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Financial Management Practices and Profitability of Business Enterprises in

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Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.7, No.16, 2016

Financial Management Practices and Profitability of Business

Enterprises in Obuasi Municipality, Ghana
Joseph Yensu1* Emmanuel Konadu Yiadom 2 Samuel Awatey3

Abstract
Literature is divided on the attribution of financial management practices on the profitability of business
enterprises. This study, therefore, used empirical data, collected from ninety-eight enterprises in the Obuasi
Municipality (Ghana), to investigate the impact of financial management practices on profitability of business
enterprises. The study focused on two financial management practices, namely; working capital and capital
budgeting management. The study confirms that the working capital and capital budgeting management were
contributing to the variance of profitability measured by profit margin and return on sales. The analysis of the
collected data, however, revealed that working capital management has a positive and significant effect on the
profitability of business enterprises but capital budgeting management has a negative relationship with the
enterprises profitability. The findings further showed that cash management theories have not been fully
enforced by the enterprises in the Obuasi Municipality. The researchers therefore, recommend that financial
managers should pay much attention to their financial management practices due to its positive effect on
profitability of their firm.
Keywords: financial management, working capital, capital budgeting, profitability, business enterprise, Ghana

1. INTRODUCTION
The seems to be no consensus on the ascription of the nuance of financial management practices on profitability
of business enterprises. Many researchers have conducted studies on factors affecting financial management
premised on their objectives, but few studies have been conducted on how financial management practices
impinge profitability of business enterprises especially in the developing countries. This study, therefore made
an inquiry into how financial management practices impinge profitability of business enterprise in Ghana with
particular focus on Obuasi Municipality. In view of this, the re-examination focused on two financial
management decisions which are working capital management and capital budgeting management of business
enterprises.
According to OECD (1997), business enterprises play a major role in economic growth and
development, creation of employment and income generation. Business enterprises in Ghana contribute
enormously to National Gross Domestic Product (GDP) and employment in the informal sector. It creates
employment and leads to the export of locally manufactured goods and services as well as helping the local
government authorities to generate tax revenues for socio-economic development.
Obuasi Municipality is one of the vibrant commercial centers in the Ashanti region of Ghana.
According to the National Board for Small Scale Industries (NBSSI), there are about three hundred and ninety-
seven business enterprises in Obuasi town. Though the number of enterprises are growing at an accelerated rate;
ineffective financial management practices are presumed to persist in the municipality. This implies that some of
the enterprises in Obuasi Municipality are not profitable and this might make it difficult for the enterprises to
contract credit facilities from financial institutions because the financial institutions will always want to grant
credit facilities to profitable enterprises.
There is therefore the need to use empirical data to examine how financial management affect business
enterprises’ profitability. Thus previous studies on financial management was expanded upon by way of
centering on financial management practices on their profitability using empirical evidence from Obuasi
Municipality.

2. LITERATURE REVIEW AND THEORETICAL FRAMEWORK

Business enterprises are categorized predominantly based on ownership, namely; sole proprietorship,
partnerships, corporations and limited liability companies including limited liability partnership. However,
business enterprises could be categorized into small, medium and large based on the size. The structure of
business enterprises’ in Ghana is dependant on the size of the business. The National Board for Small Scale
industry (NBSSI) defines small and medium enterprises in terms of non-current asset and the total number of

1 Senior Lecturer at Department of Entrepreneurship and Finance, Institute of Entrepreneurship and Enterprise Development,

Kumasi Polytechnic, Kumasi-Ghana

2
Tutor at Ghana Education Service, Obuasi Municipal, Ghana
3Development Planning Officer and, M&E Specialist: Local Government Service; Asokore Mampong Municipal Assembly,

Ghana

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employees. Enterprises with not more than nine employees are classified as small enterprises with the asset base
of not exceeding ten million Ghana cedis.
According to Agyei-Mensah (2011), the major cause of these business enterprise failures in Ghana is
careless financial management. The intended goals of financial management are the foundations upon which the
efficiency and effectiveness of financial management are evaluated and compared. The efficient and effective
acquisition and use of finance in any enterprise leads to proper employment of the enterprise’s finance. The
intended goals of financial management are grouped into two main components and they are maximization of
profit and wealth (Paramasivan and Subramanian, 2009. English (1990) also added growth as one of the targets
of financial management. Researchers who have researched into financial management have no difference when
it comes to the thoughts of key financial management decisions.
According to modern theories, working capital has alternatively two strategies, namely; aggressive
funding strategy and conservative funding strategy. Whereas higher returns and risk are associated with
aggressive working capital management, lower risks and returns are associated with conservative working
capital management (Gardner et al, 1986; Weinrand and Visscher, 1998). According to Brealey et’al (2006), in
order to supervise working capital expeditiously and effectively, there is the need for businesses to focus their
attention on four distinct short-term assets including accounts receivables, inventories, cash and short-term
securities.
Enterprises through credit managing; that is making decisions regarding credit analysis, terms of sale
and decision and collection policy can manage their accounts receivables. When enterprises sell their goods on
credit, accounts receivable are accrued to the enterprises. The enterprise sometimes receives cash in weeks, or
even months depending on the terms of payment. An enterprise can achieve a significant advantage in working
capital if it improves the efficiency of collection. According to Brealey et’al (2006), too aggressive solicitation
of cash harms the sales of the enterprise which has the potential of causing a conflict between solicitation of cash
and sales.
Stenzel and Stenzel (2003) conceptualised capital budgeting as the best available option and financing
decision for long-term investment that maximizes owner’s wealth. Contemporary financial management theory
has it that maximization of shareholders’ wealth is the ultimate goal of every enterprise and in order to achieve
this goal; there is the need for some decision-making processes such as investment decisions, financing decisions
and the decision on the dividend policy (Correia et’ al, 2001; Parkison and Ogilvie, 2002).
These decisions show that capital budgeting is essential as far as business enterprise’s profitability is
concerned. This means that for maximizing shareholders’ wealth, capital budgeting should be given much
attention. One thing that also makes capital budgeting critical is that at times it is not easy to reverse an
investment that has already been undertaken without a cost.

2.1 Measurement Of Profit

Profit is either seen as accounting profit or economic profit. Accounting profit only considers the difference
between total revenue and total expenses. The only problem with this kind of profit is that it ignores risk.
Economic profit solves this problem by considering the opportunity cost in addition to the difference between
total revenue and total expenses. According to the economists, enterprises only make profit if and only if the
enterprise’s profit is higher than what investors are expected to gain severally in the capital market.
There are many measures of profitability. These measures enable analysts to evaluate the enterprises’
profit with respect to a given level of sales, a certain level of assets, or the owner’s investment. Owners, creditors
and management pay close attention to boosting profits because of the great importance the market places on
earnings. To measure profitability of business enterprises, return on equity (ROE), return on sales (ROS) and
return on assets (ROA) are used as the key measurement ratios. Return on equity measures the return earned on
the common stockholders’ investment in the enterprise. Generally, the owners are better off the higher the return
on equity. Return on sales measures the percentage of each sales remaining after the enterprise has paid for its
goods. Return on asset measures the overall effectiveness of management in generating profits with its available
assets (Gitman and Chad, 2012).
Business enterprises profitability is influenced by factors such as revenues, capital and cost which
depend on the profitability measures provided by Ross et’al (2010). Marketing, development of new products
and management of sales determines the revenue but practices of financial management affect both the capital
and the cost (Kieu, 2004).

2.2 Definitions of Variables

It’s first necessary to have a definition of some key financial management concept in order to have better
appreciation of the impact of financial management practices on profitability of business enterprises.
2.2.1 Working Capital Management
Working capital management has many nuances in literature but the common definition deals with efficient

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Vol.7, No.16, 2016

management of firm’s investment in current assets and liabilities; such as cash, marketable securities, accounts
receivable and inventory. According to Ross et’ al (2010), working capital management is the enterprise’s short-
term asset and liabilities. There is the need for financial managers to comprehend the management of the short-
term capital so that current assets and liabilities would be managed efficiently. The two strategies of working
capital according to Gitman and Chad (2012), categorisation are aggressive and conservative strategy.
Aggressive working capital strategy: This is a financing strategy that an enterprise uses short-term debt
to finance its seasonal capital requirement.
Conservative working capital strategy: The enterprise use long-term debt to finances its permanent and
seasonal capital requirements.
2.2.2 Capital Budgeting Management
Capital budgeting is the process of appraising and picking out long-term investments that is in consonance with
the goal of increasing the value of owners. According to Ross et’ al (2010), capital budgeting is the process of
putting an enterprise’s scarce resources into long-term investment. The two main expenditures under capital
budgeting are capital expenditure and operating expenditure.
Capital expenditure dealth with when the funds invested in the enterprise are expected to yield profits
over a period of time not less than one year.
Operating expenditure also deals with when the benefit that would be received after the initial funds
outlay is within one year.
Techniques of Capital budgeting include payback period, net present value and internal rate of return.
Payback period talks of the amount of time that the enterprise needs to recoup its initial capital/funds invested.
This is calculated from the cash flow. The difference between the value of a project and its cost constitute net
present value. A project’s rate of return is the discount rate that gives a zero net present value. This discount rate
according to Brealey et’al (2006), is known as the internal rate of return or discounted cash flow.

3. MODELS AND RESEARCH METHODOLOGY

This section described the research methodology used in the study. The study design and sample are described as
well as the instrument used to collect the data, including methods implemented to maintain the validity and
reliability of the instrument. In a sequel to the above, it also gives a brief overview on the hypothesis and the
estimation techniques and outlined how those techniques contributed to the success of the study.

3.1 Hypothesis And Estimation Techniques

Given that literature is divided on the attribution of financial management practices on the profitability of
business enterprises, this study draw the hypothesis which would be used to answer the research questions
raised as follows:
H1: Capital Budgeting has a positive relationship to profitability of business enterprises
H2: Working Capital Management as a financial management practice has a positive relationship to profitability
of business enterprises.
This paper applied Linear Regression Models in order to test the postulated hypothesis aiming at examining the
effect of financial management practices such as capital budgeting and working capital management on
profitability of business enterprises. The regression model is stated in equation (1) below.
Y = b0 + b1WCM + b2 CBM + ui.......... .......... .......... .......... .......... ........ equation 1
Where
Y = Profitability
WCM = Working Capital Management
CBM = Capital Budgeting Management
bo = intercept
b1 and b2 are coefficients
Ui = stochastic term

3.2 Data Source And Sampling Method

According to Awatey and Domfeh (2014); the sources of data, the methods used in collecting the data, and how
the data are finally analysed, interpreted and presented affects the success or otherwise of any empirical research.
The major methods for collecting the primary data from the enterprise used in this study was predominantly
through the administering of questionnaire and interviews. The questionnaire was used in situations where
personal interviews were not possible. Open-ended questions were used in the collection of data on financial
management practices, to give the business enterprise a sense of freedom in expressing their views, together with
pre-coded questions in which answers were given to the enterprise to select. The researchers used interviews to
gather information that is not covered by the questionnaire especially on the financial ratios used by the

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Vol.7, No.16, 2016

enterprise.
An available records from the Business Advisory Centre of National Board for Small Scale Industries
and Ghana Revenue Authority in Obuasi revealed that there are about one hundred and ninety-seven
manufacturing enterprises and two hundred trading enterprises. By using a random digit table with 5 percent
margin of error; ninety-nine manufacturing enterprises and one hundred trading enterprises were chosen. Using

a sampling fraction of , ninety-eight (98) enterprises comprises of both manufacturing and trading erterprises
were sampled.
The descriptive statistics and multiple regression analysis together with bivariate data analysis were
used to analyze the data that was collected. The investigations into financial management practices of business
enterprises was carried-out using descriptive statistics. The data was summarised by calculating the frequency
distribution, averages and percentage distribution. The researchers finally measured association among the
independent variables using Pearson’s correlation coefficient.

4. EMPIRICAL RESULTS AND DISCUSSIONS

This section presents the background of the business enterprises sampled and the findings of financial
management practices on profitability of these business enterprises. It also focuses on the analysis of the
empirical data which was collected qualitatively complemented by statistical description.

4.1 Background Of The Business Enterprises And Findings

Premised on the nuances of the attribution of financial management practices on the profitability of business
enterprises; the researchers predominantly used questionnaire to collect information from ninety-eight (98)
business enterprises out of the one hundred and ninety-seven manufacturing enterprises and two hundred trading
enterprises in the Obuasi Municipality. The dominant method used to involve these manufacturing and trading
erterprises to gain control over the process of defining the impact of financial management practices on
profitability an was in-depth interview.

Source: Authours Construct from Field Survey in June, 2015

Accessing information from the questionnaire administration indicates that greater proportions of the
business enterprises that were recruited in the Obuasi Municipality are manufacturing enterprises. The figure 1
above shows that sixty-two percent of the enterprises sampled are manufacturing enterprises whilst only thirty-
eight percent of the business enterprises are are trading enterprises.
The findings further indicate that eighteen percent of the business enterprises sampled have been in
operations less than six years and eighty-two percent has operated more than six years. It is imperious to indicate
that the business enterprieses with six or more years of operations increases the profundity of the business
enterprieses financial knowledge on the impact of financial management practices on business enterprises
profitability.

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Table 1: Characteristics of Business Enterprises

AGE OF BUSINESS ENTERPRISE NO OF ENTERPRISES PERCENTAGE (%)
Less than six years 18 18.3
More than six years 82 81.7

ANNUAL SALES NO OF ENTERPRISES PERCENTAGE (%)

less than GH¢1,000,000 53 54.1
between GH¢ (1,000,000 and 5,000,000) 42 42.9
more than GH¢ 5,000,000 3 3.1

TOTAL ASSETS NO OF ENTERPRISES PERCENTAGE (%)

less than GH¢1 million 77 78.5
between GH¢1-5 million 20 20.4
more than GH¢5 million 1 1.1
EMPLOYEES
Less than 15 95 96.9
More than 15 3 3.1
Source: Authours Construct from Field Survey in June, 2015
It is very interesting to note that fifty-four percent of the enterprises have annual sales less than GH₵1m,
forty-three percent have between GH₵1m and GH₵5m and only three percent record more than GH₵5m as
annual sales.
It can be inferred from the table 1 above that seventy-nine percent of the business enterprises have total
asset less than GH₵1m, whilst twenty of the business enterprises sampled have total asset between GH₵1m and
GH₵5m and only one percent have total asset more than GH₵5m. Furthermore, ninety-seven percent of the
enterprises sampled have employees less than fifteen and the enterprises that have employees more than fifteen
are just three percent.
As far as response to questionnaire are concerned, there is an indication from table 2 that thirty-six
percent of the business enterprises sampled prepare cash budgets often or always whilst about six percent of the
business enterprises sampled never prepare cash budget.
Table 2: Cash Management Practices
FREQUENCY OF CASH BUDGET NO OF ENTERPRISES PERCENTAGE (%)
PREPARATION
Never 6 6.1
Rarely 5 5.1
Sometimes 52 53.1
Often 24 24.5
Always 11 11.2

Never 7 7.1
Weekly 14 14.3
Monthly 57 58.2
Quarterly 14 15.3
Semiannually 4 4.1
Annually 1 1.0
Source: Authours Construct from Field Survey in June, 2015
It is very interesting to note that fifty- eight percent of the business enterprises sampled prepare a
monthly cash budget, whereas fourteen percent prepare cash budget weekly, four percent and one percent
prepare cash budget semi-annually and annually respectively. This information showed that most of the
enterprises prepare cash budget monthly.

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Table 3: Determinants of Cash Balance

DETERMINATION OF THE TARGET NO OF ENTERPRISES PERCENTAGE (%)
CASH BALANCE
Never 10 10.2
Rarely 18 18.4
Sometimes 54 55.1
Often 12 12.2
Always 4 4.1

BASIS OF CASH BALANCE NO OF ENTERPRISES PERCENTAGE (%)

DETERMINATION
Cash management 1 1.0
Historical data 3 3.1
Owner’s/manager’s experience 93 94.9
Others 1 1.0
Source: Authours Construct from Field Survey in June, 2015
On the issue of the determination of cash balance, it is clear from table 3 that sixteen percent of the
business enterprises sampled often or always determine cash balance, whereas twenty-nine percent never or
rarely determine the target cash balance and this gives the confirmation that most business enterprises pay little
attention to the policy of cash balance. The table also reveals that about nine-five percent of the business
enterprises sampled did indicate that the determination of the cash balance is based on the experience of the
owner/manager. There are an insignificant percentage of the business enterprises sampled that applies theories
of cash management determination. This showed that cash management theories have not been fully enforced.
Table 4: Surplus or shortage of cash
OCCURRENCE OF CASH SHORTAGE NO OF ENTERPRISES PERCENTAGE (%)
Never 10 10.2
Rarely 5 5.1
Sometimes 78 79.6
Often 3 3.1
Always 2 2.0

OCCURRENCE OF CASH SURPLUS NO OF ENTERPRISES PERCENTAGE (%)

Never 4 4.1
Rarely 56 57.1
Sometimes 31 31.6
Often 5 5.1
Always 2 2.0

INVESTMENT OF CASH SURPLUS NO OF ENTERPRISES PERCENTAGE (%)

Bank deposit 22 22.4
Treasury bill purchase 6 6.1
No investment 65 66.3
Others 5 5.1
Source: Authours Construct from Field Survey in June, 2015
About fifteen percent of the businesses have never or rarely been on the shortage of cash, only five
percent of the business enterprises sampled always or often have cash that is not sufficient for their
activities/operations (Table 4). Conversely, the business enterprises sampled who answered that they sometimes,
always or often have cash surplus constitute thirty-nine percent. Sixty-one percent never or rarely have cash
surplus.
It is surprising to notice from Table 4 above that about sixty-six percent of the business enterprises
sampled does not invest their cash surplus to earn profit. Twenty-two percent put their cash surplus in their bank
account so that they will earn interest on their cash deposit. Only six percent put their cash surplus in the money
market to purchase money market instruments such as treasury bills.
In summary thirty-six percent of the business enterprises sampled often or always prepare cash budget
and most of the enterprise prepare and review cash budget on a monthly basis. Only five percent of the business
enterprises sampled are often or always in shortage of cash whiles seven percent often or always record cash
surplus but only twenty-two of the enterprises put their cash surplus into their bank account whereas almost

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sixty-six percent surprisingly do not invest their cash surplus to earn profit.
Table 5: Sales on credit and credit policies
SELL PRODUCT ON CREDIT NO OF ENTERPRISES PERCENTAGE (%)
Never 5 5.1
Rarely 9 9.2
Sometimes 63 64.3
Often 11 11.2
Always 10 10.2

CREDIT POLICY FOR CUSTOMERS NO OF ENTERPRISES PERCENTAGE (%)

Never 11 11.2
Rarely 3 3.1
Sometimes 17 17.3
Often 52 53.1
Always 15 15.3
Source: Authours Construct from Field Survey in June, 2015
Table 5 reveals that twenty-one percent of the business enterprises sampled often or always have their
product being sold on credit, only fourteen percent rarely or never sell their products on credit. It is interesting to
note that only sixty-eight percent often or always set up credit policy on their customers whilst eleven percent of
the business enterprises sampled have no credit policy for their customers but whoever wants to buy on credit
from the enterprise is permitted to do so.
Table 6: Accounts Receivable Levels And Bad Debt
REVIEW RECEIVABLE LEVELS NO OF ENTERPRISES PERCENTAGE (%)
Weekly 14 14.3
Monthly 72 73.5
Quarterly 7 7.1
Annually 5 5.1

REVIEW BAD DEBTS NO OF ENTERPRISES PERCENTAGE (%)

Never 4 4.1
Weekly 21 21.1
Monthly 65 66.3
Quarterly 3 3.1
Semiannually 3 3.1
Annually 2 2.0

BAD DEBT PERCENTAGES NO OF ENTERPRISES PERCENTAGE (%)

Less than 5% 45 45.9
5-10% 39 39.8
10-20% 5 5.1
More than 20% 2 2.0
Don’t know 7 7.1
Source: Authours Construct from Field Survey in June, 2015
The data collected reveals that seventy-four percent and sixty-six percent of the business enterprises
sampled review the level of receivables and bad debt respectively on a monthly basis. However, about four
percent of the business enterprises sampled never review bad debt. The analysis of the bad debt to sales in terms
of percentage showed that eighty-six percent of the business enterprises sampled have bad debt that is not more
than ten percent of their sales. Only seven percent of the enterprises answered that they have no knowledge about
the ratio of their dab debt to sales as shown in Table 6.
In summary, twenty-one percent of the enterprises often or always have their products sold on credit
and sixty-eight percent of the enterprises have a credit policy for their customers. The majority of the enterprises
review their accounts receivable levels and bad debts on a monthly basis which showed that enterprises control
and management of the bad debts is at a low level.

4.2 Practices of Inventory Management

A further probing was done by the researchers to ascertain the inventory management practices of the business
enterprises sampled. Questions posed included how enterprises prepare and review inventory budgets,

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determination of the level of inventory.

Table 7: Determination Of Inventory Levels And Budgets
REVIEW INVENTORY LEVELS NO OF ENTERPRISES PERCENTAGE (%)
Never 3 3.1
Rarely 5 5.1
Sometimes 8 8.2
Often 35 35.7
Always 47 48.0

PREPARE INVENTORY BUDGETS NO OF ENTERPRISES PERCENTAGE (%)

Never 2 2.0
Rarely 2 2.0
Sometimes 25 25.1
Often 31 32.5
Always 38 38.8
Source: Authours Construct from Field Survey in June, 2015
It can be observed from the table above that eighty-four percent of the enterprises sampled often or
always review the inventory levels and seventy-one percent of the enterprises often or always prepare budgets
for inventory. Only four percent never or rarely prepares budgets for inventory. Ninety-eight percent of the
business enterprises sampled said the determination of inventory levels is based on the experience of their owner.
The issue here is that almost all the enterprises have limited application of inventory theories.

4.3 Capital Budgeting Management Practices

Enterprises were quizzed on how frequent they evaluate investment projects and the efficiency level of
reviewing the use of the fixed asset as well as the kind of methods they use to evaluate projects.
Table 8: Evaluation Of Investment Projects
EVALUATES PROJECTS BEFORE NO OF ENTERPRISES PERCENTAGE (%)
MAKING INVESTMENT DECISIONS
Never 5 5.1
Rarely 8 8.2
Sometimes 32 32.7
Often 28 28.6
Always 25 25.5

REVIEW EFFICIENCY OF FIXED ASSET NO OF ENTERPRISES PERCENTAGE (%)

AFTER INVESTING
Never 2 2.0
Rarely 6 6.1
Sometimes 15 15.3
Often 41 41.8
Always 34 34.7

METHOD USE TO EVALUATE NO OF ENTERPRISES PERCENTAGE (%)

INVESTMENT PROJECTS
Payback period 91 92.9
No answer 7 7.1
Source: Authours Construct from Field Survey in June, 2015
From table 8, fifty-four percent of the business enterprises sampled often or always evaluate projects
before taking decisions on the investment projects but thirteen percent rarely or never evaluate projects before
taking decisions. The concern of these enterprises is not on the evaluation of project but as the need arises, they
purchase fixed assets. On the efficiency level of fixed asset utilization, seventy-six percent of the enterprises
often or always review the efficiency of using fixed asset for the investment.
With the kind of methods that enterprises use to evaluate projects, almost ninety-three percent of the
business enterprises sampled indicated the use of payback period as the main method used for evaluating
projects. The information on the capital budgeting management in this study gives a confirmation to the research
conducted by Peel and Wilson (1996), and Luoma (1967). This means that other methods of evaluating
investment projects such as internal rate of return, modified internal rate of return, net present value and
discounted payback period are not frequently used.

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In summary, almost fifty-four percent of the enterprises often or always evaluate investment projects
before taking decision on investment and a high percentage of the enterprises review the efficiency level of the
utilization of the fixed asset after investing (76%). Ninety-three percent of the business enterprises sampled use
payback period as the main method for evaluating investment projects. The findings show that business
enterprises do not have a strong regard for capital budgeting management.

4.4 Regression Results

In this regression analysis, the researchers reports the model of profitability as measured by profit margin where
profitability was used as the dependent variable with working capital management and capital budgeting
management as the independent variables. In the second model, return on sales was used as dependent variable
while the independent variables include working capital management and capital budgeting management.
Table 9: Enterprises regression model with profitability as dependent variable
Model 1 Un-standardized Std. Standardized P-Values
Coefficients (β) Error Coefficients
(Beta) T
(Constant) -8.224 1.045 -7.870 .012
Working capital .644 .071 .903 9.062 .021
management
Capital budgeting -.034 .058 -.059 -.590 .056
management
Model Summary
Model R R Adjusted R Square Std. Error of the
Square Estimate
.854 .729 .72 .27914
Anova
Model Sum of Squares Df Mean Square F P-Values
Regression 19.863 2 9.931 127.458 .031
Residual 7.402 95 .78
Total 27.265 97
PM=8.224+0.903WCM-0.059CBM
Dependent Variable: Profitability
Predictors: Capital Budgeting Management, Working Capital Management
Source: Authours Construct from Field Survey in June, 2015
From Table 9, there is a significant correlation between profitability and identified financial
management practices with coefficient of correlation R =0.85 and at the same time with the coefficient of
determination R2 = 0.73. This means that variations in profitability are explained by changes in the independent
variables by seventy-three percent. Only twenty-seven percent of the variation in profitability is not explained by
the working capital management and capital budgeting mangement. The summary of Analysis of Variance and
F-statistics, which reveals the value of F = 127.458 is significant at the 0.031 level. Since the F value is large, the
identified financial management practices contribute greatly to the variance in the business enterprises
profitability.
The independent variables with the exception of capital budgeting management contributed positively
in terms of the variance of business enterprises’ profitability. Capital budgeting management has a negative
relationship to profitability at a significant level of 0.056. This does not support the hypothesis which states that
capital budgeting positively relates to profitability.
The regression analysis in table 10 also reveals that returns on sales and the two independent variables
are significantly correlated with the correlation coefficient R =0.520. The table also reports the model of returns
on sales with the coefficient of determination R2 = 0.270.

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Table 10: Enterprise regression model with return on sales as dependent variable
Model 2 Unstandardized Std. Standardized T P-Values
Coefficients (β) Error Coefficients
(Beta)
(Constant) .768 .733 1.048 0.021
Working capital management .036 .050 .911 .729 0.014
Capital budgeting .103 .040 .415 2.542 0.025
management
Model Summary
Model R R Square Adjusted R Std. Error of the
Square Estimate
.520 .270 .255 .19581
Anova
Model . Sum of Squares Df Mean Square F P-Values
Regression 1.347 2 .674 17.570 0.032
Residual 3.642 95 0.38
Total 4.990 97
ROS=0.768+0.911WCM+0.415CBM
Dependent Variable: Return On Sales
Predictors: Capital Budgeting Management, Working Capital Management
Source: Authours Construct from Field Survey in June, 2015
The coefficient of determination for returns on sales models above indicated that twenty-seven percent
(27%) of the variation in return on asset are explained by the working capital management and capital budgeting
management. Seventy-three percent of the variations in the return on sales are not explained by the independent
variables. In addition, the analysis of variance reveals that the value of F (17.570) is significant at the 0.032 level.
Since the F value is large though smaller as compared to the first F value, the independent variables contribute to
the variations in the business enterprises sales returns. The table also showed that all the independent variables
contributed significantly in terms of the variance of business enterprises’ return on sales.
The results of this study confirms the research conducted by Block (1997), that business enterprises pay
much attention to cash management, accounts receivables, inventory management and capital budgeting
management.
Besides, this study found out that working capital management has a positive relationship with
profitability but capital budgeting management has a negative relationship with business enterprise profitability.
These findings are also in consonance with the research conducted by Asuquo et’ al (2012) on the effect of
financial management practices on the profitability of small and medium enterprises in Nigeria.

5. CONCLUSIONS AND RECOMMENDATIONS

The findings of this empirical research showed that ninety-three percent of the enterprises sampled used payback
period as the main method of evaluating investments decisions. It is rather unfortunate that sixty-six percent of
the enterprises do not invest their cash surplus in the money market for profit because these enterprises have
little knowledge on investing in the money market. The regression analysis also confirms that the independent
variables were contributing to the variance of profitability measured by profit margin and return on sales. In
addition, capital budgeting has a negative effect on business enterprise’s profitability whilst working capital
management has a positive effect on the profitability of business enterprises. It is recommended that since
financial management practices have an effect on business enterprises profitability, financial managers should
pay much attention to these practices.

REFERENCES
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