25 Izmantots

International J ournal of Business and Management Cases Vol. 1 No.
2
June|2012 www.ijbmc.com Page | 1

Assessing Working Capital Management of SMEs in
Ghana Using Inventory and Trade Credit

ASIAMAHYEBOAH, Lecturer/ HOD, Department of Marketing, Faculty of Business and Management
Studies, Kumasi Polytechnic

Abstract
Even though, the SME sector plays a major role in the development of the Ghanaian economy yet, they are
faced with huge challenges including inadequate knowledge and skills in managing the business and its
finances. However, in as much as finance is the life blood of all firms, SMEs have to manage their finances
properly in order to be better and competitive. The aim of this study is to explore the working capital
management of SMEs using stock or inventory and credit to customers as factors. The study was qualitative
using questionnaire and personal interview to gather data from fifty (50) participants. The findings showed that
small businesses try to manage their working capital well and their working capital management practices are
strong with the exception of their trade credit and collection aspect that was found to be weak. Based on the
findings, recommendations were given to help improve the sampled businesses working capital.

Key words: Working Capital, Inventory, SME, Financial Management, Credit, Economy

1. Introduction
One of the significant yardsticks used to measure a flourishing economy is a vibrant small- and medium- scale
enterprises (SME) sector. The world economy, arguably, is riding on the crest wave of the success of small- and
medium- scale enterprises. SMEs continue to spring up in almost every part of the globe. Even countries like
Croatia, Slovenia, China, Russia, Vietnam and many others whose economies were controlled by the state are
now providing favourable environment for the setting up of small businesses and their growth (Zimmerer and
International J ournal of Business and Management Cases Vol. 1 No. 2

Scarborough, 2008). SMEs thrive in virtually all industries, although the majority is concentrated in the services,
commerce and retail industries (ibid).

The role that small and medium enterprises play in the development of an economy cannot be underestimated.
SMEs contribute to economic development by creating jobs for the worlds growing labour force, particularly in
developing countries. In an article, Fida (2009) stated that:

According to statistics, in industrialized countries, SMEs are major contributors to private sector employment.
SMEs contribute to over 55 per cent of Gross Domestic Product (GDP) and over 65 per cent of total
employment in high income countries. account for over 60 per cent of GDP and over 70 percent of total
employment in low income countries, while they contribute about 70 per cent of GDP and 95 per cent of total
employment in middle income countries

In Ghana, SMEs play important role in engendering growth and development because they form significant part
of the economy. In an article by Abor and Adjasi (2007) it was stated that SMEs contribute about 85 per cent of
manufacturing employment and account for 92 per cent of businesses in Ghana (Cited in Steel and Webster,
1991).

In spite of the important role that SMEs play in the Ghanaian economy, they are faced with huge challenges.
These challenges are inadequate knowledge and skills in managing the business and its finances, inadequate and
erratic financing or credit facilities, lack of access to improved technology, inadequate socio-economic
infrastructure, and lack of ready market for their products and services (Mustapha, 2009) among others.

However, to make these SMEs better and competitive, their finances have to be managed properly. This stems
from the fact that finance is the life blood of every organization whether big or small. If managed well it can
spur businesses to grow and provide value for their owners. On the other hand, if ill managed, it can facilitate
the collapse of a business and plunge its owners into debt. Financial management capabilities therefore are
crucial for the survival of business organization.

Most small business owners in Ghana do not use proper working capital management techniques or tools as aids
in their working capital decision making. They rely on other managers experience, their intuition, hunches and
what other businesses are doing. This results in incorrect stock holding, poor credit screening, frivolous
spending of cash, unnecessary acquisition of assets not benefiting the core business, and lax debt collection
practices. All these are common factors that account for SME failure (Zimmerer and Scarborough, 2008).

A lot of studies on working capital management have been done but the emphasis has been on large public and
private (corporate) businesses in developed countries. The issue of whether the findings and recommendations
are applicable and relevant to SMEs has received little attention. Commenting on this issue Zingales (2000)
asserts that, empirically, the emphasis on large companies has led us to ignore (or study less than necessary)
the rest of the universe: the young and small firms, who do not have access to public markets (Cited in Abor
and Biekpe, 2005). The few studies in this area tend to concentrate on SMEs of advance economies with often
varied and inconclusive results (Abor and Biekpe, 2005).This issue has received little attention in the Ghanaian
context. This study therefore aims at assessing the working capital management of SMEs in Ghana using
inventory and trade credit. The contribution of this paper is two-fold. Firstly, it introduces a novel construction
which links inventory and credit management to the companys performance arguing that effective stock and
credit management can help improve firms financial performance. Secondly, from a managerial point of view,
the findings of this paper can be used to support managerial decision making both at operational and strategic
levels aiming towards improved operational quality.

The first section of the paper after this introduction reviews literature relevant to assessing working capital
management in SMEs using stock and credit for the purpose of performance improvement. This review
summarizes the main literature used in developing the construction. Next, the study methodology is described
and the case company and the developed construction are introduced. Finally, the results of the study are
presented and discussed, followed by the conclusions and implications for management and further research.

2. Literature Review
2.1 Introduction to Financial Management
The contribution of Financial Management to the development of modern businesses dates back to the 1900s.
Van Horne and Wachowicz (2005) assert that financial management during this period was basically concerned
with raising of funds and managing firms cash positions. The increasing popularity of present value concepts
encouraged financial management to become concerned with choosing capital investment projects (ibid).

In order to judge that a financial management decision has been efficient, there is the need to have an objective
that will serve as a yardstick for the measurement of actual performance. Although various objectives are
present, Van Horne and Wachowicz (2005) claim the most important goal is the maximization of the wealth of a
firms present owners. Ross et al (2004) also identifies profit maximization as an alternative goal. However, the
meaning of this goal is unclear; whether it means accounting net income or earnings per share. There is no
appropriate trade-off between current and future profits (ibid). Maximizing earnings per share (EPS) is often
advocated as an improved version of profit maximization (Van Horne and Wachowicz, 2005).

The shortcomings of EPS are that it does not specify the timing of expected returns; risk is not considered and it
does not allow for a dividend policy on market price of the stock (ibid). In view of these drawbacks, maximizing
the market price per share is the appropriate objective because it serves as a barometer for business
performance; it indicates how well management is doing on behalf of its shareholders (Van Horne and
Wachowicz, 2005: p 4). Various stakeholders with interests in the firm results in businesses adopting many non-
financial objectives, examples of which are: survival, diversification, maintaining a satisfied workforce, growth,
being environmentally conscious and so on (ACCA, 2002). Ross et al (2004) make a case for businesses that
have no traded stock. They argue that since the total value of the stock in a corporation is simply equal to the
value of the owners equity, the objective should be stated as to maximize the market value of the existing
owners equity (ibid). The researcher agrees with this assertion because it cuts across all forms of business
ownership: sole proprietorship, partnership and Limited Liability Company.

2.1.1 The Scope of Financial Management
Financial management is concerned with the acquisition, financing and management of assets (Van Horne and
Wachowicz, 2005). The boundary of financial management covers three main decision areas: the investment,
financing and asset management (ibid). Ross et al (2004) shed more light on these areas by explaining that
capital budgeting concerns the planning and managing long term investments; capital structure refers to mixture
of long- term debt and equity maintained by a firm and working capital management which is a firms short-
term assets and liabilities. Another scope identified by ACCA (2002) is raising of finance; efficient allocation of
resources; and maintaining control over the resources.

2.1.2 Overview of Working Capital Management
Working capital management is a significant area of financial management, and the administration of working
capital may have an important impact on the profitability and liquidity of the firm (Shin and Soenen, 1998).
There are two major concepts of working capital. Net working capital according to Van Horne and Wachowicz
(2005) is the difference between current assets and current liabilities while gross working capital is the current
assets. They assert that working capital is synonymous with current assets. ACCA (2002) describes working
capital management as the management of all aspects of both current assets and current liabilities, to minimize
the risk of insolvency while maximizing the return on assets. Van Horne and Wachowicz (2005) on the order
hand say it concerns the administration of the firms current assets along with the financing needed to support
current assets. According to Garcia- Teruel and Martinez- Solano (2007) firms can choose between two basic
types of strategies for net working capital management: they can minimize working capital investments or they
can adopt working capital policies designed to increase sales. In determining the appropriate amount, or level of
current assets, the trade- off between profitability and risk must be considered. Profitability varies inversely with
liquidity and profitability moves together with risk (ACCA, 2002, and Van Horne and Wachowicz, 2005).
Management of the firm, argues Garcia- Teruel and Martinez- Solano (2007), therefore has to evaluate the
trade- off between expected profitability and risk before deciding the optimal level of investment in current
assets.

Working capital can be classified by components (cash, marketable securities, receivables, and inventory) and
by time either permanent or temporary. Permanent working capital is the amount of current assets required to
meet a firms long- term minimum needs. Conversely, temporary working capital is the amount of current assets
that varies with seasonal needs (Van Horne and Wachowicz, 2005 and Ross et al, 2004). ACCA (2002) also
classifies working capital as short term net assets which are made up of stock, debtors and cash less short- term
creditors.

2.2 Cash Management
Keynes (1936) suggests three reasons why individuals hold cash: transaction, speculative and precautionary
motives. It has been noted that businesses also hold cash for these same motives (ACCA, 2002 and Van Horne
and Wachowicz, 2005, Ross et al, 2004). Cash management entails the efficient collection and disbursement of
cash and temporary investment of idle cash (Ross et al, 2004). Gitman (1974) argues that the cash conversion
cycle was a key factor in working capital management. The cash conversion cycle represents the average
number of days between the date when the firm must start paying it suppliers and the date it begins collecting
payments from its customers (ibid). Van Horne and Wachowicz (2005) posit that a firm generally benefits by

speeding up cash collection and slowing down cash payments. The process of cash concentration are
engaged in by (large) businesses to improve control over corporate cash, provide for more effective short- term
investing and reduce idle cash balances (Ross et al, 2004 and Van Horne and Wachowicz, 2005). Methods used
to control disbursement include the use of payable through drafts, the maintenance of separate disbursement
accounts, zero balance accounts, and controlled or remote disbursing (ibid).

The concept of cash concentration, which is, speeding up cash collection and slowing down cash payments, in
the opinion of the researcher cannot be effectively practiced by small businesses because they consume a lot of
money in a bit to grow and they risk losing their credibility if they unduly delay payments.

2.2.1 Management of Debtors and Creditors
Howorth and Wilson (1998) assert that trade credit plays an important role as a component of net working
capital and a source of short term finance for businesses. Granting trade credit boost up a firms sales in many
ways- it can act as price cut (Brennan et al, 1988; and Peterson and Rajan, 1997); serves as incentive for
customers to acquire goods at periods of low demand (Emery, 1987); and help firms to strengthen long- term
relationship with their customers (Ng et al, 1999). However, creditor management, Rafuse (1996) contends, Is
essentially a Darwinian situation- the survival of the fittest. Large companies enforce their terms with smaller
companies, who in turn enforce their terms with those smaller yet. The intention of most [UK] companies is to
defer payment well beyond the agreed arrangements and actual payments frequently extend beyond the terms
(ibid). In order to manage this late payment which has been cited as a major problem of small businesses (FPB,
1996) there is the need for businesses to formulate and implement aggressive credit and collection policies (Jose
et al, 1996 and Deloof, 2003). These policies explain Van Horne and Wachowicz (2005) entail several
decisions: the quality of accounts accepted; the length of the credit period; the size of the cash discount (if any)
for early payment; any special terms such as seasonal dating; and the level of collection expenditures. In order to
maximize profits, firms are advised to vary these policies together until they achieve an optimal solution. The
optimal solution would be the one that results in the marginal gains equaling the marginal costs (Van Horne and
Wachowicz, 2005 and Ross et al, 2004). Figure 2.4 on the next page illustrates this assertion.

Tinkering with the various policies to achieve the optimal solutions is not simple as simple as it seem. It takes
experience, frequent practice and long time to achieve this result.

Figure 2.2: The costs of granting credit: Source: Ross et al, 2004

Even though a careful credit analysis and scrutiny may result in significant reduction in trade credit granted
which in turn may provoke a decrease in sales from customers (Garcia- Teruel and Martinez- Solano, 2007), it is
still essential to determine what the maximum amount of credit or credit line should be (Van Horne and
Wachowicz, 2005).

2.2.2 Inventory management
Inventory management remains a serious concern for businesses wishing to remain competitive and survive in
the marketplace (Wallin et al., 2006). Monczka et al., 2002 and Handfield, 2002 estimate that typical
manufacturing firms spend 56 percent of revenue to cover the direct cost of purchased goods; this figure is even
higher for the typical wholesaler and retailer. The indirect cost of having to manage the purchased goods is also
estimated to be between 30-35 percent of the value of the purchased goods (Chase et al., 2004). Ordering and
maintaining inventory has several costs. These include capital cost, administrative charges, storage charges,

shrinkage, taxes and insurance (Holdren and Hollingshead, 1999; Ross et al., 2004). Most of these costs vary
directly with the average quantities of inventories held and the obvious strategy of cost avoidance is to reduce or
eliminate inventories (ibid). Koumanakos (2008) agrees with the inventory reduction or elimination strategy by
arguing that too much inventory consumes physical space, creates a financial burden, and increases the
possibility of damage, spoilage and loss. He goes further to state that excessive inventory compensates for
sloppy and inefficient management, poor forecasting, haphazard scheduling and inadequate attention to process
and procedure (ibid). However, reducing or eliminating inventory has its shortcomings. It disrupts
manufacturing operations and often leads to customer dissatisfaction which may cause a customer to switch to a
competitor (Koumanakos, 2008). The inventory management goal is to adopt an optimal strategy that manage
the inventory efficiently (by minimizing cost or maximizing profit) and at the same time provide an acceptable
customer service (Holdren and Hollingshead, 1999; Koumanakos, 2008).

The researcher thinks that achieving the trade- off between managing inventory efficiently and acceptable
customer service is very difficult. This is because a lot of factors impact efficient inventory management.

2.2.3. Inventory Management Control Techniques
Traditionally, academic literature on inventory management have focused on the transactions approach
characterized by the trade- off between holding costs and ordering costs represented by the ABC and the
Economic Order Quantity (EOQ) models (Ross et al., 2004 and Koumanakos, 2008). Koumanakos (2008)
asserts that the expansion of the Operations Management frontiers has led to the addition of new inventory
control techniques like the Just-in-Time (JIT) and the materials requirements planning systems (MRP) methods.
The ABC classification model is a refinement of Paretos 80 percent/ 20 percent grouping (Holdren and
Hollingshead, 1999). This inventory management technique is to divide inventory into three (or more) groups.
The underlying idea is that small portion of inventory in terms of quantity might represent a large portion in
terms of inventory value (Ross et al., 2004).This enables the firm to devote more management attention and care
to controlling the more valuable items (Van Horne and Wachowicz, 2005). The figure (2.7) below illustrates an
ABC comparison of items in terms of the percentage of inventory value represented by each group versus the
percentage of items represented

Figure 2.3: An ABC inventory analysis model Source: Ross et al, 2004

The EOQ model is best- known model to explicitly establish an optimal inventory level. It affirms that the
optimal quantity of an inventory item to order at any one time is that quantity that minimizes total cost over a
planned period (Ross et al., 2004; Van Horne and Wachowicz, 2005). An inventory items order point is that
quantity to which an inventory must fall to signal a reorder of the EOQ amount. Under conditions of
uncertainty, a safety stock must be provided. By varying the point at which orders are placed, one varies the
safety stock that is held (ibid). Figures 2.5 and 2.6 below illustrates the EOQ model under conditions of
certainty and uncertainty


Figures 2.5 and 2.6 below illustrates the EOQ model under conditions of certainty and uncertainty

Figure 2.4: Economic order quantity model with order point when lead time is nonzero and certain. Source: Ross et
al, 2004
Frame A: Expected demand and lead time occur

Frame B: Actual demand and lead time differ from what was expected

Figure 2.5: Safety stock and order point when demand and lead time are uncertain: Source: Ross et al, 2004

The JIT model is used to manage dependent inventories. Inventories are acquired and inserted in production at
the exact time they are needed (Ross et al., 2004; Van Horne and Wachowicz, 2005). The JIT management
philosophy focuses on pulling inventory through the production process. The goal of JIT system is to reduce
inventories, continuously improve productivity, product quality and manufacturing flexibility (ibid).

The MRP model is a computer- based system for ordering and or scheduling production of demand dependent
inventories. According to Ross et al., (2004) the basic idea behind the MRP is that, once finished goods
inventory levels are set, it is possible to determine what levels of work-in-progress inventories must exist to
meet the need for finished goods. It is then possible to calculate the quantity of raw materials that will be
needed.

Wallin et al., (2006) also identify four basic approaches to managing inbound inventory, raw materials,
components, sub- systems, or retail inventory. These are inventory speculation; inventory consignment; reverse
inventory consignment; and inventory postponement. With the inventory speculation, a firm purchases
inventory items and physically hold these items in its storage facilities before these items are used or demand is
certain (Bucklin, 1965). Inventory consignment approach is where a firm physically holds purchased items in its
inventory but ownership resides with the supplier (Coughlan et al., 2001). Reverse inventory consignment is
where a firm pays for and own inventory but will not take custody of inventory until needed (Wallin et al.,
2006). Inventory postponement is where the firm deliberately delays the purchase of inventory until the demand
is determined with certainty (Bucklin, 1965).


Wallin et al., (2006) argues that there is no one-size-fits-all inventory management approach that is right for
every firm or for every context. Notwithstanding the practical and theoretical drawbacks associated with these
techniques, Koh et al., (2007) assert that their application in real business setting should produce results.
Financial managers should therefore critically analyse the various models and approaches to come out with
those that will be optimal for a firms inventory management

3. Methodology
This study used a qualitative approach involving top 50 Ghanaian SMEs across industries. To ensure the
authenticity of their stances, respondents were selected using purpose sampling based on their positions,
qualifications, affiliation, length of working experience and their expertise in the areas of corporate governance.
One hundred (100) participants were approached personally or telephone, but only 50 participated. The
participants were from four categories namely; owner (30%), chief executive officer (40%), general manager
(20%) and others, representing junior and middle level managers (10%). Based on Marshall and Ross man
(2006) they are considered as group elite because they are influential, prominent and well-informed, and have
in depth knowledge of the subject. Therefore, they can provide rich information for the study.

The data of this study were obtained and analyzed through content analyses

4. Data Presentation, Analysis And Discussion
Table 1. Background of Participants
Demographics
Characteristics
Participants
Owner
(N = 15)
CEO
(N = 20)
General Manager
(N = 10)
Others
(N =5)
1. Age (years)
Mean
Minimum
Maximum
2. Gender
Male
Female
3. Educational Qualification
Others
HND
1
st
Degree
Masters
PHD
4. Experience in Corporate Management
(years)
Mean
Minimum
Maximum

61
53
69

10
4

10
5
3
6
0

17
12
37

47
39
55

12
3

8
2
5
6
0

9
6
16

50
45
55

12
0

6
3
1
2
0

12
6
16

53
42
64

6
3

3
1
0
2
0

14
4
20

The above table indicates that the oldest business owner is 69 years where as the youngest is 53 years. The age
of management of the sampled SMEs also range from 42 to 64 years with a minimum of four years corporate
experience to a maximum of thirty-seven years. With regards to qualification of management, the least is HND
and the highest is Masters degree, some of them also have a combination of academic and professional
qualification. On sex, the table indicates that out of fifty sampled management only ten of them are females and
forty are males.

Table 2. Description of 50 Ghanaian SMEs based on Industry Sector
No. Industry sector Number of company Percentage
1
2
3
4

5
6
7
Trading & Services
Herbal Medicine
Micro Finance
Basic & Secondary
Education
Construction
Agro-Processing
Sachet Water
12
5
12
10

3
3
5
24
10
24
20

10
6
6
Total 50 100

From table two (2), 12 companies representing 24% belong to the trading and services, 5 companies
representing 10% belong to herbal medicine sector, 12 of the companies which represent 24% are from micro
finance whilst 10 companies representing 20% belong to basic and secondary education. Construction sector is
made up of 3 companies which represents 10%, the agro- processing sector has 3 companies which represents
6% and the sachet water sector also has 5 companies and that also represents 6% selected for the study to reflect
the situation on the ground.

Table 3. Class of Customers Offered Credit
Class of customers Frequency Percentage (%)
Loyal customers 28 56
Big customers 12 24
Small customers 5 10
New customers 0 0
Old customers 5 10
Other 0 0
Total 50 100
Source: Field data

Table 3 depicts the class of customers respondents said they offer credit to. Twelve respondents (70%) said they
offer credit to loyal customers while twenty percent (4 respondents) offered credit to big customers. Ten percent
(2 respondents) gave credit to old customers. This is represented graphically below;

Figure 1; Class of customers offered credit Source: Field data

Table 4. Duration credit is given to customers
Duration Frequency Percent (%) Cumulative Percent (%)
One week- 2 weeks 10 25 25
2 weeks- 1 month 24 60 85
1 month- 2 months 6 15 100
2 months- 3 months 5 10
3 months plus 5 10
Total 50 100
Source: Field data

On the issue of duration or repayment of credit, longest period is three months plus constituting ten percent and
the earliest is two weeks also constituting twenty-five percent. However, the bulk of credit granted stood at sixty
percent spanning from two weeks to one month. This indicates the SMEs awareness of the fact that granting
long term credit can affect their operations negatively.
0
10
20
30
40
50
60
70
Frequency
Percentage (%)

Figure2 Methods used to screen customers for credit Source: Field data

Figure 2 above indicates clearly that 36% of respondent use other means (customers bankers) to screen their
customers followed by 29% who stated that they used competitors information. Twenty- one percent (21%) said
they rely on industry or trade associations whereas 14% fall on customers suppliers. Finally, none (0%) used
credit reference bureaus.

Table 5: Type of security customers back their credit source: Field Data
Type of Security Frequency Percent (%) Cumulative Percent (%)
Post- dated cheque 20 40 65
Bank guarantee 12 24 95
Industry/trade association guarantee 8 16 95
Other 10 20 100
Total 50 100

Looking at Table 5, it can be seen that 65% of all credit given to customers is backed with a post- dated cheque;
bank guarantee backs 30% and 5% is backed with other means (respondent said customers goodwill).
.

Figure 3 types of stock SMEs keep Source: Field data

Figure 3 indicates that 55% of the total sample hold finished goods inventory. Thirty percent keep raw material
inventory and 15% hold work-in-process (WIP) stock. This depends on organizational policy and the marketing
environment.

0%
29%
21%
14%
36%
Methods used to screen customers for credit
Credit reference bureaus
Competitors
Industry/trade associations
Customer's suppliers
Other
Raw material Work-in-Process Finished goods Supplies
6
3
11
0
30
15
55
0
Types of stock SMEs keep
Frequency Percent (%)

Figure 5: Response to usage of stock management tools Source: Field data

From the figure 5 above, it can be seen that as many as 60% of respondents said they used some stock
management tool while the remaining 40% said they do not use any. This is further illustrated in figure 6 below;

Figure 6 : Stock management techniques SME managers use :Source: Field Data

Of the sixty percent of the respondents who said they use some stock management tools or techniques, 42% use
the Just-in-Time (JIT) model, 33% use the Economic Order Quantity (EOQ) model, 17% employ the ABC
model and 8% uses other (Periodic Review System) technique.

4.1.1 Findings on the Credit Management of the Selected SMEs
Based on the findings of the analysis in the previous chapter, it can be deduced that the selected SMEs managed
the credit they extend to their customers well. This can be inferred from the high rate of respondents who
offered credit to only loyal customers because they see them as true stakeholders in their businesses. The fact
that they do not give credit to just any customer and they make conscious effort to screen customers before the
trade credit is given is an indication that they want to control the level of credit and also reduce the default rate.
Also, the post dated cheque and the bank guarantee that the respondents demand as security goes to buttress
this assertion.

The relatively shorter period that majority of the respondents gave to their customers is an indication that they
are aware of the negative effect that granting long credit periods can have on their cash flow and for that matter
their working capital.

The tacit admission of the respondents to the fact that their customers deliberately defer payments beyond the
agreed time; that their big customers are not sanctioned when they flout agreed terms unlike small customers
0
10
20
30
40
50
60
Yes No Do not Know
Frequency
Percent (%)
17%
33%
42%
8%
Stock management techniques SME managers use
ABC Model Economic Order Quantity (EOQ) model
Just-in-Time(JIT) Model Other(Periodic Review System)

and that their credit and collection policies are not strong enough shows how SMEs are vulnerable to their
customers. The vulnerability stems from their inability to enforce their terms due to their size.
It can be generally conclude from the findings that the selected SMEs managed the trade credit they offered to
their customers well notwithstanding the weaknesses identified.

4.1.2 Findings on the Stock Management of the Selected SMEs
The fact that all the respondents said they kept stock is an indication that the selected SMEs are aware of the
importance of stock to their working capital combination. Excessive stock or stock out, cause a lot of problems
to businesses either by piling avoidable costs or causing customer disaffection and switching. The greater
number of managers sampled who said they are not comfortable with either of them shows that they are
seemingly aware these problems and would want to avoid them.

Holding stock entails incurring some cost which when managed well can ensure the profitability of businesses.
The high proposition of respondents who said they know the stock management techniques available and that
they use it often to their advantage suggests that the selected businesses are concerned about minimizing their
costs especially ordering costs which they identified to be their most important concern.

Again, the respondents use of such factors as the anticipated demand for their goods, impending shortages, the
season or time of the year, the perishable nature or ease of obsolescence of their products and the interest on
capital invested in the stock to guide them in arriving at the optimal stock levels to hold in addition to using the
stock management techniques proves that they want to minimize costs at all times.

Furthermore, the majority of the managers or owners who were sampled indentified interest payment and
spoilage as their major problems when they hold excessive stock. Juxtaposing this with the fact the majority of
the respondents said their most important reasons of holding stock are to decouple their businesses from
fluctuations in demand and to hedge against future price increases depicts a trend that the respondents seek to
increase their sales and by extension their profits and at the same time trying to minimize their costs. It can be
concluded that respondents actively manage their inventory well.

5. Conclusion
The contribution of SMEs to the economy of Ghana is enormous. They are found in almost all the sectors of the
economy. Notwithstanding the important role that they play in nation building, they face serious challenges such
as inadequate finance, difficulties in marketing their products and lack of financial management discipline just
to mention a few.

The objective of this research was to assess the extent of working capital management practices of some
selected SMEs in Ghana. The scope of the study was narrowed to trade credit and stock. The research adopted a
case study strategy so that a research can deeper insight and to see new phenomena. Quantitative data collection
technique questionnaires) was adopted to gather the primary data. The research was conducted with both
secondary and primary data. The data collected was analyzed using a combination of qualitative and quantitative
techniques. The findings showed that small businesses manage their working capital efficiently and also their
working capital management practices are strong with the exception of their trade credit and collection aspect
that was found to be weak. Based on the findings, recommendations were given to help improve the sampled
businesses working capital.

Asiamah Yeboah
(DipM, MCIM, CharteredMarketer, B.Ed, MBA),
Lecturer/ HOD,
Department of Marketing,
Faculty of Business and Management Studies,
Kumasi Polytechnic, Ghana

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