IMPACT OF FINANCIAL MANAGEMENT PRACTICES ON PROFITABILITY OF BUSINESS ENTERPRISES.

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND TO THE STUDY

Business Enterprises (SMEs) are seen as a driving force for the promotion of an economy (Khan and Jawaid, 2004) and they contribute immensely to the economic development of any country. According to OECD (1997), business enterprises play a major role in economic growth and development, creation of employment and income generation. Business enterprises in Nigeria contribute enormously to National Gross Domestic Product (GDP) and employment in the informal sector. It creates employment and leads to the export of locally manufactured goods and services as well as helping the local government authorities to generate tax revenues for socio-economic development. As in most developing countries, small and medium-scale enterprises form a significant part of the economic growth. Nevertheless, they face a number of problems, including access to finance from formal sources, which is often considered to be the most important problem (MFPED, 2008).

Consequently, the growth of the SME sector directly affects the performance of the nation. In all economies they constitute the vast majority of business establishments and they are usually responsible for the majority of employment opportunities created which account for one third to two thirds of the private sector turnover (Ntsika, 2002). It is estimated that SMEs contribute 56% of private sector employment and 36% of the Gross Domestic Product (GDP) worldwide (Ariano, 2010). In many countries, SMEs have been a major engine of growth in employment and output over decades. In developing countries they are seen as a major „self-help‟ instrument for poverty eradication due to the ease of entry and exit. The success or failure of small to medium enterprises (SMEs) is contingent on their financial viability and one of the most common problems facing such firms is their ability to secure sufficient cash flow and working capital to remain profitable.Financial management is one of several functional areas of management which is central to the success of any small business (Meredith, 2006). Financial management is the management of finances of a business in order to achieve the financial objectives of the business. McMahon et al. (2008) defines financial management based on mobilizing and using sources of funds: Financial management is concerned with raising the funds needed to finance the enterprise‟s assets and activities, the allocation of theses scare funds between competing uses, and with ensuring that the funds are used effectively and efficiently in achieving the enterprise‟s goal.