The Impact of Working Capital Management Practices and Capital Structure Decisions on Access to Finance and Performance of Small Businesses in Ghana

Abstract

Despite the important role small businesses play in the overall health of the Ghanaian economy, a number of constraints have been identified as hindering their performance, a major one being access to finance. Small businesses find it difficult to access finance for their operations. The concept of finance gap has emerged in the finance literature to describe the herculean tasks involved in the financing of small business activities. The concept expatiates on the supply and demand barriers relating to small business financing. While the supply side identify screening, monitoring and enforcement problems by finance providers as impeding supply of finance, the literature discusses owners' and firm characteristics as the main demand side factors that hinder small businesses’ effort to access finance and enhance their performance. This study posits that the owners' and firm characteristics are inadequate to explain the demand side factors, and that small businesses' internal operations potentially hold the key to their ability to access external finance and to enhance their performance. Internal operations relating to key financial management issues such as working capital management practices and capital structure decisions, not adequately covered in the literature, comprise the gaps examined in this thesis. This research examines the effects of working capital management practices and capital structure decisions on access to finance and performance of small businesses in Ghana. Using the Resource-Based Theory (RBT), with its two dimensions of resources and dynamic capabilities, this study concurs that resources required to enhance finance access and performance are both physical and intangible. Between the two, intangible resources are deemed, in this study, to hold greater strategic and operational potential. Accordingly, the study finds that small businesses lacking physical resources could enhance access to finance and performance by leveraging intangible resources. Efficient working capital management practices and appropriate capital structure decisions represent desired intangible resources for small businesses. These resources are organized to attract funding and to create value for customers, and thus, improve performance. Consequently, an argument is made that efficient working capital management practices and the right capital structure decisions act as dynamic capabilities that enhance access to finance and performance of small businesses. Based on the results of a quantitative field research that involved face-to-face interviews with owner/managers of small retail firms in the Accra/Tema metropolis of Ghana using a structured questionnaire, a model comprising working capital management practices, capital structure decisions, access to finance, and performance, was developed for the study. The validity of the model was tested with the collected data set, comprising 330 retail firms. The partial least squares (PLS) analytical method of the structural equation model (SEM) was used to test the model. On the basis of this, hypotheses regarding the effect of working capital management practices and capital structure decisions on access to finance and performance were tested by utilizing various aggregate working capital management and capital structure measures drawn from the literature. The test of the model and the survey results provide evidence for a significant positive impact of working capital management practices and capital structure decisions on access to finance and performance. Regarding the individual relationships, the study failed to identify a significant relationship between access to finance and performance. Overall, results suggest that working capital management practices and capital structure decisions are essential influencers of the access to finance and performance of Ghanaian small businesses. This study extends the application of the demand side factors in explaining the financing difficulties of small businesses, and thus, provides theoretical support for the need to pay attention to internal operations of businesses.