Financial Management Practices and Performance of Small Businesses

The role of management in influencing performance of a firm need not be overemphasized. But financial management for SBs is quite a new area. In Africa, SBs represent over 90% of all businesses. In Somaliland, SBs constitute the largest portion of the private sector, employing 98.5% and contributing 70% of the GDP. However, their performance declined during 2010-2013. Their profits fell by 3.98%, solvency by 18.36%, and cash flow declined. But the management practices adopted and their effect on performance of SBs had not been empirically investigated. Guided by Six Sigma Theory, this study investigated the effect of financial management practices on performance of SBs in Borama town with focus on working capital management, financial control and financial planning. The study found that working capital management [F (1, 276) = 3.88, p = .012, R2 adj = .542]; financial control [F (1, 276) = 3.88, p = .010, R2 adj = .022]; and financial planning [F (1, 276) = 3.88, p = .024, R2 adj = .016] had significant effect on performance of SBs in Borama town. The study concludes that financial management practices have a significant effect on performance of SBs in Borama town.