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Inventories occupy the most strategic position in the structure of working capital of most firms and small-scale enterprises and are an important component to the success and expenditure reduction of a firm. They make up an important part of a small-scale enterprise’s production process as they facilitate continued production. The general objective of this study is to assess the impact of inventory management practices and on the financial performance of small-scale enterprise in Kaduna State using selected small-scale enterprises. To achieve this objective, the study was guided by four specific objectives: to determine the effects of net transactions approach to inventory management on financial performance of small-scale firms in Kaduna state.
1.1 Background of the Study
Small Scale Enterprises play a critical role to global, regional and local economies. World over, Small Scale Enterprises have continued to support billions of lives through direct and indirect employment especially in the developing nations. As reported by World Bank (2015), formal Small-Scale Enterprises contribute up to 60% of total employment. They also back up to 40% of national income in developing economies, a number that further increases significantly when informal Small-Scale Enterprises are included. The report underlines the growing importance of the Small-Scale Enterprises sector in aiding match to job creations especially in Sub-Saharan Africa. Regionally, as Africa hits the billionth person mark, a similar case is highlighted with SMEs expected to play a critical role to growth of economies to support growing populations (Sanders, 2011).
According to a report by the Nigerian Private Sector Alliance (2017), notwithstanding their great significance to the Kenyan economy contributing over three quarters of the GDP, about half of the total workforce and roughly a quarter of all business enterprises, Small and Medium Scale Enterprises (MSMEs) continue to grapple with a mountain of challenges which has continued to hurt their financial performance. Bowen, Morara and Mureithi (2009) reports that three out of five Small-Scale Enterprises fail in their first years of operation. A report by the National Bureau of Statistics (2016) also indicates that about half a million small enterprises in Kenya die annually with a total of 2.2 million MSMEs subsiding for the period between 2012 and 2016. This demonstrates
the magnitude of the challenges bedevilling this class of business organisations. Agyei-Mensah (2010) lists poor inventory management practices as among the principal causes of MSMEs failure observing that most SMEs lack a formal working capital management system, therefore relying on subjective working capital management decisions (Howorth and Westhead, 2003).
According to Bhattacharya (2004), working capital management is concerned with maintenance of efficient levels of current assets and current liabilities. According to Bhalla (2010), management of working capital is critical as it plays a critical role in the determination of an organization’s performance direction. Mathew (2007) observes that greater investment in current assets leads to lower risk in settling short term obligations but on the same time leads to lower profitability.
As a guiding premise, WCM essentially involve a trade-off between profitability and risk. As such, investment decisions seeking to boost profitability would be expected to also increase risk levels. On the converse, risk reduction choices would also reduce prospective profitability of firms. Singh (2008) observes that organizations that build a stable working capital framework are able to boost their earning potential. Preve and Sarria-Allende (2010) adds that a prudent WCM system helps in boosting not only liquidity but also earning capabilities of firms.
1.2 Statement of Problem
According to the Nigerian Private Sector Alliance (2017), notwithstanding their great significance to the Nigerian economy contributing over three quarters of the GDP, about half of the total workforce and roughly a quarter of all business enterprises, Small and Medium Scale Enterprises (MSMEs) continue to grapple with a mountain of challenges which has continued to hurt their financial performance. Bowen et al., (2009) reports that three out of five SMEs fail in their first years of operation. A report by the National Bureau of Statistics (2016) also indicates that about half a million small enterprises in Kenya die annually with a total of 2.2 million MSMEs subsiding for the period between 2012 and 2016. This demonstrates the magnitude of the challenges bedevilling this class of business organisations. Agyei-Mensah (2010) lists poor working capital management practices as among the principal causes of MSMEs failure observing that most Small-Scale Enterprises lack a formal working capital management system, therefore relying on subjective working capital management decisions (Howorth& Westhead, 2003). While studies had been done on this area, key gaps remained unresolved which included contextual, empirical, conceptual and methodological gaps. Ndagijimana (2014) examined Working Capital Management for SMEs in Nairobi, Kenya. The study results indicated that accounts payable management, accounts receivable management and cash management were the profound WCM practices implemented by SMEs. Empirical gaps were unveiled on the need to extend the assessment to consider the association between those WCM and financial performance. Njeru, Njeru and Tirimba (2015) studied on Cash Management practices and Financial Performance of SACCOs. The study established that cash management practices positively influence the financial performance of SACCOs. Empirical gaps were unveiled on the need to expand the framework of working capital management variables considered other than cash management. Kiprotich, Wanjare, Joab, and Oluoch (2013) assessed working capital management practices and financial performance. The study targeted sugar cane out grower firms. Findings established poor financial performance of out-grower companies and related the same to weak working capital management framework adopted by the out-grower companies. The study presented methodological gaps on the need to consider more dimensions of financial performance such as profitability indicators. Contextual gaps were also presented on the need to undertake a local study. To address stakeholders’ concerns and fill the unresolved gaps on the subject, the current study determined the effect of inventory management on financial performance of SMEs.
1.3 Research Questions
The following research questions were answered in the course of this research work.
i. What is the effects of Optimal Inventory quantity on Financial Performance
ii. What is the effects of Inventory holding cost on Financial Performance of Small-Scale Enterprise in Kaduna State?
iii. What is effects of Just in Time (JIT) Inventory Policy on Financial Performance of Small-Scale Enterprise in Kaduna State?
iv. What is the effects of inventory management systems on financial performance of Small-Scale Enterprise in Kaduna State.
v. What is the influence of forecasting and replenishment on financial performance of Small-Scale Enterprise in Kaduna State?
1.4 Objective of the Study
The main objective of the study is to investigate the impact of inventory management on the financial performance of small-scale enterprises in keeping costs down while still meeting customer service requirements. The sub-objectives of this study are to:
The study was guided by the following specific research objectives
i. To investigate the effects of Optimal Inventory quantity on Financial Performance of Small-Scale Enterprise in Kaduna State.
ii. To find out the effects of Inventory holding cost on Financial Performance of Small-Scale Enterprise in Kaduna State
iii. To determine effects of Just in Time (JIT) Inventory Policy on Financial Performance of Small-Scale Enterprise in Kaduna State
iv. To determine the influence of forecasting and replenishment on financial performance of Small-Scale Enterprise in Kaduna State.
v. To verify the impact of inventory management on the financial performance of Small-Scale Enterprise in Kaduna State.
1.5 Scope of the Study
Due to the limitation of time, it is impossible for the author to make a longitudinal study, in which the implementation result of the proposed inventory control system can be observed and verified. And this harm the credibility of the study to some extent.
The case study scope is limited to the internal inventory management of selected Small-Scale Enterprises within Kaduna Metropolis, not reaching out into the other actors in the supply chain network. In other words, the interaction among the actors in the network in terms of inventory management is excluded. And from the SCM perspective, the contribution of the study is reduced.
1.6 Plan of the Study
The first chapter gives an introduction of the background of this study. Furthermore, it gives an explanation on the problems inherent in the subject matter of the study. Then the research questions and purpose of this project are presented. The chapter ends with the scope of this study and the outline of following chapters.
Chapter 2 explored the different theories and models that are related to the subject of this project and can be used for the analysis.
In chapter 3, the author examines different research methods and present what methods are applied to this project.
In chapter 5,the author conducted the analysis guided by theoretical framework. The analysis part is based on our empirical findings. Furthermore, the author presented their suggestions upon the problems identified. While chapter 5of the project presents the summary, conclusion, recommendations were made and suggestions were made for further studies.
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