Instructions:
1.
2.
3.
4.
This assignment is an individual assignment.
Students MUST use their own words.
Student must apply academic writing standards and APA style guidelines.
Support your submission with course material concepts, principles, and theories
from the textbook along with at least two scholarly, peer-reviewed journal
articles.
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grading.
Assignment Question(s):
(20 Marks)
Q1. Keenly observe the figure given and give you opinion on the information by answering the
questions below.
TREKKING COMPANY
For Month Ended August 31
Sales
Cost of goods sold
Gross profit
Operating expenses
Income before taxes
Income tax expense (30%)
Net income
Specific
Identification
$
6,050
4,582
$
1,468
450
$
1,018
305
$
713
Balance sheet inventory
$
1,408
$
FIFO
6,050
4,570
1,480
450
1,030
309
721
$
1,420
$
$
$
$
LIFO
6,050
4,730
1,320
450
870
261
609
$
1,260
$
$
$
Weighted
Average
$
6,050
4,622
$
1,428
450
$
978
293
$
685
$
1,368
a. Which financial statement do you think is prepared by Trekking Company? What is
Specific Identification, FIFO, LIFO, or Weighted Average? Explain (1 Marks)
b. Explain in your own words the process of these methods with a numerical example for
each. (4 Marks)
c. Assume that you are the manager of the company mentioned in the figure above which cost
method would you prefer, support your answer. (1 Marks)
Q2. A company that uses a perpetual inventory system made the following cash purchases and
sales. There was no beginning inventory.
January 1:
February 5:
March 16:
Purchased 550 units at $55 per unit
Purchased 350 units at $65 per unit
Sold 250 Units for $85 per unit
Prepare general journal entries to record the March 16 sale using the FIFO inventory valuation
method and the LIFO inventory valuation method. ( 4Marks)
Q3. Please log-in to Saudi Digital Library via your students service on SEU’s website. Find the
following article, and answer the questions below (you should be able to answer the questions by
reading the abstract of the article only):
Article:
Al Smirat, Belal Yousef (2016). “Cash Management Practices and Financial Performance of
Small and Medium Enterprises (SMEs) in Jordan”. Research Journal of Finance and
Accounting, Vol. 7, No. 2. (4Marks)
a. Explain the issues mentioned in the abstract which the author would like to explore on.
b. Assume that you are the cash manager of such Enterprises, how would you support them
with cash management practices for better financial performance of SMEs.
Q4. The bank statement of DPLC Company for July 31st showed a cash balance of $3,375. The
company's Cash account in its general ledger showed a $2,489 debit balance. The following
information was also available as of July 31st.
a. A customer's check for $250 marked NSF was returned to DPLC Company by the bank. In
addition, the bank charged the company's account a $63 processing fee.
b. The July 31st cash receipts, $3,125 were placed in the bank's night depository after banking
hours on that date and this amount did not appear on the July 31st bank statement.
c. A $38 debit memorandum for checks printed by the bank was included with the canceled
checks.
d. Outstanding checks amounted to $2,863
e.
A customer's note for $2,250 was collected by the bank. A collection fee of $63 was
deducted by the bank and the difference was deposited in the account.
f. Included with the canceled checks was a check for $688, drawn on another company, DY
Incorporation.
Prepare a bank reconciliation as of July 31st. (6 Marks)
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Plagiarism is NOT be tolerated. All assignments will be auto-checked for plagiarism. If you are
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the plagiarism. Always check before submission.
Research Journal of Finance and Accounting
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.7, No.2, 2016
www.iiste.org
Cash Management Practices and Financial Performance of Small
and Medium Enterprises (SMEs) in Jordan
Dr. Belal Yousef AL Smirat
Department of Managerial and Finance Sciences, Al-Balqa Applied University, Jordan, Karak
ABSTRACT
This study examined empirically the cash management practices and its effect on the financial performance of
SMEs in Jordan. However cash shortage is a chronic challenge to these firms, and cash management is very
crucial to the survival and growth of small and medium enterprises.
To meet the objective of this study, the researcher sampled firms operating in various sectors of economic
activity. A structured questionnaire was used to collect primary data from the respondents which were analyzed
to generate frequencies and percentages.
The study revealed that only (32) percent from SMEs kept track of Cash Receipts and payment. and the majority
(67%) of respondents have no knowledge about cash control procedures. The study concluded that cash
management practices have influence on the financial performance of SMEs. The researchers recommend to the
need to for SME managers to embrace efficient cash management practices as a strategy to improve their
financial performance .
Keywords: Cash management, cash surplus, cash deficit, cash control, small and Medium enterprises.
1. INTRODUCTION
All over the world small and medium enterprises (SMEs) are considered as backbone of a country's economy.
They play a key role in economic development and make an important contribution to employment and GDP,
and are important contributors to total employment and job creation. In Jordan SMEs comprise 98.5% from the
total amount of registered companies, and 60% of formal jobs, in addition to 50% of the GDP in 2013 (1) and
they are the engine of solving the unemployment.
Cash is used to pay business obligations. Cash management assumes more importance than any other current
asset and the major aim is to maintain adequate control over cash position to keep the firm with sufficient liquid
and use the excess cash in some profitable way.
Cash is the vital component of the working capital because it keeps a business running. It is the hub around all
financial matters centre. Thus, management of cash is crucial for the success of an enterprise. The adequacy of
cash and other current assets, together with their efficient handling, virtually determines the survival or
extinction of a business concern. Cash is an important current asset for the operations of business. It is the basic
input needed to keep the business running on a continuous basis (Abu Tabanja 2005).
No business operation is isolative of cash management. Cash is regarded as the most important current asset for
the operation of business (Olowe, 1998). Cash is the basic input required to keep the business running on a
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continuous basis and it is also the ultimate output expected to be realized by selling the services or products
manufactured by the firm (Pandey, 2010).
The role of Small and Medium Scale Enterprises (SMEs) in the world economy have been highly emphasized as
the means through which rapid industrialization and other development goals of a nation can be realized. Small
and medium sized enterprises (SMEs) form a large part of economy and are regarded as the drivers of socioeconomic development in all countries .
The general objective of this study is to ascertain the cash management practices among small and medium scale
enterprises in the Jordan .
The study focuses on cash management practices is limited to the practices associated with management of cash
and cash equivalents of small and medium scale in Jordan as well as the effect of cash management on the
financial performance of SMEs.
2. Literature Review
Cash generally can be said to be liquid money in form of coins, notes and other related means of instant
exchange.
2.1 Small And Medium Business Defined
The importance of SMEs has attracted a lot of attention internationally in past few years due to their significant
contributions to the economies of both the developed and developing countries (Asiedu, 2006).
Small and Medium Enterprises have been defined in various ways according to the capital of the
enterprise, size ,the number of people employed by the enterprises, the ownership and management of the
enterprises and sales volume, all the definitions agree on the common views that small or medium businesses
employ few people and are characterized by a relatively small amount of capital and turnover.
2.2 Small And Medium Business in Jordan
There is no universal definition of small scale businesses. However, different scholars, writers, researchers and
policy makers have used different definitions for small scale businesses basing on the number of people
employed, capital employed among other relevant factors.
In Jordan, the Ministry of Planning and International Cooperation (2011), define small enterprises as those with
less than 20 employees, and medium enterprises as those with between 20 to 99 employees. However, to bring
greater precision to the analysis these numbers were further broken down into brackets.
The brackets are: 1-4, 5-19, 20-49, 50-99 which are in compliance with the Department of Statistics
classifications. The private sector in Jordan is made up of large firms with 196,945 employees, and SMEs
represent 60% of the total private sector and 37% of total employed in Jordan. Most Jordanian SMEs work
within the formal sector and are registered, as specified by law. Formal SMEs play a vital role in job generation .
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A sizeable percentage of self-employed firms are in the unregistered (informal) sector (that is, firms that deliver
lawfully permitted services and products without being legally registered). There are 146,707 SMEs registered
enterprises in the Kingdom. (Jordan Human Development Report, 2011).
2.3 Cash management
Cash management refers to the management of an entity’s cash to ensure sufficient cash to sustain the entity’s
daily operations, finance continued growth and provide for unexpected payments while not unduly forfeiting
profit owing to excess cash holdings (Akinyomi:23).
Basically cash management is concerned with managing cash flows that is cash inflows and cash out flows.
Major sources of cash inflow include cash from operating activities, sell of business assets among others.
Sources of cash out flows include settling of creditors, purchase of inventory among others. 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, soeren & Gemuenden, 2011).
2.4 The Importance of Cash Management
Cash management decision is one of the important decisions because of the scarcity of financial
resources of many companies, and for different objectives and, as we know that cash is the most liquid assets,
where cash is considered an important element in the management of the company’s operational process in order
to achieve success. The cash management is a function of financial management and that are interested financing
and investment operations as the cash component affects the performance of the companies and the competitors
in markets. A lot of companies interesting to think in the following decisions: capital structure, capital budgeting
and the decision of the working capital where the decision of the working capital is the important decisions that
affect of the performance of companies in terms of liquidity, which is reflected on the profitability and hence the
level of competition in the market as it may determine the survival or the company out of the market (Appuhami,
2008)
According to Akinyomi (2014:58), the importance of managing cash in a business comprises of the following
advantages:
- Managing cash helps in achieving liquidity in a business and proper control;
- It assists in the planning towards reducing cash expenses and increasing cash receipts to ensure the business is
liquid;
- Proper managed cash is vital as the future cash flow behavior cannot be predicted. Therefore, it’s essential to
plan; and
- Through proper controls of cash, innovative procedures could be implemented for cash receipts and cash
payments in the business.
2.5 Cash management in SMEs
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.
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Efficient cash management involves the determination of the optimal cash to hold by considering the trade-off
between the opportunity cost of holding too much cash and the trading cost of holding too little (Ross et al.,
2011) there is the need for careful planning and monitoring of cash flows over time so as to determine the
optimal cash to hold. Good cash management can have a major impact on overall working capital management.
3. Research Methodology
A descriptive study was chosen to undertake this research to discover and understand the cash management
practices of the small and medium enterprise. the research was conducted by gathering data from both primary
and secondary sources. Based on the literature review and the theoretical framework, a survey questionnaire was
developed to be the major instrument of this study. Questionnaires were the main instrument that was used in
gathering the data. The questionnaires contained both open-ended and closed ended questions. Out of 300
samples of questionnaires sent to SME managers, 270 (90%) were returned and found to be usable.
4. Results and Discussion
4.1 Profile of Responding Firms and Respondents
The results obtained from the survey through questionnaires are presented in this section. Table (1) shows that In
terms of number of years in business, many of the proprietors have been in business between 5-10 years
representing about 40 percent. Twenty-nine percent had been in business between 1-5 years whiles 13 percent
had been in business for more than 10 years. And the respondents experience showed that (18%) have less than
one year. The finding shows that the largest number of SMEs (84%) is Sole Proprietorship, followed by
Partnership (11%) and Limited Liability company (5%) respectively, with Limited Liability company comprising the smallest number (5%) of SME businesses.
The large number of the respondents most educated individuals to earn a living reflected by an average
percentage of 44% from School certificate, Diploma, level (32%) percent and Bachelor's degree (20%) percent .
This means all categories of individuals participate in operation of small scale business. Only four percentage of
respondents are Master s degree.
The nature of the business of the SMEs as depicted in Table 1 reveals that (34%) and percent were engaged in
Wholesale, a business which is very easy to set-up in Jordan. Other businesses engaged in by respondents
included Retail and Manufacturing 11 percent, . and respondents from Other services constitute only 32% (see
Table 1).
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Table 1: Characteristics of Enterprises studied and Owners
Characteristics
Frequency
percent
Less than 12 months
49
18
1year – 5years
78
29
5 years – 10years
108
40
Above 10years
35
13
Total
270
100
Sole Proprietorship
226
84
Partnership
29
11
Limited Liability company
15
5
Total
270
100
School certificate
120
44
Diploma
86
32
Bachelor's degree
55
20
Master s degree
9
4
Total
270
100
Retail
62
23
Wholesale
92
34
Manufacturing
30
11
Other services
86
32
Total
270
100
A. Number of Years in business
B. Type of Business Ownership
C. Educational Background of
MSEs Operators
D. Type of Industry MSEs
Operate in
The level of knowledge in cash management practices
Improving cash management practices is one of the most important issues of the financial world .the table(2)
below shows owner of SMEs knowledge in cash management practices.
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Table 2: The level of knowledge in cash management practices
Cash Management Practice
Yes
Percent
No
Percent
Total
Percent
Preparation of Cash Budget
76
28
194
72
270
100.00
Operating Bank accounts
188
69
82
31
270
100.00
Keeping track of Cash receipts
94
35
176
65
270
100.00
Keeping track of Cash Payments
91
34
179
66
270
100.00
Keeping Proper Books of Accounts
88
33
182
67
270
100.00
The results of the descriptive statistics for Knowledge in Cash Management Practices
are reported in Table
(2).The majority (67%) of the respondents indicated they did not have Knowledge in Cash Management,
Keeping track of Cash receipts, Payments, Keeping Proper Books of Accounts. And only (33) percent of
respondents maintain bank accounts .
Most respondents of the medium and small-scale operators under investigation had no knowledge about how to
implement sound cash management practices.
Keeping track of Cash Receipts
Table 3: Keeping Track of Cash Receipts
Type of MSEs
Yes
Percent
No
Percent
Total
Percent
Retail
21
24
41
66
62
23
Wholesale
29
33
63
34
92
34
Manufacturing
9
10
21
11
30
11
Other services
28
32
58
32
86
32
Total
87
32
183
68
270
100
Table(3) shows that present information on the financial records keeping of SMEs in the Jordan. when the
respondents were asked to indicate whether they kept track of cash receipts ,(32% )of the respondents ,from
Wholesale(33%) ,answer yes, as indicated from (Table 3). Of the remaining (270) who answered the question,
69% indicated that did not keep track of their cash receipts ,This makes them very susceptible to the risk of
misappropriation of funds.
This means that majority of SMEs didn't keep financial records of their business in order to manage their cash
flows and as a result help determine the financial position of their business. Kasim, et al (2015), attributed the
high rate of SMEs failure to poor financial records keeping and insufficient use of accounting.
Keeping Track of Cash Payments
Table (4) presents the responses of owner managers of the SMEs, regarding the Keeping Track of Cash
Payments for their businesses.
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Table 4: Keeping Track of Cash Payments
Type of MSEs
Yes
Percent
No
Percent
Total
Percent
Retail
20
32
42
68
62
23
Wholesale
31
34
61
66
92
34
Manufacturing
8
27
22
73
30
11
Other services
25
29
61
71
86
32
Total
84
31
186
69
270
100
From Table(4), the Keeping track of cash payments is crucial in ensuring that the enterprises have sufficient cash
balances. Cash payments must also be controlled through proper monitoring to control cash outflows. Cash
payments by MSEs should be streamlined in order to ensure that these small businesses that continually face
financial challenges are saved from this situation,( Attom , 2014).
The respondents who did not have kept track of their cash payments (69) percent, and only (31) percent who
keep track of their cash payments, represent small portion of(270) response. See table(4).
Controlling cash flows by Nature of Business
Table 5: Controlling cash flows by Nature of Business
Type of MSEs
Yes
Percent
No
Percent
Total
Percent
Retail
19
31
43
69
62
23
Wholesale
28
30
64
70
92
34
Manufacturing
18
60
12
40
30
11
Other services
28
33
58
67
86
32
Total
93
34
177
66
270
100
The above result in Table( 5) revealed that on average (34%) of the SMEs under study applied cash flow control,
but the majority of SMEs under the study findings revealed that on average (66%) of SMEs studied did not
Controlling their cash flows.
Preparation of Cash Budget
When the respondents were asked to indicate whether they prepare the Cash Budget
Table 6: Preparation of Cash Budget
Type of MSEs
Yes
Percent
No
Percent
Total
Percent
Retail
17
27
45
73
62
23
Wholesale
22
24
70
76
92
34
Manufacturing
9
30
21
70
30
11
Other services
21
24
65
76
86
32
Total
94
35
176
65
270
100
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From table(6) above,( 65) percent of the respondents who seldom prepares the cash budget reported they didn’t
need it at the time while (35) percent reported that cash budgets apply to their business. This implies that up to
176 of the respondents, who did not prepare cash budget, didn’t actually see the need for its preparation. Only
94 of the SMEs indicated they prepare budgets. This finding supports the pronouncement by Waweru (2003),
that majority of businesses do not prepare cash budgets. It also confirms Kwame (2007) decree that most small
businesses have problems on how to prepare cash budgets.
Types of Bank Account Kept by MSEs
Table(7) presents the responses of owner managers of the SMEs, regarding the type of bank Accounts, the most
widely used was current Accounts, whiles saving accounts was the least used. (47) percent of the respondent
operated Bank account as depicted in Table (7), as compared to( 25) percent who stated they did not maintain
bank accounts. The result shows that most SMEs are beginning to appreciate the importance of having a business
account. This is similar to the finding of Hamza &others(2015) who concluded that majority of respondents
operated bank accounts widely in current accounts.
Table7: Types of Bank Account Kept by MSEs
Type of account
Frequency
Percent
savings
38
14
current only
126
47
Current &savings
39
14
Non response
67
25
Total
270
100
Records Kept on Cash Transaction
Table 8 shows the documents on which records of cash transactions of SMEs are kept.
When the respondents were asked to indicate the various records they kept on cash transactions, Cash book
records were the most significant (33%) as depicted in Table (8). Other forms of records kept on cash
transactions with their respective responses included cash book (22), bank statement (22%) and cheque (21%).
Seventeen percent and seven percent respectively of respondents indicated they also keep records of their cash
transactions by way of payment voucher and note book.
Table 8: Records kept on Cash Transactions
Type of records
Frequency
Percent
Cash book
98
33
Bank statement
56
22
Cheque
57
21
Payment voucher
43
17
Note book
16
7
Total
270
100
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The relationship between cash management practices and financial performance
The results establish the relationship between cash management practices and the financial performance of
SMEs. Pearson’s correlation coefficient was used to address this objective.
Pearson’s correlation coefficient results
Table(9) shows that correlation results that there was a strong positive relationship between SMEs’ Financial
Performance (FP) and Effective Cash management (ECM) (R=0.612, p
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