Does Maintaining Liquidity Improve the Performance of Small Businesses

Abstract

This paper investigates the impact of liquidity management within financial management metrics on the sustainability and growth of small businesses as expansion efforts diversely reduce failure rates in small medium and micro enterprises (SMMEs). While SMMEs are globally recognized for their role in economic development, many struggle to sustain operations beyond three years, with only a minority achieving notable growth. This study explores financial management’s significance in enhancing internal efficiency, fostering higher growth rates, and ensuring small businesses’ endurance and survival. Aimed at supporting SMME growth, informing policymakers about regulatory improvements, and stimulating economic growth to benefit the population living below the poverty line in South Africa, this research involved participants from SMMEs in the Mangaung region. An exploratory qualitative study was conducted, utilizing interviews and thematic analysis methods. The research findings indicated that a majority of participants lacked effective financial management practices, primarily due to an inadequate understanding of the benefits associated with financial management in the context of SMMEs. Several obstacles were identified, including an unstable income cycle influenced by external factors affecting the organization, which leads to substantial deviations from planned financial strategies. Furthermore, time constraints arising from operational demands also hinder the effective management of financial resources. The improper application of financial management principles resulted in a general lack of estimating costs, profits, and financial planning. However, SMMEs that properly implemented these principles experienced prolonged existence due to higher revenue, which has led to growth and sustainability, confirming the benefits of financial management in micro-enterprises.