Effects of Financial Management Practices on Profitability of Small Businesses in Mogadishu, Somalia

This part of the book is the summary that highlightsin briefly the overall five chapters of the book. Most previous researchers have concentrated on examining, investigating and describing the behavior of Business Enterprises in practicing financial management.Although they provided much descriptive and empirical evidence on financial management practices, it appears that there are still some gaps in the literature which need to be addressed.Previous researchers focus on investigating and describing financial management practices, but there has been little research examining the effect of financial management practices on business profitability. to achieve this objective this book focused on four variablesby targeting selected SMEs in Mogadishu. These four variablesare; to investigate the effects of working capital management on profitability, to investigate the effects of financial planning management on profitability, to investigate the effects of financial literacy on profitability and to investigate the effects of resource allocation on profitability of small businesses in Mogadishu Somalia. The target population of this study was150 SMEs operating in Mogadishu, howlwdag district in bakaro market. Stratified random sampling technique was used since the population consists of managers, owners and employees. The sample size of this study contained 109 of the owners, managers and employees of SMEs. This study used a questionnaire to collect data.Data was analyzed using Statistical Package for Social Sciences (SPSS) version 22.0, which is a software tool for data analysis.Data collected was purely quantitative and it was analyzed using descriptive analysis. Regression analysis was used to come up with the model. The study used a multiple regression equation. Implementing efficiently and effectively financial management practices through employing financial manager practitioners or training and developing the old ones bring SMEs to be profitable.Most problem faced SMEs was they lack enough financial management practices that could made possible all the financial transactions, investments and financing decisions to line in order to reach financial objectives of the business. The finding of the study reveals that only few owners and managers have proper financial management practices and able their business to be profitable. The study findings established that there was a positive relationship (R= 0.991) between the variables. The study also revealed that 98.2% of profitability in the SMEs could be explained by the variables under study. The recommending SMEs‟ owners/managers should employ financial management practices to increase profitability of their business. © 2016 Elixir All rights reserved. Elixir Fin. Mgmt . 94 (2016) 40502-40515 Finance Management Available online at www.elixirpublishers. com (Elixir International Journal) Mursal Hussien Mohamoud and Nagib Omar/ Elixir Fin. Mgmt. 94 (2016) 40502-40515 40503 advancement of rapidly growing SMEs along the globalization process. As studying on small business financial management practices, Mcmahon and Holmes (1991) point out that financial management is crucial to the profitability, survival and wellbeing of small enterprises. Additionally, in the study about the financial management practices and profitability in SMEs, Kieu (2004) indicates that SME profitability is positively related to the efficiency of principal components of financial management practices. The more efficient financial management practices, the higher profitability. By raising the efficiency of financial management practices, SMEs can improve their profitability. As In Mogadishu-Somalia where this study will take place, there are many Small and medium-sized enterprises that constitute the large part of the private sector with specific reference to their numbers and employment figures. SMEs are central to poverty reduction, because they are owned and employ relatively poor persons. They are therefore important instruments for both income distribution and equitable participation in the process of economic development. SMEs are often considered to be a key source of productivity, growth, and job creation and hence, their performance is important for economic development of the country. According to International leadership and management center (ILMC 2010)many small and medium enterprises in Mogadishu are facing challenges due to poor financial management practices, Low entrepreneur and business skills, Weak market linkages and unfavorable business environment. Hadi (2012) enlightened that some SMEs in Mogadishu are not functioning smoothly due to inadequate funds from financial institutions, because credits in Somalia have been largely pre-dominated by informal trust-based lending practices, where determination of credit-worthiness and mitigation of counterpart risk were both addressed through familial and clan relationships (Alax 2006). Since there are no empirical studies conducted in Mogadishu-Somalia showing whether financial management practices has an influence on business profitability of SMEs. This need has triggered the researcher to make study on financial management practices and business profitability of SMEs in Mogadishu-Somalia. Most previous researchers have concentrated on examining, investigating and describing the behavior of Business Enterprises in practicing financial management (Hassan Ali 2012). Their findings are mainly related to exploring and describing the behavior of business enterprises towards financial management practices. Although they provided much descriptive and empirical evidence on financial management practices, it appears that there are still some gaps in the literature which need to be addressed. First, most empirical evidences came from the developed economies such as the United States of America. There seems to be a lack of evidence from less developed countries like Somalia. Second, most previous researchers focus on investigating and describing financial management practices. There has been little research examining the effect of financial management practices on business profitability (McMahon, et al. 1993). This lack of empirical evidence from less developed economies and the lack of examination of the effect of financial management practices on business profitability are major gaps in the knowledge of financial management. Therefore, it is difficult to convince business practitioners of the need for changes in practices until evidence of the effects of financial management practices on business profitability are provided and the relationship between the two variables is proved. Based on previous research findings and recognition of these gaps, a study of the effect of financial management practices on profitability is justified and the effect of financial management practices should be developed and tested by using empirical data from less developed economies (kieu, 2004). Research Objectives 1. To investigate the effects of working capital management on profitability of small businesses in Mogadishu Somalia 2. To investigate the effects of financial planning management on profitability of small businesses in Mogadishu Somalia 3. To investigate the effects of financial literacy on profitability of small businesses in Mogadishu Somalia 4. To investigate the effects of resource allocation on profitability of small businesses in Mogadishu Somalia 2. Related Literature 2.1. Theoretical review 2.1. 1.Configurational theory Configurational theory underpins this study. According to this theory, organizational performance depends primarily on the interplay between the different parameters. This being the case, relevant internal drivers of working capital performance must be identified and optimized with an integrated approach to match the requirements of the contextual variables. Only if these conditions are fulfilled overall firm performance will reach its maximum. This theory did not specifically underlined managing the components of working capital management, but it addressed that, managing working capital variables that are conceptualized in this study as; cash management, managing inventories and receivables will pave a wary for business specially small and medium enterprises to perform well. High performing companies understand the company and industry specific drivers behind each component of operative working capital and focus on optimizing the most promising ones. During this process, they consider the entire value chain to reveal the root causes of tied up cash and take into account all interdependencies between the respective components. They apply a holistic approach in which they do not randomly reduce costs but consider all trade-offs with costs and capital employed to optimize the company value. By applying the appropriate levels of each component, obstacles that slow cash flow can be removed and overall business performance can be improved (Buchman & Udo, 2011). Economic growth and development, an increase in the number of corporations and the separation of management and ownership have turned agency problems into one of the most significant challenges of investors. Agency problems arise from the fact that investors are usually either not inclined or incapable of managing the company and thus delegate the responsibility to managers. If both the managers and investors aim to increase personal benefits, and performance control would require certain expenses, then the message conveyed would be that the agent may not be striving to provide returns to investors and to increase his/her wealth (Amir &Aslani, 2005). Thus the recognition and utilization of factors influencing the company‟s performance may be the most important obligation of the investors for evaluating the agent (management) and accordingly the going concern of the economic entity. The going concern of economic entities depends to a large extent on short term resource manageme