Objetivos específicos

Research findings show that many informal business owners see their businesses as a way of getting out of poverty, but have no formalised financial institution support and advice in starting up their businesses. They seek advice from friends and just go for it, and the problem is that they are not financially prepared to start their business in a formalised way; hence the cash management activities are impulsive in nature with a less planning for cash flows. Consequently, these business owners face high costs of cash management including heavy losses due to poor investment decisions and in the form of fines due to the illegal nature of these businesses (Barbour & Llanes, 2013:24). Deen-Swarray, et al. (2012:1) emphasised that the informal sector continues to face many challenges and obstacles preventing informal businesses from reaching their full potential. Deen-Swarray, et al. (2013:1) particularly pointed out that informal businesses are generally small, often lacking the capital, skills and expertise necessary to expand and improve their businesses and they rely heavily on intuitive approaches to cash management. Deen-Swarray, et al. (2012:1) further noted that rigorous tax laws, labour laws, the registration process and the lack of access to finance and other resources hinders informal business owners to opt for these less professional approaches to cash management and have impended the growth of these businesses.

In the survey about Bank Financing to informal businesses in East Africa by Calice, Chando and Sekioua (2012:7), these authors found that informal businesses are profitable business ventures although banks find difficulty in dealing with them in terms of financing as they lack adequate information in terms of cash flows from their businesses. Calice et al. (2012:7) concluded that this is attributed to the fact that informal businesses do not have formal cash management approaches to ascertain their cash flows to avail to banks.

75

The specific components of cash management in the informal sector are discussed in the following subsections.

(A) CASH PLANNING

According to Torero, Robles, Hernandez, De La Roca, Webber and Thomas (2006:27), informal businesses rarely engage in formal cash planning. Clearly, the answer has to do with the benefits and costs of formal planning activities such as hiring planning consultants. Torero, et al. (2006:27) stated that non-compliance with authority regulations will help businesses reduce their expenses. As a result, informal businesses tend to keep themselves invisible and cannot adopt any meaningful resource planning, of which cash planning is a part.

Barbour and Llanes (2013:25) confirmed that informal businesses intuitively plan for their cash flows and in most cases rely on friends for advice since they do not have expertise on formal planning. In this regard, Orobia, et al. (2013:130) found that cash management in informal businesses has a huge impact on their performance and survival and most informal businesses do not last to their expected life, since their working capital is poorly planned and cash, in particular, is misused.

The findings by Uwonda, et al. (2013:70) revealed that on average 41.81% of service sectors of informal businesses in Northern Uganda do not carry out cash flow planning with an average of 58.19% carrying out cash flow planning. The findings revealed that at least 55.83% of informal businesses prepared their cash flow projections and at least 63.33% of informal businesses prepared their cash budgeting. The findings show that only 49.17% of informal businesses take into consideration tax avoidance in their expansions. The failure to plan for cash resources implies that most informal businesses in Uganda are caught unawares when it comes to settling of financial obligations and operating expenses when they fall due.

In the study about opportunities and constraints facing informal businesses, Willemse (2011:11) found that the majority of South African informal businesses do not make use of any form of banking of their cash receipts, while others use cash rounds where money

76

is pooled monthly between members and each member is then given the opportunity to receive the pooled amount at the allotted time. While this approach to cash management suggests some form of cash forecasting, as one can easily predict the amount from the anticipated cash round, it also suggests no growth in cash holdings as no interest is expected as would be the case in formal banking, which could partly explain the stagnated nature of informal businesses.

Barbour and Llanes (2013:25), Torero, et al. (2006:27), and Orobia, et al. (2013:130) suggested that cash planning in the informal business sector is seriously lacking when compared to ideal cash planning activities of planning for cash receipts and disbursements suggested by Abioro (2013:182), Evans (2000:11), Van Horne and Wachowics (2009:121), Bhavet (2011:149), Kakuru (2005:97), Mathur (2010:131) and Uwonda, et al. (2013:70).

(B) CASH FORECASTING AND BUDGETING

Fletcher (2011:1) asserted that while every business must establish priorities as they relate to utilization of cash resources, this might not be done in informal businesses as the owners and managers can determine their business destination. In comparison to large complex businesses, Fletcher (2011:1) pointed out that this is simply not ideal to make daily mid-course adjustments. Instead, the road to the future must be planned and the cash flows required to get there must be budgeted in some detail. Only in this way can management have sufficient warning of when mid-course corrections are necessary. Empirical studies in many countries show that informal business are faced with the problem of working capital and cash management in particular as they do not plan their cash receipts and how to invest their cash surplus (Padachi, Howorth & Narasimhan, 2012:128). Therefore, they make irrational decisions regarding their cash investment, decisions which lead to business failure.

In a related development, Kehinde (2011:276) noted that informal businesses do not strategically plan their cash resources and are often hit with cash shortages. Informal

77

businesses have no formal cash forecasting and budgeting techniques to ascertain their potential cash flows as compared to majority large businesses.

On cash management practices, the following conclusions were drawn from the investigation and discussion on cash management practices of informal businesses in the Ashanti Region of Ghana. About 57% of informal businesses always prepared cash budgets. Considering the importance of efficient management of cash by informal businesses, it is not surprising that only 7% of respondents claimed that they never prepared cash budgets (Agyei-Mensah, 2012:567). The current findings show that most informal businesses in Ashanti Region are familiar with using cash budgets as tools in planning and controlling cash flows in the business.

Detailed results of the study by Uwonda, et al. (2013:73) revealed that 86.67% of informal businesses matched their cash out-flows with their cash inflows. The findings further revealed that 89.17% of this sector of informal businesses routinely checked its credit policies. The findings revealed that at least 59% of informal businesses in the service sectors adhered to the prepared budget during the implementation and 66.7% of informal businesses in this sector ensured programme review and budgetary control (Uwonda, et al., 2013:70). These findings indicated that the majority of the managers and owners seemed to appreciate the importance of cash forecasting and budgeting in their businesses.

In a study conducted in Uganda by Turyahebwa, et al. (2013a:29), the findings revealed that there were a few informal businesses that prepared cash budgets. This is a clear indication that cash is managed using ad hoc approaches and, for those who prepared the cash budget, the budgets were not reviewed regularly to match with the current operations. This is probably the major reason why a number of informal businesses experienced cash shortages.

Fletcher (2011:1), Padachi, et al. (2012:128), Uwonda, et al. (2013a:70), Turyahebwa, et al. (2013a:29) and Kehinde (2011:276) agreed that the lack of proper cash forecasting and budgeting are some of the major causes of informal business failure, generally

78

suggesting that informal businesses do not conduct ideal cash forecasting and budgeting.

(C) FINANCIAL CONTROL AND REPORTING

Young, Schaffers and Bruwer (2012:11323) defined internal controls as the policies and procedures that were put in place to ensure that owners and managers can take the correct action, which will eventually ensure that a business achieves its objectives. The authors asserted that internal controls, if well incorporated into an informal business’s operations, are sound tools for safeguarding business resources and cash in particular. Young, et al. (2012:11323) however, noted that internal controls cannot reduce all errors and irregularities that keep the business growing although they are confident that they can make management aware of potential problems adversely affecting business success.

In line with the above statement, Deen-Swarray, et al. (2013:5) noted that informal businesses rely on cash for transacting financially with their customers and suppliers and even for sending money. At the same time informal businesses mostly communicate in person with customers and suppliers. They lack controls such as banking cash and few individuals use personal bank accounts for business purposes or have a dedicated business account. Conversely, many own and make use of mobile phones for business purposes compared to large formal businesses with multiple bank accounts for effective cash control purposes.

In the study about the regulation of money lending business in Kerala, Jeromi (2007:7) found that the majority of informal businesses are not regulated and have no designed financial reporting rules and procedures. This is basically attributed to the fact that they are not directly accountable to anyone as all cash proceeds go to individual business owners.

The findings by Uwonda, et al. (2013:70) revealed that informal businesses in the service sector in Uganda have no strong financial controls with at least 97% ensuring that all expenditures are not explained and justified. The findings further revealed that on

79

average 64% of the service sector of the informal businesses under study does not apply to cash flow control, with 35% being completely ignorant about cash flow control systems.

The study by Okello-Obura (2012:456) revealed that although the business records are not filed, it is impressive to note that most of the informal businesses have acceptable storage equipment or systems such as drawers, office cupboards and office shelves where records are stored. This implied that informal business studied in Uganda have physical controls on their records including financial documents.

Among the financial control measures used by the informal businesses were identified as cash receipts represented by 88.5%, payment by cheques 61.5% while 42.3% maintain petty cash, according to the study in Kenya by Ondiek, et al. (2013:90). The meaning of these findings is that most informal businesses have limited financial controls to ensure efficient and effective operations of their businesses. These research findings suggest that proper financial control and reporting as cash management components are not often practiced by the majority of informal businesses across the most parts of the globe.

(D) DEBTOR COLLECTION, CASH CONVERSION CYCLE AND DISBURSEMENT Turyahebwa, et al. (2013a:31) in the study about financial management practices in informal businesses in Uganda, it was found that debtor collection was very poor. It was found that approximately 95% of businesses that sold on credit tended to sell to anyone who wished to buy without formal credit worthiness evaluation of the recipients. This resulted in high levels of high accounts receivable.

Similarly, in the study about effective working capital management in informal businesses in Nigeria, Kehinde (2011:271) established that most informal businesses have debtor management problems. It was specifically established that most informal businesses do not engage their working capital, and debtor management in particular, in such a way to enjoy maximum profit and that the combination of debtor management

80

strategy, cash management, account payable (creditors) and most importantly stock management strategy left much to be desired.

Dumbu and Chabaya (2012:90) studied the assessment of impact of working capital management practices on the performance of informal businesses in Zimbabwe. It was established that the majority of the informal businesses are very slow at collecting debts as most do not provide incentives to speed up the cash conversion and cycle (CCC). Credit is extended on personal relationships than business relationships.

In the study conducted by Ondiek, et al. (2013:90), the findings revealed that more than three quarters of the informal business sector utilised speeding cash collection (85%) and controlling payments (89%) as the cash management techniques. At least 29% were employing cash flow synchronisation and 33% used cash pooling.

Collection of cash from credit customers as a component of cash management is a common challenge to most informal businesses in developing countries. The study conducted by Bowen, Morara and Mureithi (2009:16), revealed that 25% of informal businesses studied ranked debt collection among the top three challenges they face in their businesses. In response to this challenge, half of those who faced this problem resorted to collecting their debts at the end of the month, 20% reported that they avoided giving goods and services on credit to avoid cases of bad debts and the associated costs of accounts receivable collection.

The findings by Turyahebwa, et al. (2013a:29) showed clearly that the extent of accounts receivable management among informal businesses is low. Though these businesses offer goods to their customers on credit, it is important to note is that trade credit is particularly important in the case of informal businesses, since trade debtors are the main asset on most of their businesses’ balance sheets. This is further supported by the high levels of bad debts and the findings revealed that the levels of bad debts were not reviewed.

Regarding collections from debtors, the study by Agyei-Mensah (2012:574) revealed that 80% of informal businesses always sell their products or services on credit and

81

about 47% always set up their credit policies in relation to the customers, whereas 10% of informal businesses tend to sell on credit to anyone who wishes to buy. This finding shows that selling products or services on credit is a common trend among informal businesses in the Ashanti Region of Ghana. Again, the study found out that most informal businesses reviewed their levels of receivables and bad debts quarterly and it is not surprising that 67% of reporting informal businesses always experienced bad debts (Agyei-Mensah, 2012:574).

Previous findings in this area by scholars including Turyahebwa, et al. (2013a:31), Kehinde (2011:271), Xavier (2013:183), Agyei-Mensah (2012:574), Bowen, et al. (2009:16-31), Ondiek, et al. (2013:90) and Dumbu and Chabaya (2012:90) suggest that informal business give less attention to effective management of debtors with no ideal credit and debtor collection arrangements.

(E) INVESTMENT OF CASH SURPLUS

According to the study carried out in Kenya by Ondiek, et al. (2013:90), 30.8% reported above KShs 200 000, 42.3% reported that the optimal amount of cash maintained by the informal businesses was between KShs 51 000 and 100 000, 11.5 % reported that the optimal amount of cash held was between KShs 10 001 and 50 000 while 15.3% reported that the optimal amount of cash held was less than KShs10 000. Only 5.8% reported efficient investment of short term cash surplus which suggests a cash management problem in informal businesses.

Similarly, according to the study by Agyei-Mensah (2012:574), only 3.0% of responding informal businesses always had a shortage of cash for spending, while 60.0% always or sometimes had a surplus of cash. Nevertheless, only about 27.0% of informal businesses deposited cash surplus into bank accounts, while up to 63.0% did not know how to use the temporary cash surplus for profitable purposes. This finding reveals that cash surplus rather than cash shortage is a problem for these informal businesses. The findings by Turyahebwa, et al. (2013a:34) are similar with those of Agyei-Mensah (2012:574) that revealed that few informal businesses have cash surplus, do not invest

82

in marketable securities in order to generate more income and that this practice hinders their growth which eventually leads to their failure. Low cash surplus could partly be attributed to low sales revenues/cash inflows and a weak credit policy and thus nothing is left to be invested to booster their growth.

A study by Goss, Mas, Radcliffe and Stark (2011:11) noted that over 70% of people in informal business do not have a formal bank account; hence many people in this business sector have to figure out their own ways to save money. An increasing number of people participate in informal savings groups as a short term option to invest their cash.

However, Kamath and Ramanathan (2011:15) found that most owners of informal businesses rarely have surplus cash for investment as they often have high amounts of debt. This implies that most informal business owners often spend more time on the spending side than the receipt side which rarely leaves them spare cash for re-investing. Burke, Hartog, Ichou and Van Stel (2010: 15) studied the determinants of the volume of informal venture finance by gender, and the study findings revealed that the majority of informal investors tend to invest short term cash in family businesses or businesses of their friends. This suggests that informal investors are risk averse regarding decisions on investing their cash surplus.

Therefore given the findings above, it can be concluded that most informal business owners with spare cash tend to invest in near cash investments although the majority do not have savings in cash and are not bothered with investing in short term investment opportunities.

(F) COMPETENCES AND SKILLS OF STAFF

According to Adams, De Silva and Razmara (2013:1), most owners of informal businesses have shortfalls in skills largely due to the low education of prospective workers, unequal access to training, underdeveloped markets, lack of attention by public

83

training providers and market constraints affecting informal businesses. As such, they find themselves less competent to manage and plan for their cash resources.

Turyahebwa, et al. (2013a:30) concurred that the lack of effective management during the early stages of a business is also a major cause of business failure for small businesses. Business owners tended to manage these businesses themselves as a measure of reducing operational costs.

In the same instance, the NCR (2011:14) showed that informal businesses’ access to credit and support in South Africa is limited by the poor level of managerial competence and skills of the business owner in managing cash resources.

According to the study carried out in Uganda, Uwonda, et al. (2013:70) revealed that the majority of the respondents (46.7%) had a diploma as the highest level of qualification followed by a certificate from institutions of learning (23.3%). Only 16.7% had a secondary education. This implies that although the majority of the managers of informal businesses had studied further they did not possess competences and skills in cash and business management and partly explains why most informal business in less developed countries face cash management challenges.

According to the findings by Osamwonyi and Tafamel (2010:200), the majority of those who managed informal businesses in Edo State in Nigeria passed through apprenticeship and are poorly educated. The meaning of this is that informal business owners may not be sufficiently informed to respond to enlarged and heightened competition and management of modern businesses. These findings mean that most