budget
performance, this study assessed the effect of budgetary process on budget performance in
public sector using state corporations in Kenya as a focus. The budgetary process of state
Corporation is assessed using variables such as budgetary participation, budgeting
sophistication, Budget feedback and Budgetary Controls. The budgetary performance of
State Corporations in Kenya is examined by use of budget compliance, value for Money and
Budget goal achievement. A descriptive research design was employed by the study. The
target population of this study was 450 employees of Kenyatta National Hospital who are
involved in budget making. The study uses a formula to come up with a sample size of 72 of
this study. A questionnaire, whose content validity was checked through an expertise
opinion and reliability through test pre-test methods, was used to gather information. The
study used descriptive statistics to analyze the quantitative data and content analysis for the
qualitative data. The relationship between budgeting process and budget performance was
analyzed using correlation and regression analysis. The study established that budgetary
perticipation has an effect on budget performance of State Corporations in Kenya.
Regarding budgeting sophistication, the study found that it indeed has a significant effect on
performance of State Corporations in Kenya. The study concluded that budgetary
participation had the greatest effect on the budget performance of State Corporations of
Kenya, followed by budgetary control, then budget feedback while budgeting sophistication
had the least effect on the budget performance of State Corporations of Kenya. Therefore
the study recommends that staff proposals should be taken into consideration since budget
participation is measured from the following factors; the ability for the subordinates to
influence the design of the budget, extent the superior manager contacts the subordinates.
The study therefore recommends that there should be clear communications channels in all
corporations. The study recommends that to add weight to this study, another study should
be done to investigate the factors affecting performance in state corporations of Kenya.

2.5 Research Gaps

While existing research offers valuable insights, several gaps remain in our
understanding of how cash flow management affects the performance of small businesses in
Burao, Somaliland. Also, existing studies on cash flow management often focus on
developed economies or formal sectors. Little research specifically addressed the unique
challenges and opportunities faced by small businesses in post-conflict environment like
Burao. Moreover, understanding how local customs, trust dynamics, and risk aversion
influence payment behaviors and credit practices is crucial. Consequently, most studies
focus on short term impacts. Investigating the long-term consequences of different cash
flow management strategies for small businesses in Burao would be valuable.

2.6 Conclusions
While existing research highlights the importance of cash flow management for
small business success, more focused research on Burao is crucial. Understanding the
specific challenges and opportunities in Burao can lead to the development of tailored
interventions and resources for small businesses to improve their cash flow management
and, consequently, their performance.