JOMO KENYATTA UNIVERSITY OF AGRICULTURE

AND TECHNOLOGY
SCHOOL OF HUMAN RESURCE AND DEVELOPMENT
MASTER IN BUSINESS ADMINISTRATION
UNIT TITLE: FINANCE SEMINAR
UNIT CODE: HCBA 3208

THE EFFECTS OF CASH MANAGEMENT TECHNIQUES ON

THE PERFORMANCE OF SMALL AND MEDIUM
ENTERPRISES IN MOGADISHU

AHMED MOHAMED AMIN

ID: HD333-C005-6251/2014
AARON L. MUKHONGO

DEDICATION
This research report is dedicated to my parents, and brothers and sisters, to my friends, your
support always encouraged me to work harder.

TABLE OF CONTACTS
DEDICATION ...i
TABLE OF CONTENTS .........................................................................................................................ii
ABSTRACT ..............................................................................................................................................iv
1.0 INTRODUCTION ...............................................................................................................................1
1.1 Background of the study........................................................................................................................1
1.2 Statement of the problem ......................................................................................................................2
1.3 Objectives of the study ..........................................................................................................................3
1.4 Research questions ................................................................................................................................3
1.5 Scope of the study ..................................................................................................................................4
1.6 Significance of the study .......................................................................................................................4
1.7 Limitation of the study ..........................................................................................................................4
LITERATURE REVIEW ......................................................................................................................5
2.2 Theoretical Framework ......................................................................................................................5
2. 3 Conceptual Framework .....................................................................................................................6
2.4 Review of Variables ............................................................................................................................7
2.4.1 Cash budgeting ...........................................................................................................................7

ii

2.4.2 Cash collection period ...............................................................................................................7

2.4.3 Cash disbursement .....................................................................................................................8
2.4.4 Performance of SMEs...9
2.4.5 Summary ...10
3.1 Research Design...................................................................................................................................11
CONCLUSION AND RECOMMENDATIONS ...............................................................................11
4.1 Findings and Conclusion......................................................................................................................11
4.2 Recommendations................................................................................................................................12
REFERENCES.........................................................................................................................................13

iii

ABSTRUCTS
In this paper investigate the effect of cash management technique on the performance of small
and medium enterprises, although small and medium enterprises are faced with problems of
delayed payment of workers which perhaps is caused by poor management of cash. Many
firms are having negative cash flows which result into difficulties in funding firms
commitments such as paying suppliers, meeting payroll demands and paying taxes. Holding
inadequate amount of cash or cash equivalent interrupted the normal flow of most firm activities.
There is also failure by most business firms to satisfy the cash budgeting, cash collection period
and cash disbursement.
The objectives of the researchers are to investigate the effect of cash management techniques
on the performance of SMEs in Mogadishu Somalia, to analyze the effect of cash budgeting on
the performance of SMEs in Mogadishu Somalia, to identify the effect of cash collection
period on the performance of SMEs in Mogadishu Somalia, to find out the effect of cash
disbursement on the performance of SMEs in Mogadishu Somalia. The researcher has been
taken theories of cash management models like Baumol (1952) and Miller and Orr (1966) .which
are discussed cash flows. The researcher uses desk research, because this paper is a seminar
paper.The researcher found that cash management techniques have been affected on the
performance of small and medium enterprises in Mogadishu.
The study concludes that, the key to successful cash management lies in tabulating realistic
projections, monitoring collections and disbursements, establishing effective billing and
collection measures, and adhering to budgetary parameters because cash flow can be a problem
to the business organization. Internal controls over cash management are needed at all levels of
the organization that handle cash and/or cash equivalents. However, the organization unit finance
officers must provide guidance to all employees who have cash management responsibilities;
The researcher recommended that Administrators should calculate the cash amount best suited
for the level of activity, plan timing of relevant payments and collections and draw up a policy of
investments in assets with high liquidity that can be converted in to cash allow transaction costs
to serve as support for their funds maintained by the company.

iv

1.0 INTRODUCTION
Small and medium enterprises play an important role in every economy. However, the success of
small and medium enterprises (SMEs) largely depends on a number of factors including sound
cash management technique. Small and medium enterprises usually face a number of challenges
including lack of collateral, poor accounts preparation and poor cash management procedures
(Naidu & Chand, 2011; Lobel, 2013; Tagoe, Nyarko, & Anuwa-Amarh, 2005).

1.1 BACKGROUND OF STUDY

Cash is commonly referred to as the life-blood of a business. According to Attom and Mbroh
(2012), cash refers to currency (coins and paper) that is generally accepted as a medium of
exchange for goods and services. It also includes money in hand, bank accounts balances,
petty cash, cheque and short-term highly liquid investments held by the firm.
Cash is generated by MSEs mainly through their daily business activities. However, their funds
from daily business activities are woefully inadequate to support expansion in their operations
thereby creating a vacuum (cash deficit) which has to be handled appropriately in order to
survive in the competitive business environment. Ross, Westerfield and Jordan (1998) hint that
small businesses in particular, must pay attention to the timing of cash inflows and outflows in
order to ensure that cash is available to meet their financing needs.
Cash Management the main ambition of most organizations is today to present good financial
results. An organization's financial results is, for example, strongly influenced of the efficiency
in an organization's value chain. Accordingly to Larsson (2000) the efficiency in the value chain
can be improved, if the organization's control and perhaps adjust their financial routines. one part
of an organization financial routines with great potential, which often is neglected, are
organizations managing their liquid capital or cash management (ibid).
Cash management is, according to Larsson (2000), not a new phenomenon and organizations
have always considered how their liquid capital in the best way should be managed. Even though
managing liquid capital always has been done, the term of cash management has brought new
light to managing liquid capital with focus on the time demission of cash flow (ibid) .

During the fifties the first cash management models were presented and the concept of cash
management was taken in use (ibid). Larsson (2000) holds that cash management can be defined
as "theories and models for handing liquid capital". According to cash management report 580
which Larsson discusses, cash management consists of e.g handling liquid capital and cash flow.
Larsson holds that many organizations neglect their work with cash management. This neglect
arises from the shortcoming of e.g efficient payment routines and trade receivables (ibid).
Larsson describes that these routines easily can be obsolete if organizations don't focus enough
on follow up and developing existing routines.
Trade receivables are part of the work with cash management that ties up a considerable part of
an organization's working capital (Larsson 2000)
In Somalia, many businesses in Mogadishu city there is some problems of cash management
including lack of business knowledge, central bank, cash on hand and short-term highly liquid
investments held by the firm.
The general objective of this study is to ascertain the effect of cash management technique on
performance small and medium enterprises in Mogadishu and its environs. Specifically, the
study explores effect of cash management technique on performance small and medium
enterprises; identifies the cash controls used by small business operators and suggests strategies
to ensure sound effect of cash management technique on performance small and medium
enterprises.
1.2 STATEMENT OF THE PROBLEM
Despite the fact that cash management in small and medium enterprises involves managing
monies to maximize cash availability and performance which involves synchronization of
business cash receipts perfectly with cash payments bearing abroad aspect of maximizing
performance.
Small and medium enterprises are faced with a problem of delayed payment of workers
which perhaps is caused by poor management of cash. Many firms are having negative cash
flows which result into difficulties in funding firms commitments such as paying suppliers,
meeting payroll demands and paying taxes. Holding inadequate amount of cash or cash
equivalent interrupted the normal flow of most firm activities. There is also failure by most

business firms to satisfy the cash budgeting, cash collection period and cash disbursement. Its
upon this fact that the researcher has been propelled to out this research topic to ascertain the
effect of cash management techniques on the performance of small and medium enterprises in
Mogadishu Somalia. This low performance in these small and medium enterprises may be
attributed to inappropriate cash management policies adopted. If these firms do not adopted
appropriate cash management policies, they are likely to collapse.
1.3. OBJECTIVES OF THE STUDY
This study was based on the following general and specific objectives;
i) To investigate the effect of cash management techniques on the performance of SMEs in
Mogadishu Somalia.
ii) To analyze the effect of cash budgeting on the performance of SMEs in Mogadishu
Somalia.
iii) To identify the effect of cash collection period on the performance of SMEs in Mogadishu
Somalia.
iv) To find out the effect of cash disbursement on the performance of SMEs in Mogadishu
Somalia.
1.4 RESEARCH QUESTIONS
This research was guided the following research questions:
i) What is the effect of cash management techniques on the performance of SMEs in
Mogadishu Somalia?
ii) What is the effect of cash budgeting on the performance of SMEs in Mogadishu
Somalia?
iii) What is the effect cash collection period on the performance of SMEs in Mogadishu
Somalia?
iv) What is the effect of cash disbursement on the performance of SMEs in Mogadishu
Somalia

1.5 Scope of the Study

The study focused on to investigate the effect of cash management techniques on the
performance of small and medium enterprises in Mogadishu Somalia, To analyze the effect of
cash budgeting on the performance of small and medium enterprises in Mogadishu Somalia, to
identify the effect of cash collection period on the performance of small and medium enterprise
in Mogadishu Somalia, to find out the effect of cash disbursement on the performance of small
and medium enterprises in Mogadishu Somalia
1.6 Significance of the Study
The study was very significant to the different stakeholders that include; management, the
Researcher, Suppliers, Consumers and Government organizations in the following ways;
The study make the management know cash budgeting on the performance of small medium
enterprises.
The study findings were used by future researchers and academicians as they provide
information to help them in their study especially in the same significance of
the study.
The study findings were of great benefits to the small and medium enterprisers
management to broaden their knowledge on how performance measured in these small and
medium enterprises in Mogadishu Somalia.
1.7 Limitations of the study
The study involved the following constraints;
Time: The time allowed to do this research was not enough to allow exhaustive study and obtain
all the essential information for much more suitable conclusions. The problem was minimized by
putting much effort on this research so as to meet the deadline.
Financial Constraints: The Researcher was limited by financial resources such as the transport
costs and stationery to carry out research effectively. In an effort to mitigate this shortcoming,
the researcher will source for funds from a few sponsors.

2.1 LITERATURE REVIEW

This chapter presents literature on the effect of cash management techniques on the performance
of small and medium enterprises in Mogadishu Somalia. The presentation follows the order of
the objectives, to investigate the effect of cash management technique on the performance of
the small and medium enterprises, to analyze the effect of cash budgeting on the performance
of small and medium enterprises, to identify the effect of cash collection period on the
performance of small and medium enterprises, to find out the effect of cash disbursement on
the performance of small and medium enterprises.
2.2 THEORETICAL FRAMEWORK
Baumol (1952) creates a model in which a decision maker invests his wealth in an interest
bearing asset and a non-interest bearing cash balance. Receipts and expenditures are not perfectly
synchronized, which creates the need for transaction balances (Tobin, 1956). The transfer of
funds between the two assets comes with transaction costs. So the decision maker faces a tradeoff. On the one hand he earns interest from investing in the interest bearing asset, but on the
other hand he incurs transaction costs from selling the illiquid interest bearing asset when he
needs to make certain payments. The demand for money increases with the transaction costs of
transferring funds from the interest bearing asset to the cash balance and decreases with the
interest rate or the opportunity costs of the cash holdings.
Miller and Orr (1966) adapt the money demand model of Baumol (1952) to include the
variability of the cash flows. The model shows the same relation between transaction costs and
the demand for money as the model of Baumol (1952). The model of Miller and Orr (1966) also
shows that the demand for money is an increasing function of the variability of the cash flows.
Mulligan (1997) shows there are economies of scale in the demand for money using a sample of
12,000 firms for the years 1961-1992. The results indicate that large firms hold less cash as a
percentage of sales than small firms.
Opler et al. (1999) describe the transaction and precautionary motives. The transaction motive is
that firms hold cash simply for daily transactions (Miller and Orr (1966). For Mulligan (1997)
firms cash holdings are based on its activity, technological sophistication, and opportunity costs.
In the case of precautionary motive, during periods when external finance is costly, firms hold

cash to continue to invest in positive NPV projects. This is particularly important when firms
with positive NPV investment opportunities are unable to generate enough internal cash to
finance them. Thus, cash holdings have a positive NPV for financially constrained firms. This
concept has a relation with monetary theory because transaction and provision is a main reason
in managing cash. In addition, this reason also has an assumption which all the concept of
treasury management is in the good judgment of their terms. (Maseda & Iturralde, 2001). Cash
conversion cycle shows the relation between liquidity and profitability. It is more important to
measured profitability compared to if the company is using current ratio (Eljelly, 2004).The
higher the ratio the higher the comfort level. All of the cash flow ratios are not uniform but vary
by industry characteristics. The analyst would then adjust his assumptions accordingly to assess
the liquidity of a firm.
2.3 CONCEPTUAL FRAMEWORK
Independent Variable

Cash budgeting

Dependent Variable

Performance of SMEs

Cash collection period

Cash disbursement
2.4 Review of variables

2.4 REVIEW OF VARIABLES

The researchers study is to investigate the effect of cash management techniques on the
performance of small and medium enterprises in Mogadishu Somalia, to analyze the effect of
cash budgeting on the performance of small and medium enterprises in Mogadishu Somalia, to
identify the effect of cash collection period on the performance of small and medium enterprises
in Mogadishu Somalia, to find out the effect of cash disbursement on the performance of small
and medium enterprises in Mogadishu Somalia.
2.4.1 CASH BUDGETING
Cash budget is a review or projection of cash inflows and outflows. It can be used as a tool for
analyzing the revenues and costs of a company or individual.
Budgets are considered to be the core element of an efficient control process and consequently
vital part to the umbrella concept of an effective MCS (Davila & Foster, 2007, Puxty & Lyall,
1989). As a forward looking set of numbers, budgets project future financial performance which
enables evaluating the financial viability of a chosen strategy (King, Clarkson & Wallace, 2010,
p. 41). In most organizations this process is formalized by preparing annual budgets and
monitoring performance against budgets. [] Budgets are therefore merely a collection of
plans and forecasts. They reflect the financial implication of business plans, identifying the
amount, quantity and timing of resources needed (Innes, 2005, p. 135). The implementation of
budgetary procedures, i. e. the establishment of short to medium-term objectives, serves the
purpose of providing estimates of future sales revenues and expenses, to provide short and longterm objectives for a coordinated management policy. Further benchmarks for management and
task controls (Refer to Table 2 of a Comprehensive MCS) are provided by comparing actual
results with budgeted plans and to take corrective actions if necessary (Fisher, Maines, Pfeffer &
Sprinkle, 2002).
2.4.2 CASH COLLECTION PERIOD
Business concern must concentrate in the field of Cash Collections period from customers. For
that, the concern prepares systematic plan and refined techniques. These techniques aim at, the
customer who should be encouraged to pay as quickly as possible and the payment from
customer without delay. Cash Collection Period concern applies some of the important
7

techniques as follows: It is a collection procedure in which payments are made to regionally

dispersed collection centers, and deposited in local banks for quick clearing. It is a system of
decentralized billing and multiple collection points.
Lock box system is a collection procedure in which payers send their payment or cheques to a
nearby post box that is cleared by the firms bank. Several times then the bank deposit the
cheque in the firms account. Under the lock box system, business concerns hire a post office
lock box at important collection centers where the customers remit payments. The local banks
are authorized to open the box and pick up the remittances received from the customers. As a
result, there is some extra savings in mailing time compared to concentration bank
Prompt Payement by

Customer

Business concern should encourage the customer to pay

promptly with the help of offering discounts, special offer etc. It helps to reduce the delaying
payment of customers and the firm can avoid delays from the customers. The firms may use
some of the techniques for prompt payments like billing devices, self address cover with stamp
etc.
Early Conversion of Payments into Cash, business concern should take careful action regarding
the quick conversion of the payment into cash. For this purpose, the firms may use some of the
techniques like postal float, processing float, bank float and deposit float.
2.4.3 CASH DISBURSEMENTS
An effective cash management is not only in the part of cash collection period, but also it should
concentrate to slowing their disbursement of cash to the customers or suppliers. Slowing
disbursement of cash is not the meaning of delaying the payment or avoiding the payment.
Slowing disbursement of cash is possible with the help of the following methods:
Avoiding the early payment of cash, The firm should pay its payable only on the last day of the
payment. If the firm avoids early payment of cash, the firm can retain the cash with it and that
can be used for other purpose.
Centralise disbursements system decentralized collection system will provide the speedy cash
collections. Hence centralized disbursement of cash system takes time for collection from our
accounts as well as we can pay on the date.
8

2.4.4 THE PERFORMANCE OF SMES

Small and medium-sized enterprises (SMEs)1 are crucial economic actors within the economies
of nations (Stanworth and Gray 1993, NUTEK 2004, Wolff and Pett 2006). They are a major
source of job creation (Storey et al. 1987, Castrogiovanni 1996, Clark III and Moutray 2004) and
they represent the seeds for future large companies and corporations (Castrogiovanni 1996,Monk
2000). SMEs are more innovative than larger firms, due to their flexibility and their ability to
quickly and efficiently integrate inventions created by the firms development activities (Acs and
Yeung 1999, Qian and Li 2003, Verhees and Meulenberg 2004, Timmons 1998). Research
supports the notion that SMEs that engage in innovation activities are better performers
(Gerorski and Machin 1992, Soni et al. 1993, Freel 2000,Vermeulen et al. 2005, Westerberg and
Wincent 2008, Qian and Li 2003, Verhees and Meulenberg 2004). Studying SMEs can enhance
our understanding of their needs in respect to growth and development. Such understanding
would enable scientists, practitioners, and policy-makers to formulate sound support strategies
for SMEs (Norrman 2008).
Due to the significance of SMEs to local economies, it is necessary to study and evaluate their
performance (Acs 1999). Such study helps to design governmental and nongovernmental SME
support programs. Therefore, it is important that the performance evaluation methods used can
deliver a thorough understanding of SME efficiency. I use the terminology the efficiency of the
firm in the context of this thesis to emphasize the firms ability to optimize and maximize
output in relation to input delivered. SME models must be able to assess the progress in a firms
growth and development through different phases such as the start-up phase, reaching and
maintaining a state of stability and maturity, further growth, and eventual decline and closure
(Klofsten 1992a). The nature of the term performance implies utilization of different ways to
describe performance-related situations (e.g. survival, growth, success, failure, and bankruptcy)
(Newbert et al. 2007, Audretsch and Mahmood 1994).
In Somalia, there are many small and medium enterprises in Mogadishu Bakara Market but
many businesses have problems of cash management.
2.6 SUMMARY
Cash budget is a review or projection of cash inflows and outflows. It can be used as a tool for
analyzing the revenues and costs of a company or individual

Budgets are considered to be the core element of an efficient control process and consequently
vital part to the umbrella concept of an effective MCS (Davila & Foster, 2007, Puxty & Lyall,
1989). As a forward looking set of numbers, budgets project future financial performance which
enables evaluating the financial viability of a chosen strategy (King, Clarkson & Wallace, 2010,
p. 41). Business concern must concentrate in the field of Cash Collections period from
customers. For that, the concern prepares systematic plan and refined techniques. These
techniques aim at, the customer who should be encouraged to pay as quickly as possible and the
payment from customer without delay. Cash Collection Period concern applies some of the
important techniques as follows: It is a collection procedure in which payments are made to
regionally dispersed collection centers, and deposited in local banks for quick clearing. It is a
system of decentralized billing and multiple collection points. An effective cash management is
not only in the part of cash collection period, but also it should concentrate to slowing their
disbursement of cash to the customers or suppliers. Slowing disbursement of cash is not the
meaning of delaying the payment or avoiding the payment. Slowing disbursement of cash is
possible with the help of the following methods: Avoiding the early payment of cash, and
Centralise disbursements system. Small and medium-sized enterprises (SMEs)1 are crucial
economic actors within the economies of nations (Stanworth and Gray 1993, NUTEK 2004,
Wolff and Pett 2006). They are a major source of job creation (Storey et al. 1987, Castrogiovanni
1996, Clark III and Moutray 2004) and they represent the seeds for future large companies and
corporations (Castrogiovanni 1996,Monk 2000). SMEs are more innovative than larger firms,
due to their flexibility and their ability to quickly and efficiently integrate inventions created by
the firms development activities (Acs and Yeung 1999, Qian and Li 2003, Verhees and
Meulenberg 2004, Timmons 1998).

10

3.1 RESEARCH DESIGN

The researcher uses desk research, because this paper is a seminar paper.
4.1 FINDINGS AND CONCLUSION
The researcher found that cash management techniques have been affected on the performance
of small and medium enterprises in Mogadishu. Cash budget is a review or projection
of cash inflows and outflows. It can be used as a tool for analyzing the revenues and costs of a
company or individual.
Business concern must concentrate in the field of Cash Collections period from customers. For
that, the concern prepares systematic plan and refined techniques. These techniques aim at, the
customer who should be encouraged to pay as quickly as possible and the payment from
customer without delay.
An effective cash management is not only in the part of cash collection period, but also it should
concentrate to slowing their disbursement of cash to the customers or suppliers. Slowing
disbursement of cash is not the meaning of delaying the payment or avoiding the payment.
Slowing disbursement of cash is possible with the help of the following methods:
The study concludes that, the key to successful cash management lies in tabulating realistic
projections, monitoring collections and disbursements, establishing effective billing and
collection measures, and adhering to budgetary parameters because cash flow can be a problem
to the business organization. Internal controls over cash management are needed at all levels of
the organization that handle cash and/or cash equivalents. However, the organization unit finance
officers must provide guidance to all employees who have cash management responsibilities;
The researcher also bears ultimate responsibility for internal controls over cash collections,
disbursements, and holdings which are accounted for by his/her operations. Therefore,
responsibilities of cash management officers, cashiers, certifying officers, and other accountable
officers to establish and maintain controls should be formally delegated by organization unit
finance officers.

11

4.2 RECOMMENDATION
Administrators should calculate the cash amount best suited for the level of activity, plan timing
of relevant payments and collections and draw up a policy of investments in assets with high
liquidity that can be converted in to cash allow transaction costs to serve as support for their
funds maintained by the company.
Cash collections should be closely monitored with the aim of accelerating cash inflows to speed
up the collecting of accounts receivables.
Cash disbursements should be also closely monitored with the aim of negotiating a reduction in
cash outflows so as to reduce payments.
Financial projections should be accurate in order to project and forecast the amount of cash
earned through business operations. Accurate forecasting should be based on a range of scenarios
and risks so that the organization would be having an understanding of the key drivers of the
cash position.
Instilling a cash conscious culture is integral to maintaining a steady focus on cash. The company
should employ a cash focus at the top communicating it throughout the organization.
The company should actively consider ways of shortening the cash operating cycle to make the
company more generative. A cost benefit analysis should be performed to determine whether it is
worthwhile to employ more resources, additional staff or new plant to speed up the production
process and shorten the cash operating cycle.

12

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Campello, M. G. (2010). Cash Disbursement. 316.
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R, B. (2002). Cash Budgeting . Ordando: Brace Collegue .
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