SHEBA UNIVERSITY

COLLEGE

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF WORKING CAPITAL MANAGEMENT PRACTICE

IN MICRO AND SMALL BUSINESS ENTERPRISES (A CASE OF
MEKELE CITY ADMINISTRATION)
BY:AMBAY HAILE
ID:
ADVISOR:

A RESEARCH PAPER SUBMITED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULLFILMENT OF THE
REQUIREMENTS OF BACHELOR OF ARTS (BA) DEGREE IN
ACCOUNTING AND FINANCE

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 December, 2018
Mekele,Ethiopia

iii
 ASSESSMENT OF WORKING CAPITAL MANAGEMENT PRACTICE IN MICRO
AND SMALL BUSINESS ENTERPRISES IN CASE OF
MEKELE CITY ADMINISTRATION

By: AMBAY HAILE

Advisor:

Advisor Signature Date

___________ ____________ ____________
Examiner
____________ _____________ _____________
_____________ _____________ ____________

December, 2018
Mekele, Ethiopia

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Acknowledgement
First I would like to thank the almighty God for his admirable things throughout my lines.
Then I would like to express my gratitude to my advisor for her patience and support
starting from the beginning up to the end of my study. I would like to thank to my family
for their financial and moral support to the success of this study.

ACRONYMS

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FeMSEDA-Federal micro and small enterprise development agency
MSEs-micro and small scale enterprise

Table of Contents
SHEBA UNIVERSITY COLLEGE.........................................................................II

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ACKNOWLEDGEMENT..................................................................................III
CHAPTER ONE.................................................................................................1
1. INTRODUCTION...........................................................................................1
1.1 BACK GROUND OF THE STUDY...........................................................................1
1.2 BACK GROUND OF THE ORGANIZATION...............................................................2
1.3 STATEMENT OF THE PROBLEM...........................................................................3
1.5. OBJECTIVES OF THE STUDY..............................................................................4
1.5.1. General objective……………………………………………………...
1.6. RESEARCH METHODOLOGY.............................................................................5
1.6.1 Research design………………………………………………………5
1.6.2 DATA TYPE AND SOURCE.............................................................................5
1.6.3 TARGET POPULATION AND SAMPLING DESIGN.................................................5
1.6.4 METHOD OF COLLECTION AND DATA ANALYSIS................................................7
1.7 SIGNIFICANT OF THE STUDY..............................................................................8
1.8. SCOPE AND LIMITATIONS OF THE STUDY.............................................................8
1.8.1 Scope of the study……………………………………………………..8
1.8.2 LIMITATION OF THE STUDY............................................................................8
1.9 ORGANIZATION OF THE PAPER..........................................................................9
CHAPTER TWO..............................................................................................10
LITERATURE REVIEW.....................................................................................10
2.1. AN OVERVIEW OF MSES..............................................................................10
2.2 IMPORTANCE OF MSES IN DEVELOPING COUNTRIES...........................................11
2.3 CONCEPTS AND NATURE OF WORKING CAPITAL MANAGEMENT...........................12
2.4. WORKING CAPITAL MANAGEMENT................................................................14
2.5 CURRENT ASSET MANAGEMENT......................................................................15
2.5.1 CASH MANAGEMENT TECHNIQUE.................................................................15
 OPERATING CYCLE.....................................................................................15
 CASH CONVERSION CYCLE (CCC).................................................................16
2.5.2 MANAGEMENT OF ACCOUNT RECEIVABLES....................................................17
2.5.3 MANAGEMENT OF MARKET TABLE SECURITIES................................................17
2.5.4 INVENTORY MANAGEMENT.........................................................................18
2.6. MANAGEMENT OF ACCOUNT PAYABLES..........................................................19
2.7. LIQUIDITY..................................................................................................19
2.8 NEED FOR WORKING CAPITAL.........................................................................20

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CHAPTER THREE............................................................................................22
ANALYSIS AND DATA PRESENTATION...........................................................22
3.1 INTRODUCTION............................................................................................22
3.2 ANALYSIS OF GENERAL INFORMATION OF RESPONDENTS.....................................23
3.2.1. Sex and age distribution of respondents…………….
……………….24
3.2.2. Educational Background of the Respondents………………………..24
Table 3.3 educational back ground of the
respondents…………………….24
3.2.3 YEAR OF WORK EXPERIENCE........................................................................24
3.2.4 MARTIAL STATUS OF RESPONDENTS.............................................................24
3.2.5 .NATURE OF THE ENTERPRISE......................................................................25
3.3 ANALYSIS OF LIQUIDITY (CASH) MANAGEMENT AROUND MEKELE CITY
ADMINISTRATION MSES......................................................................................25
3.3.1 Startup of the
enterprise……………………………………………...25
3.3.2 WAYS OF MAINTAINING DIFFERENCE DURING SHORTAGE...................................26
3.3.3 ENTERPRISE OWNER’S HABIT TO RECORD CASH REQUIREMENT AS PLAN...............27
3.3.4 ABILITY OF BUSINESS TO KEEPS FINANCIAL RECORDS OF THE OPERATION..............27
3.4 ANALYSIS OF ACCOUNT RECEIVABLE................................................................28
3.4.1 Ways of account receivable…………………………………………..29
3.4.2 PROCEDURE ADHERED BY THE ENTERPRISE TO INVESTIGATE CUSTOMERS DURING
CREDIT GRANTING..............................................................................................29
3.4.3 MECHANISM TO ENCOURAGE CUSTOMERS.....................................................29
3.4.4 ACTION TAKEN BY ENTERPRISE FOR INDEBTED CUSTOMERS................................30
3.5 ANALYSIS OF CURRENT LIABILITY.....................................................................31
3.5.1 The Extent of Purchasing Product on Credit…………………………31
3.5.2 DURATION DATE OF CREDIT PURCHASED PRODUCT TO SETTLED THE
BILL…………………………………………………………………………31
3.5.3. NEGOTIATION FROM DEBTOR.....................................................................32
CHAPTER FOUR.............................................................................................33

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SUMMARY, CONCLUSION AND RECOMMENDATION..................................33
INTRODUCTION.............................................................................................33
4.1 SUMMARY..................................................................................................33
4.2 CONCLUSIONS..............................................................................................34
4.3 RECOMMENDATION......................................................................................35
REFERENCES..................................................................................................36

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Abstract
The study was designed to assess the working capital management practice in micro and
small business enterprise in the case of Mekele city administration. The main objective of
the study was to examine the working capital management practices of MSEs in Mekele
city Administration. Accordingly, qualitative and quantitative research method and simple
survey were utilized in order to assess them how manage their working capitals.
Furthermore, stratified random sampling technique was applied to select 99 respondents
from the total number of population (which is 10,914). From these total respondents, 88
of them were replied. From these 88 respondents 56.8% of them were male and 43.2%
were female. The result of this research concluded that there is a poor working capital
management practice of MSEs in Mekele city administration. Based on conclusion it is
recommended that the regional and the Mekele city administrative offices of micro and
small enterprises and the regional micro finance institute should give support in terms of
training and financial support for their success.

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CHAPTER ONE

1. INTRODUCTION

1.1 Back ground of the study

The development of micro and small business enterprise are considered as vehicles to
address the challenges of unemployment, economic growth, competitive advantage and
enhancing equity in the country. Due to this the federal government the countries has
formulated national micro and small business enterprise promotion and which is a
systematic approach to alleviate the problem and promote their growth the environment
for new job seekers and self-employment with a direct intervention and support. With this
respect small and micro business enterprise play an essential role in the facilitating
economic growth, bringing about equitable development, create long term jobs strength
and cooperation between micro and small enterprise and participate in export market
(FeDSE,2002).
More practically in most developing countries, micro and small business enterprise faces
a wider change of constraints and problems such as; governmental, political, legal and
regulatory environmental access to market, shortage and access to finance etc. which they
not able to solve by themselves even in effectively functioning market economy
(FeDMSE, 2002).
Working capital management is important issue in the financial decision of firms because
of its effect on firms profitability risk and consequently in value. Working management
which deals with the management of current asset and current liability, which is directly
affects the liquidity and profitability of the company. However an appropriate attention is
usually is given for. The ability of the firm to continuously operate for long period is
depending on how they deal with investment in working capital (tiringo, 2013).
The lack of supporting service or their relatively higher until cost hamper micro and
small business enterprises effort to improve their management of working capital in view
of their size and complexity of their operation, most micro and small business enterprise
fail to keep proper records of financial activities which affect their working capital. This

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has taxation, credit management and security implication lack of proper business makes
most micro and small business enterprise (Anita 2002). In Ethiopia situation there have
not been organize policy and supportive systems that help for the sector. Micro and small
business enterprise have become conformed by serious marketing problems, shortage of
supply of raw materials and lack of working capital which are considered the first most
pressing problems facing micro and small scale enterprise for not expending their
business (FeDMSE, 2012).
In Mekele city, like other towns of the country, MSEs have begun its services in (2003)
under Mekele MSEs office with five sectors. Such as agriculture, construction
manufacturing, service and merchandise that Mess Promotion office start to provide some
facilities for the operators of the sectors like cooperative them giving some training and
other services operator. However, impact of such policies has on poverty reduction and
creation employment in the sector is the issue which needs and assessment own survey
(AMSEO, 2015).

1.2 Back ground of the organization

Mekele is capital city of Tigray region which is found in northern part of Ethiopia, and
its distance from capital city of Ethiopia, Addis Ababa is about 703 km. Micro and small
business enterprise agency was established in December 1996 E.C by formulating there
are strategic business plan with one supervision and six professional who employed
temporarily. In July 1997 the agency restructured its organization in order to provide
improved and better service for micro and small enterprise under the agency. It also
strengthens in better quality workers (Federal MSE, 2003).
2000 E.C in order to provide efficient, accessible as well as better device to all micro and
small enterprise in the town by extending its system to kebele levels.
There are different facilitating (Factor) establishment at the agency in Mekele those are
 High and increasing unemployment related to interception at contraband trade
which bases for much personal income.
 High rural urban migration which for their aggravated the problem or
unemployment.

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  The chain economic system adopted by dengue which is anti-investment and
privatization that is base for employment.
The main source is found in order to help its activity in the recurrent budget from
government in addition to this the agency finds different financial source like, from NGO
service provided by the agency to small and micro enterprises under the agency was,
 Provision at production and marketing place.
 Creating job opportunity for those who are unemployed

1.3 Statement of the problem

Development of micro and small scale enterprise lead to employment of the majority of
labor force. The contribution of enterprises to the creation of job and to the alleviation of
poverty has been recognized by many third world governments. They have been given
prominence in many development plans as well as in the strategies of many donors
(Liedholm, 2002).
According to Federal urban development package of Ethiopia 2005‘’In Ethiopia, the
number of people who can work continues to grow rapidly than the ability of the
economy to provide new employment opportunities. Unemployment particularly urban
unemployment is one of the critical problems, in the country the rate of urban
unemployment, in the country was 26.4% in medium towns and 40% in large urban
towns in 2005”.
Working capital management thus plays an important role in financing MSE's. The
assumption is confirmed by the fact that working capital related problems are cited
among the most significant reasons for the failure of MSE's and strong statistical
relationship has been found between working capital management and
profitability(Tiringo,2013)
Even though micro and small business enterprises are facing the above problem, there is
no practical research as to the problems of micro and small business enterprises.

Generally, many researchers have conducted in assessment of working capital

management in small and medium business enterprise in mekele city. However, the
researcher now is trying to study in micro and small business enterprise to identify and

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assess the working capital management practices, to identify the methods of working
capital management, to determine the inventory management system, to assess credit
management mechanism in MSE's of Mekele city. Hence, the researcher has initiated on
these issues to assess working capital management in MSEs of Mekele city.

1.4. Basic research questions

As a result this research would be designed to address the real working capital
management of micro and small business enterprises and would be targeted to answer the
following research questions.
1) What are the working capital management practices in the MSE's in Mekele city
administration?
2) What techniques do MSE's in mekele city administration use in managing their
account receivable and account payable?
3) How are matters on inventory management approached with respect to working
capital management?
4) How do MSE's in Mekele city administration manage their cash flow?
5) What mechanisms do MSE's uses to assess their credit management?1.5.
Objectives of the study

1.5.1. General objective

The study is to examine the working capital management practices of MSEs in city
Administration.

1.5.2. Specific objective

1) To identify the methods of working capital management that is used in practices
of MSE's.
2) To determine inventory management system if MSE's with respect to working
capital management.
3) To examine strategies in MSE's used in administration of account receivables.
4) To determine the cash flow management in MSE's in Mekele city administration.
5) To assess the credit management mechanism that is being using by MSE's.

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1.6. Research Methodology
1.6.1 Research design
The study would adopt descriptive research method. It refers to a set of methods and
procedures that describe the nature, problems, and trends of working capital management
in MSEs. The study that would conduct under descriptive research methods in order
answers the basic research questions. It is important to get relevant information related to
working capital management in MSEs.
Under this study the researcher take both quantitative and qualitative methods.
Quantitative method helps the researcher to use statistical measure in order to analyze
what would be found through the study by distributing questionnaires. Qualitative
method was helping the researcher to interpret theoretically the collected data.

1.6.2 Data type and source

Under this study, the researcher would use both primary and secondary source of data to
achieve the objective of the study. The primary sources of data would be collected by
distributing questionnaires to the micro and small business enterprise. The secondary
sources of data would be collected from published and UN published materials,
documents record, reports and other written materials which is available to the study.
The study used quantitative and qualitative data type. Because quantitative research
focuses on numbers or quantities, its results are based on numeric analysis and statistics.
Qualitative research studies are focused on differences in quality, rather than differences
in quantity. Results are in words or pictures rather than numbers (Elaine, 2009).
Quantitative data can conduct in a number of groups, allowing for comparison, allows
generalizing to broader population, and provides numerical or rating information.
Qualitative data can provide a deeper understanding of mechanisms Provides and verbal
information that may sometimes be converted to numerical form. So the researcher used
both quantitative and qualitative data

1.6.3 Target population and sampling design

The target population in Mekele city administration in MSEs enterprise office are 10914.
The sampling technique that is used for the study is stratified random sampling technique
because of the researcher collected information from different MSEs sectors I.e.
manufacturing, merchandise, service, construction and urban agriculture that means

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based on categorization on the nature of the enterprise. In case of stratified random
sampling method the researcher would stratify the population based on the nature of the
enterprise. Then the researcher randomly draws the sample from each strata of the
population.
The population would be divided in to five sub population based on the nature of the
enterprise. This sub population is called strata and they are homogeneous. Close ended
question that have two alternatives that is Yes or NO question. Open ended questions
should be design to information freely which is not covered by the close ended question.

Table; 1.1 below shows sample size determination

NO Strata Population Proportion Sample

1 Construction 245 2 2
2 Manufacturing 1409 13 13
3 Merchandise 2964 27 27
4 Service 2556 23 23
5 Urban 1726 16 16
Agriculture
6 Irregular 2014 18 18
Total 10914 99 99
The researcher was use Yemen’s formula (1967).the formula stats:
Level of confidence=90
Margin of error= 100%-90%=10%
n= _____N_______ where:-
1+ N (e) 2
n= Desired number of sample size
N = total population of the study
e = margin of error

n =_____N_____ = _____10,914_____
1+N (e) 2 1+10,914(0.1)2

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n =____10,914___
1+10,914(0.01)
n = __10914___
1 + 109.14
n = ___10914____
110.14
n=99

The researcher would be selected randomly from each stratum as shown from the above
table 1.1. Among those 2 from the construction sector, 13 from manufacturing sector, 27
from merchandise sector, 23 from service sector, 18 from other irregular sectors and 16
from urban agriculture the researcher draw a sample of 99 in the MSES. There would be
select from the population based on the proportion, so that the researcher would collect a
complete list of the Mekele city administration MSES. And randomly would select the
sample from each category the reason for the researcher would select this technique
because in this method the sampling error is minimized and the sample possess on the
required characteristics of the population.

1.6.4 Method of collection and Data analysis

The researcher would use both questionnaire and interview to gather the information. So
the researcher would get relevant and full information from the sample respondents on
the first visit and time. The researcher used both primary and secondary source of data.
Primary data was obtained from the micro and small business enterprise through
questionnaire which is open ended and close ended questionnaires. Secondary data was
collected from published documents such as magazine, book, newspaper, and annual
report pertinent to the study.
The researcher analyzed the data by using relevant descriptive statistics such as table and
percentage in order to organize a large data in to homogeneous group.

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1.7 Significant of the study
 The study is important to get knowledge about working capital management
practice in MSE's in Mekele city administration.
 It contributes to current knowledge on growth of small scale enterprise at the
national level.
 The finding is useful not only to small scale business in the mekele city
administration but also to all small scale business throughout the country.
 This also helps stock holders in business were formulated and implement policies
that are helping them to effectively manage working capital. Determining ways
management can effectively were improve their working capital management.
 To help the MSE's gain access to finance and improve their financial management
skills and to help MSE's to adopt product manages policies as well as professional
expertise for efficient managerial works.
 The study would provide useful information for designing strategies to influence
the growth of MSE's.

1.8. Scope and limitations of the study

1.8.1 Scope of the study
The study should be limited to Mekele citry administration because of proximity time,
energy and cost saving. The small scale enterprises in Mekele city administration operate
under either physical structure or non-permanent physical structure.

1.8.2 Limitation of the study

 The study did not cover all the small-scale enterprises in Mekele city
administration.
 There were time, money and energy constraints at the time of the study.
 The results of the study did not give full information about working capital
management practices in MSEs.
 The time that was allocated for the data collection is not enough to gather all
relevant information related to working capital management practices.
 Therefore, it would be difficult to draw some conclusion about working capital
management practices MSEs.

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1.9 Organization of the Paper
This paper consisted of four chapters. The first chapter consisted the introduction parts
which includes; Back ground of the study, description of the area statement of the
problem, objective of the study, research design and methodology, significance of the
study, scope and limitation of the study, the second chapter consist only the literature
review.
The third chapter included; data analysis, interpretation and presentation. The last fourth
chapter of this research deals with conclusion and recommendation, questionnaires and
references that used to conduct this study.

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CHAPTER TWO

LITERATURE REVIEW

2.1. An Overview of MSEs

Searching for a definition of MSEs can be frustrating as there are as many definitions
there are authors on the subject. Over the years there have been many attempts at defining
what constitute small and medium scale enterprises.
Researcher's and policy makers have used variety of criteria including ;total worth,
relative size with in industry, number of employee, value of products, annual sales or
receipts, and net worth Cook.P and Nixon.F.(2000).however, the benchmark vary
considerably.
The definition of micro and small enterprises therefore varies from country to country.
The classification can be based on Firm’s assets, number of employees, or annual sales.
Cochran (2003)

Table 2.1 working definition of MSEs in Ethiopia

Sr.no Enterprise Sector Hired labor Capital

level
1 Micro Industry <5 $6000.or
£4500,<birr
100,000
Service <5 $3000,or £2200
or,<birr 50,000
2 Small Industry 6-30 $90,000
or£70,000.
Service 6-30 $1,500,000.

According to the small and micro enterprises development strategy of Ethiopia

(Published 2011) the working definition of MSEs is based on capital and labor. (Table 1)
The United Nations industrial developmental organization (UNDO) also uses number of
employees to define MSEs by giving different classifications for industrialized and
developing country. Falope, OI and AGiIone, OT (, 2009)

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The definition for industrialized country are given as follows: large- firms with 500 or
more than workers, medium- firms with 100-499 workers and small firms with 99 or less
workers.
The classification given for developing country are as follows: large firms with 100 or
more workers ,medium- firms with 20-99 workers, small- firms with 5-19 workers and
micro firms with less than 5 workers whatever the definition and regardless of the size of
the economy, the growth of the MSEs throughout the country is crucial to its economy
growth.

2.2 Importance of MSEs in Developing Countries

In the world today there is a widespread acceptance that the ability of any national
economy to adapt to change and to continue economic progress is greatly enhanced if
there is a continuing growth of new products and new job creation by small --scale
enterprises. Owners of small- scale have been in existence all over the world, ever Since
trade by Bayer began. They have been accommodating themselves to their circumstances
and opportunities of their times and place, carrying over the broad thread of their
business affairs from century to century. Manufacturer S.k. (2001).
Large number of small-scale enterprises in both the rural and urban areas, it is clear that
the small -scale industrial sector provides substantial employment opportunities for the
benefit of the rural and urban area.
There is clear and UN disputed evidence that strong and broadly based on small
-industrial sector is an essential ingredient for the economic prosperity, resilience and
innovative growth (Hitman, J.L.2011).
Small-scale enterprises are a good source of private employment and even for some
public employees as they provided useful income supplement as second job.
The small scale enterprises provide the large scale sector with goods and service at very
low prices, which makes it possible for large scale sector to make high profits .various
writers are of the view that small scale enterprises play an important role in the economy
of developing country.
The history of Ghana completely conform that the small scale enterprises sector has
helped in the country industrialization process Buame.S.K (2013)
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In most fast developed country, MSEs by virtues of their size, location capital investment
and their capacity to generate greater employment have provided their powers full
propellants effect for rapid economic growth.

2.3 Concepts and Nature of Working Capital Management

The current assets, commonly called working capital represent the portion of investment
that circulates from one form to another in the ordinary conduct of business. This idea
embraces the recurring transaction from cash to inventories, then to receivables and back
to cash that forms the operating cycle of the firm.
There are two types of working capital; permanent and temporary (fluctuating variable)
working capital.
Permanent working capital is a minimum amount (safety stocks of cash and inventories)
required to be kept in the form of current assets. It is a fund required for the day-to-day
operational activities of the firm.
Temporary working capital (fluctuating/seasonal) is the amount required to meet seasonal
demands. Current liabilities represent the firms short term financing because they include
all debts of the firm that come due (must be paid) in one year or below one year.
Net working capital is defined as the difference between the firm’s current assets and
current liability. If the firm has positive net working capital, it is the portion of the firms
current assets are financed with long-term funds, meaningless short term funds financed
with more long-term funds, and if the firms networking capital is negative shows the
current liabilities exceed the current assets. So, the firm is financing from less long-term
funds with more short-term fund (aggressive. Strategy)
The concept of net working capital is useful to groups interested in determining the
amount and nature of assets that may be used to pay current liability.
There are three strategies, but two of them are more basic (aggressive and conservative)
for determining an appropriate mix of short-term or current liability and long-term
financing.
An aggressive financing strategy calls for firm financing to meet at least its seasonal
requirements and possibly some its permanent requirements with short-term funds, the
balance is financed with long-term funds under which restricted policy current assets are

12
turned over more frequently and the holding cash, securities, inventories and receivables
are minimized (firm is financing more from short-term fund). This increases profitability
of the firm. However, is risk, the firm’s ability to meet its liability is less when it comes
due or unable to meet liability.
Conservative financing strategy, under this strategy relatively large amounts of cash,
marketable securities and inventories are carried, and sales are stipulated by liberal
financing policy (relaxed collection period) to customers a corresponding high level of
receivables are bound to occur (firm finances more from long-term funds). Use shot-term
financing in the event of an emergency or unexpected out flow of funds. It is difficult to
imagine how this strategy could actually be implemented, because the use of short-term
financing tools, such as account payables and accruals are virtually un avoidable unlike
the aggressive strategy, the conservative strategy required the firm to pay interest for un
needed funds rather than the lower the cost of aggressive strategy. Therefore, makes it
more profitable than the conservative strategy. However, it involves much more risk
(aggressive strategy).
For most firms, tradeoff between extremes represented by those two strategies should
result in an acceptable financing strategy. (Lawrence J. Gitman 693).
Many authors agree that the two concepts. Such as, liquidity ratio and techniques of
managing current assets are important in managing working capital effectively under
techniques of managing current assets: the cash conversion cycle, technique of
maintaining cash, factors influencing the choice of marketable securities, factors used to
investigate potential customers. Inventory management and source of short-term
financing are included.
(Bodil dick in son B.J campsey Eugene F. Briahm, 1997).
Working capital management involves administration of current assets and current
liabilities which consists of optimizing the level of current assets in partial equilibrium
context.
Working capital management involves the relationship between a firms short- term assets
and its short-term liabilities. Machiraju (2001)

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2.4. Working Capital Management
Working capital management involves administration of current assets and current
liabilities which consists of optimizing the level of current assets in partial equilibrium
context.
Working capital management involves the relationship between a firms short- term assets
and its short-term liabilities. Machiraju (2001) In order to manage working capital
efficiently, there must exist two elements as necessary components and desirable
quantities. Further demonstrated that good working capital management must ensure
acceptable relationship between components of a firm so as to make inefficient mix,
which guarantee capital adequacy?
Thus, working capital management should make sure that the desirable quantities of each
component of working capital are available for management.Afza, T.and Nazir, M.S.
(2007).
Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the interrelationship that exists
between them.
Working capital management involves the relationship between a firm's short-term assets
and short-term liabilities. Khan and Jain (2007)
The goal of working capital management is to ensure that a firm able to continue its
operations and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses.
Working capital management also refers to the decisions relating working capital and
short- term financing and it involves managing the relationship between a firm's short-
term assets and its short-term liabilities. Working capital entails short -term decisions
generally relating to the next one year period which are "reversible".
These decisions are therefore not taken on the same Basie as Capital Investment Decision
(NPD) rather they will be based on cash flow and or profitability.
Management will use a combination of policies and techniques of working capital. This
policies aim at managing the current assets (generally Cash and Cash equivalent,
inventories and debtors.) Working capital management is the administration of current
assets in the name of cash, marketable securities, receivables, inventories. Horne (2000).

14
2.5 Current asset management
This is also another important concept in working capital management. The technique of
current asset management includes: Technique of cash management, receivable
management, marketable security management, inventory management and source of
financing them. Two major objective of current asset management;
I. Being to minimize cash operating cycle, and
II. Being to finance those assets as effectively as possible with the overall objective of
optimizing the return on total capital employed.

2.5.1 Cash management technique

Cash is ready currency to which all liquid assets can be reduced; cash balances are
significantly influenced by firm’s production and sales.
Techniques and by its procedures for collecting sales receipt and paying for purchases
should be analyzed well. These influences can be better understand through analysis of
the firms operating and cash conversion cycle (CCC).

 Operating cycle
Operating cycles the amount of time that elapses from the points when the firm
begins to build the inventory to the point. In addition to, cash is collected from the
sale of the resulting finished product. The cycle is made up of two components the
average age of inventory (ABI), and the average collection period of ales. The firm
operating cycle (OC) is the sum of average age of inventory (AAI) and the average
collection period (APC).

OC = AAI + ACP
Average age of inventory is the length of the time required to produce and sale the
product.
AAI = Average Inventory
Cost of sales/365 days
The average collection period (ACP) represents the length of time required to collect
the sales of recipes.

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 ACP = Account receivables
(Annual credit sales)/365

 Cash conversion cycle (CCC)

The cash conversion cycle represents the amount of time the firms which is tied up
between payment for production input and receipt of payment from the sale of the
resulting fished products. It is calculated as by the number of days in the firms operating
cycle minus the average payment period for inputs to production. Cash conversion cycle=
operating cycle-Average payment period (CCC=OC-APP).
Average payment period (APP) is the length of time the firm is able to different payment
on its various resource purchase.

Ideally, the firm like to have a negative cash conversion cycle, means the average
payment period exceeds the averages of inventory plus the average collection period. In
contrast the manufacturing.
Firms will usually not have negative cash conversation unless they extend their average
payment period on unreasonable length of time. But a firm needs to pursue strategies to
minimize it without causing harm to the company in form of lost sales or in ability to
purchase on credit. The basic strategies that should be employed by the firm to manage
cash conversion cycle are:-
 Turn over inventory as quickly as possible avoiding stock outs that might result in
loss of sale
 Collects accounts receivable as quickly as possible without losing future sale
because of high pressure collection technique.
Pay accounts payable as late as possible without damaging the firm’s credit rate. (James
C. Van Horne, 1998). And (Bodil Dickinson B.J campsey Eugene F. Briahm, 1997).

2.5.2 Management of Account Receivables

Account receivables represent the extension of credit by which the firm gives to its
customers. The extensions of credit to customers by most manufactures are a cost of
doing business. By keeping its money tied up in account receivable, the firm loses
time value of money and runs the risk of non-payment by its customers. The level of

16
 account receivable should not be judged too high or too low based on historical
standards of industry norms, but the test should be whether the level of return we are
able to earn from this asset equal or exceeds the potential gain from other
investments. We must ask whether we are optimizing our return in light of
appropriate risk and liquidity consideration.
Generally, the firm’s financial manager directly controls account receivable through
involvement in the establishment and management of
 Credit policy
 Collection policy
Credit policy is the determination of credit selection, credit standards and credit-
terms. Credit selection is the decision whiter to extend to credit to customer and how
much credit to extended.

The collection policy should consider the both firm’s had debt because of extended
collection period and the customers of the firm. It is bad for the firm extended
collection period, but preferable by customers of the firm. Therefore, the collection
period has to consider both the firm’s and its customer interest.

2.5.3 Management of market table securities

Marketable securities are short term interest earning. Money market instrument used by
the firm to obtain a return on temporarily idle fund
When fund are being hold for other than immediate transaction purpose (cash) they
should be converted from cash to interest bearing marketable securities from return point
up to upper limits is achieved.
Under normal conditions, the longer the maturity period of securities, the higher they
yield.
A wide variety securities, differing in terms of default risk; interest rate risk, liquidity
risk, inflation risk and expected rate of return available to firm that choice to hold
marketable securities (Fundamental of financial management. Theory and practice
Brightam, Ehrardt, 2002).

17
2.5.4 Inventory Management
The word inventories have been defined in many ways. Inventories defined as stockpiles
of raw materials, supply, components, working process, and finished good that appear at
numerous points throughout the firm’s production and logistics channels.
Inventories is the stock of any item or resource used in an organization .Jacob,A.O,
(2004). An inventories system is the set of policy's and controls that monitor level of
inventories and determine what level should be maintained, when stocks should be
replenished, and how large orders should be. Finally inventories defined as a stock as the
stored accumulation of material resources in a transformation system.
International Accounting Standards (IAS) states that inventories shall be measured or
valued at the lower of cost and net realizable value.
The cost of inventories comprises all cost of purchase, cost of conversion and cost
incurred in bringing the inventories to their present location and condition. Pycraft metal
(2004).
Source of Finance
A firm can adopt different financing policies Vis’ – a-vise’ current assets;
Three types of financing may be distinguished:
1. Long– term financing – The source of long-term financing include ordinary share
capital. Preference share capital, debentures, long-term borrowings from financial
institutions and reserves and surplus (retained earnings)
2. Short– term Financing – The short term financing is obtained for a period, less than
one year. It is arranged in advance from banks and other suppliers of short –term finance
in the money market. Short-term finance in clued working capital funds from banks,
public deposits, commercial paper, factoring of receivable etc.
3. Spontaneous Financing - Spontaneous financing refers to the automatic sources of
short term funds arising in the normal course of a business. Trade (suppliers’) credit and
outstanding expenses are examples of spontaneous financing.

2.6. Management of Account Payables

18
Accounts payable are one of the major source of UN secured short term financing.
Utilizing the value of relationship with payee is a sound objective that should be
highlighted as important as having the optimal level of inventories.
As a consequence, strong Allan's between company and its suppliers strategically
improve production lines and strengthen credit record for future expansion.
Hill& Sartorius (2011).Trade credit is the largest category of short-term credit,
representing about one -third of the current liabilities of non-financial corporation.
Firms must have policies concerning those who authorize purchasing, and how
purchasing is geared to demand. This can lead to proper management of accounts payable
.Attrill, P. (2006).Belt, (2013) also adds that the accounts payable are more deferrable in
that the average payment can be extended by managerial decision. However, this sever
ability is limited to an unknown extent; eventually, supplier will refuse to seal firms that
excessively delay payment.

2.7. Liquidity
Liquidity refers to the solvency of the firms overall financial position there as with
which can pay its bills. The three basic measures of liquidity are:
 Net working capital
 The current ratio
 Quick (acid-test) ratio
Liquidity ratio has two parts, current ratio and quick ratio. Current ratio is the
measure or expresses the relationship between firm’s current assets and its current
liability, and it is calculated as current assets divided by the current liability. The
result shows the liquidity position of the firm.

To high current ratio indicates the firms holding of excessive current asset? To low
current ratio indicates poor ability to satisfy short term obligation or liability. A
current ratio of 2.0 is occasionally cited as acceptable but, a value depends on the
industry in which the firm operates reference.
(Financial management I. M Pandey, 2005.

19
Current ratio measures short-term solvency of the firm. High ratio indicates good
liquidity position, increase in current liabilities faster than current assets indicates to the
firm a bad liquid position that means the firm unable to meet its liability when comes
due.

Quick ratio is also called acid-test ratio, it is the strength test of liquidity, it is
calculated by dividing the firm’s current asset minus inventories by current liabilities;
quick ratio= Current asset-Inventory
Current liabilities
A quick of 1.0 or greater is occasionally recommended, but an acceptable value depends
largely on the industry.
Excessive liquidity reduces a firm’s risk of being unable to satisfy short-term obligation
as they come due, but sacrifices profitability, because;
 Current assets are less profitable than fixed assets and
 Current liabilities are less expensive financing sources than long-term funds.
Quick ratio measures the ability to pay of its short-term obligation without relying
on the sale of inventory. The higher ratio, the higher the firm’s liquidity position.

2.8 Need for working capital

The need for working capital to run the day-to- day business activities cannot be over
emphasized. We will hardly find a business firm which does not require any amount of
working capital. Indeed, firms differ in their requirements of the working capital. We
know that a firm should aim at maximizing the wealth of its shareholders. In its
Endeavour to do so, a firm should aim at maximizing and it should be earned sufficient
return for its operations. Earning a steady amount of profit requires successful sales
activity. The firm has to invest enough founds in current assets for generating sales.

20
CHAPTER THREE

ANALYSIS AND DATA PRESENTATION

3.1 Introduction
This chapter covers the presentation, analysis and interpretation of data collected from
primary sources. A total of 99 questionnaires were distributed to the workers of micro and
small enterprises in order to collect data about assessment of working capital
management practice in micro and small scale enterprises in Mekele city.
To make raw data simple for further analysis, editing and classification are made clearly;
the raw data were organized on groups on the basis of common characteristics.
Descriptive analysis as data analysis technique, table put in frequency or respondent
number and percentage is used.
Finally reasonably explanation of the relation was identified and the final task of
interpretation was accomplished after considering all the relevant factors.
As shown in table 3.1 out of the questionnaires distributed 99 to micro and small
enterprises, replies were obtained from 88 owners of the enterprise.

Table 3.1.: Rate of Responses by Respondents

Questionnaires Customers
Respondents Valid Percentage
Returned 88 88.9%
Not Returned 11 11.1%
Total 99 100%
Source: Survey result, 2010

21
3.2 Analysis of General Information of Respondents
3.2.1. Sex and age distribution of respondents
Table 3.2 sex and age distribution of respondents;
Age distribution Sex distribution
Total Male Female
18-30 35 16 19
31-45 46 29 17
45 and above 7 5 2
Total 88 50(56.8%) 38(43.2%)

Table 3.2 above shows that from the total number of 88 respondents 56.8% of them are
male and the remaining 43.2% are female respondent, and the age distribution also shows
that 35 respondents aged 18-30 years, 46 of them aged 31-45, and 7 of them aged more
than 45.

3.2.2. Educational Background of the Respondents

Table 3.3 educational back ground of the respondents
NO Educational Back number of Percentage (%)
Ground respondents
1 Illiterate 3 3.4
2 primary school 17 19.3
3 12 completed 43 49
4 Diploma 21 23.8
5 Degree 4 4.5
6 Total 88 100.0
Source: regional MSES agency in 2010
The data in the table 3.3.above shows that most of the respondents have educational
background of 12 completed and college diploma which account 49% and 23.8%
respectively respondents, nearly 19.3% of respondents were completed primary level,
3.4% respondents illiterates, and 4.5% of them hold BA degree.

3.2.3 Year of work experience

Table 3.4 Year of work experience

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Experience in year No of respondents Percentage
(%) Source:
Less than2 year 33 37.5
3 up to 5 year 39 44.3
Equal on above 6 year 16 18.2
Total 88 100
questionnaires 2010
The above table 3.4 shows that the year of mark experience respondents. Accordingly
data reveal that 33(37.5%) of the respondents who have less than 2 years’ work
experience 39(44.3%) of the respondents have 3 up to 5 year work experience and
16(18.2%) of the respondents have equal and above 6 years work experience. This
implies that the experience of respondents who are operated micro and small enterprises
from those respondents 3 up to 5 year work experience enterprises are dominated in the
mark area of the enterprise

3.2.4 Martial Status of Respondents

Table 3.5 Martial status of respondents

NO Marital status Number of Percentage (%)

respondents
1 Single 30 34
2 Married 52 59
3 Divorce 6 7
4 Total 88 100.0
Source፡ survey 2010
Table 3.5 above shows marital status of respondents, 30(34%) of the respondents were
single, 52(59%) of the respondents were married, 6(7%) respondents were divorce can
see from the table that most of the respondents were married.

3.2.5 .Nature of the Enterprise

Table.3.6 The nature of the enterprise
No Nature of Respondents Percentage (%)
enterprises
1 Sole proprietors 58 66

23
2 Corporation 9 10
3 Partnership 21 24
4 Limited 0 0
Total 88 100
With regarding to the nature of the enterprise, the findings disclosed that the enterprise
functioned as sole proprietors, partnered with other colleagues and organized themselves
as cooperatives to jointly establish and man their enterprise. However, most of the
enterprises were sole proprietors as depicted by the table 3.6 the enterprise were located,
in Tigray national regional state Mekele city administration.

3.3 Analysis of liquidity (cash) management around Mekele city

administration MSEs.
3.3.1 Startup of the enterprise
Table 3.7 initial startup of the enterprise

No How did you finance Number of Percentage (%)

your business respondents
initially?
1 Self-finance 37 42
2 Borrow from bank 24 27.3
3 Borrow from friend 16 18.2
4 Purchase on credit 11 12.5
Total 88 100
Source; survey 2010

Among respondents 37(42%) replied that the financed by their own when they start their
enterprise. 16(18.2%) from the respondent said that they were helped by their friend and
24(27.3%) have borrowed from bank to get capital when their start it is clearly put in the
above table only 11(12.5) people when purchase on credit when they start their business.
Based on the above brief expression the researcher conclude that most enterprise owner
that are found around Mekele city administration are self-financed

24
3.3.2 Ways of maintaining difference during shortage
Table 3.8 ways of maintaining difference during shortage

No How do you manage Number of Percentage (%)

the difference in respondents
your enterprise
where there is
shortage?
1 Self- finance 35 39.8
2 Purchase on credit 32 36.4
3 Borrow from friend 21 23.8
and family
Total 88 100
Source: questionnaire 2010
The researcher observe from the above table when there was shortage of finance in a
given organization(enterprise) owner find some aid in the form of credit either from their
family or friend, this idea is supported by 60.3% from the whole respondents. on the
other hand 35(39.8%) from the respondents said that shortage was balanced by them,
32(36.4) respondents were purchase on credit and the rest 21(23.8%) respondents replied
that they got aid from friend and family when their enterprise fails in shortage of finance.
Therefore the above expression indicate that credit is the main solution during shortage of
finance/budget/.

3.3.3 Enterprise owner’s habit to record cash requirement as plan

Table 3.9 habit of owners to record cash requirements

No Do you write down Number of Percentage (%)

such estimates of respondents
cash requirement as
a plan or budgeted
document?
1 Yes 35 39.8
2 No 53 60.2

25
 Total 88 100
Source: survey questionnaire 2010

Table 3.9 shows that 35(39.8%) of the respondents answered they registered each cash
requirement include income and expense with clear and well prepared document.
Whereas the rest 53(60.2%) of the respondents do not have well prepared recorded data
about their daily event. Therefor based on the above information the researcher conclude
that most small and micro scale enterprise that are found in Mekele city do not have well
organized and recorded cash requirement information or their daily performance report.

3.3.4 Ability of business to keeps financial records of the operation

Table 3.10 the ability of respondents’ enterprise to keep
financial records of operation

No Does the business Number of Percentage (%)

keep financial respondents
records of cash
transaction
1 Yes 35 39.8%
2 No 53 60.2%
Total 88 100%
Source፡ survey questionnaire 2010
The above table shows that the ability of their business to keep financial record is not
good, this supported by 53(60.2%) respondents. The other 35(39.8%) respondent said
that each enterprise has a good habit to register each event that takes place in each
enterprise starting from selling and purchasing product up well organized tentative
schedule of their enterprise. From this idea the researcher infer that most enterprises that
are found in Mekele city administration do not keep financial records safely, and this
leads them to confuse to know their profit and capital.

26
3.4 Analysis of Account Receivable
3.4.1 Ways of account receivable
Table 3.11 selling mechanism of the enterprise

No Do you same times Number of Percentage (%)

sell on credit? respondents
1 Yes 50 56.8
2 No 38 43.2
Total 88 100
Source: survey questionnaire 2010

Among the whole 88 respondents 50(56.8%) replied that they sell their product with
credit sometimes. Among respondents 38(43.2%) enterprise owners replied that they
never sold their product with credit because in most cases there delay in returning backs
the debt on time. Respondents also indicate they try to who are their customers and they
try to investigate the nature of the customers. Based on the above analysis the researcher
infers that most enterprise sold their product with credit either by the means of their
customers or other related means.

3.4.2 Procedure adhered by the enterprise to investigate customers

during credit granting
Table 3.12 formal credit investigation procedure
No Are the following Number of respondents
procedures adhered to
investigating prospective
credit customer?
1 Cheek customer's profile All
from other business center
2 Cheek customer’s previous All
financial dealing
3 Cheek customers bank All

27
 reference
Source፡ survey questionnaire 2010
Table 3.12 shows that all sample respondents use almost similar procedure to granting
credit product exchange from their customers, for instance, all respondents’ cheek their
customer's profile from other business center and other related organization about his or
her previous general back ground. They also cheek their permanent customers’ bank
reference and other financial activity.

3.4.3 Mechanism to encourage customers

Table 3.13 customer encouragement system

No Do you give cash Number of Percentage (%)

discount to your respondents
customers?
1 Yes 31 35.2
2 No 57 64.8
Total 88 100
Source; survey questionnaire 2010
As it is clearly shown in the above table 31(35.2%) from the respondents replied that they
try to discount the price of some product so as to attract customers. On the other hand
57(64.8%) from respondents said due to other reason they are unable to discount price for
their customers. From this the researcher concludes that most of MSEs in Adigrat city
don’t provide cash discount to their customers.

3.4.4 Action taken by enterprise for indebted customers

Table 3.14 measurement taken by owner of enterprises for
indebted customers;
No What measurement Number of Percentage (%)
you had been taken respondents
for indebted
customers?
1 Take legal obligation 43 49
2 Take no action 9 10.2

28
3 Stop additional 13 14.8
transaction with
them
4 Giving additional 23 26
time to pay
Total 88 100
Source; survey questionnaire 2010
Among the 88 respondents, only most of them 43(49%) of respondents said that take
legal obligations and 13(14.8%) of respondents said they stop transaction with them and
23(26%) respondents said they give additional time to pay for their customers, and
9(10.2%) of the respondent said they do not take any action against them. Evidence from
the result suggests that there is absence of credit collection mechanism for most of MSEs.

3.5 Analysis of Current Liability

3.5.1 The Extent of Purchasing Product on Credit
Table 3.15 .the Extent of Purchasing Product on Credit

No How often you purchase Number of respondents

goods with credit? Number Percent
1 Some times 39 44.3%
2 Often 18 20.5%
4 Never 31 35.2%
Total 88 100%
Source; survey questionnarie2010

Table 3.15 shows 31(35.2%) from the respondents answered they never purchase any
product or raw material with credit. 39(44.3%) from the respondents said sometimes
there are exchange of goods and service with credit when there is an enterprise that has
clear and documented credit manual form. The result shows that most of MSEs never
purchase any raw material or purchase on credit sometimes.

29
3.5.2 Duration date of credit purchased product to settled
the bill
Table 3.16 duration date of credit purchased product to settle
the bill.
No How is the length Number of respondents
Number percent
of your credit
purchased product
to settle the bill?
1 7 days 25 28.4%
2 14 days 30 34.1%
3 21 days 31 35.2%
4 Other ………. 2 2.3%
total 88 100%
Source፡ survey questionnaire 2010
As the data in table 3.16 above shows 35.2% from the respondents’ answered they paid
/canceled their credit after 21 days, 34.1% of the respondents settle their bill card after 14
days according to their contract that they agreed with the seller enterprise. The rest 2
respondents agreed with their seller enterprise to pay /canceled their credit after they sell
to other third party/customers. Based on the above information the researcher infer that
MSEs that are found here in Mekele city have get chance to purchase any product with
credit by any means if they are willing to purchase on credit.

3.5.3. Negotiation from Debtor

Table 3.17 enterprise negotiation from suppliers when they
purchase product

No Do younegotiated No of respondents
Number Percent
from your suppliers
when you purchase
raw materials?
1 Yes 54 61.4%
2 No 34 38.6%

30
 Total 88 100%
Source፡ survey questionnaire 2010

The above table shows that 54 respondents are signed agreement when they purchase
product from debtors how and when they settle their bill. Whereas the rest 34 respondents
never agreed with their suppliers when they bought product and there is no clear and
well-known deadline to settle bill.

CHAPTER FOUR

Summary, Conclusion and Recommendation

Introduction
The fourth chapter presents the summary, conclusion and recommendations of the
research. The summary high lights the silent findings for the specific objectives.
Conclusions and recommendations were drawn based on summary of the findings. The
study covered 88 sample micro and small scale enterprise from Mekele city.

4.1 Summary
As to how issues on liquidity management were tackled, the major findings for the
objective one dedicated that:
 The majority of respondents don’t kept records of their financial transactions.
 Most MSEs Owners that are found around Mekele are self- financed and they
were got their initial capital from their own.
 Most MSES that are found in Mekele city don’t keep financial records safely, and
this leads them to confuse to know their profit and capital.
 Most MSES that are found in Mekele city don’t have well organized and recorded
cash requirement information or their daily performance report.
 The main solution credit is on during shortage of finance /budget.

31
  Most entrepreneurs use their profit for expansion purpose. This indicates that
most enterprise will have a chance to change themselves from micro and small-
scale enterprise to medium and high level industries.
 That most MSES sold their product with credit either by the means of their
customers or other related means.
 Most of MSES undertake formal credit investigation before granting credit to
their customers. This help to them to keep the long life of their enterprises.
 Most of MSES in the town don’t provide cash discount to their customers.
 There is absence of credit collection mechanisms for most of MSES.
 Most of MSES never purchase any raw material or purchase on credit sometimes.

4.2 Conclusions
According to the information that put in the summary part of this study working capital
of those micro and small enterprise that are found in Mekele city administration is
somewhere from depend on credit from bank and families and friends. Furthermore:-
 The absence of any government body to initial entrepreneur when they start their
 Business can highly affect them from speeding rapidly their business. his invite
enterprise to kill/waste their time and energy/power with in the same statues for a
long period of time
 Most enterprises that are found in the city administration don’t keep their cash
requirement record and their daily financial record in well-organized- document
form and this play negative side effect to maintain difference during shortage.
This is because they don’t know what they need to day and what their enterprise
will need in the future.
 Most enterprise sells and purchase product different raw material from different
body. Specially, they investigate their permanent customers’ profile and grant
credit selling with formal/legal contract/agreement/.
 All of the enterprise almost use similar mechanism and procedure to grant credit
selling system and sold their product both credit and hand to hand cash to their
customers, not only selling product with credit but also they bought different raw

32
 material from different suppliers and they get chance up to21 days to pay their
credit or settle bill.
Generally, there are poor performance of working capital management system in most
enterprise that are found her in Mekele even man power distribution is young and enough
in number.

4.3 Recommendation
The recommendation of the research was premised on the summary of and conclusions
from the results and discussion. Based on the summaries of the analysis and conclusions
MSEs entrepreneurs are urgent to:
 The city administration micro and small enterprises offices should prepare
different short term and long term training for those owners of enterprise to
increase their know how in the area of working capital management.
 The regional micro finance institute should start very quickly to borrow money
for the establishment of new MSEs and working capital for the existing
enterprises.
 Micro and small enterprises should record their daily income and expenses this
help to manage their overestimated and under estimated expenses.
 Formulate a credible credit policy for their enterprises in crafting such a policy
criteria should be set as to the conditions and terms for credit granting.
 The enterprise should manage account receivable in their investment by selling on
credit to customers.
 Enterprises should prepare formal credit investigation and know their customer’
in detail before they grant credit selling.
 Prepare budget each time they intend to embark on major expenses. This will
forestall un necessary, unwanted, overestimated and under estimated expenses.

33
  Enterprises should encourage their customers with different mechanisms starting
from price discount up to giving chance to get their product with credit for those
customers who faced limitations in finance.
 In addition to Mekele City administration micro and small scale enterprise office,
the region MSE's Bureau should supports those enterprises both financially and
academically through different mechanism for instance giving them comfortable
market place with/low/adequate fee.

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