GREAT LAND COLLEGE

COLLEGE OF BUSINESS AND ECONOMICS

MBA Program
THE IMPACT OF FINANCIALCONISTRAINTS ON
PERFORMANCE OF MICRO AND SMALL
ENTERPRISES IN NEJO TOWN,WEST ETHIOPIA
BY
MELKAMU TEMESGEN
ADVISOR:-DEBELA YOHANIS (PHS Candidate)
A PROPOSAL SUBMITTED TO GREAT LAND COLLEGE, POSTGRADUATE
STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE
OF MASTERS OF BUSINESS ADMNISTRATION

JULY,2024

NEJO, OROMIA, ETHIOPIA,

Table of contents

Contents
1
Table of contents..................................................................................................................................2
Chapter One..........................................................................................................................................3
Introduction..........................................................................................................................................3
1.1. Background of the Study...............................................................................................................3
1.2. Statement of the Problem..............................................................................................................5
1.3 .Research Questions.......................................................................................................................6
1.4. Objective of the study....................................................................................................................6
1.5. Significance of Study....................................................................................................................6
1.6. Scope of the Study.........................................................................................................................7
1.7. Limitations of the Study................................................................................................................7
1.8. Organization of the Study..............................................................................................................7
Chapter Two.........................................................................................................................................8
Review of Related Literature................................................................................................................8
2.1. Introduction...................................................................................................................................8
2.2. Definition of MSEs........................................................................................................................8
2.3. The Role of small businesses for the economy...........................................................................10
2.4.MSEs National Policies and Implementing Bodies of the Strategy Ethiopia..............................10
2.5. The Concept of Business Performance........................................................................................12
2.6. Factors Determining Financial Performance of MSEs................................................................12
2.7. Empirical Literature Review.......................................................................................................14
2.8. The Conceptual Framework........................................................................................................17
CHAPTER THREE............................................................................................................................18
3. RESEARCH METHODOLOGY.................................................................................................18
3.1 Research design............................................................................................................................18
3.2 Data Type and Collection Methods..............................................................................................18
3.3 Population and Sampling Design.................................................................................................19
3.3.1 Population..................................................................................................................................19
3.3.2 Sampling Design.......................................................................................................................19
3.4 Data Analysis Methods................................................................................................................19
3.5 Definition of Research Variables.................................................................................................19
3.6. Linear Regression Analysis.........................................................................................................20
Chapter Four.......................................................................................................................................20
Chapter Four.......................................................................................................................................20
Work Plan...........................................................................................................................................20

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4. BUDGET BREAKDOWN...........................................................................................................21
References..........................................................................................................................................22
APPENDIX........................................................................................................................................30

Chapter One

Introduction

1.1. Background of the Study

It is generally recognized that micro and small enterprises (MSEs) have vital contribution to the
economic development and creation of wider employment opportunity in developing countries
3
with large number of unemployed people. As Habtamu, et al, (2013) noted, MSEs do serve as a
means of bringing economic transition by using the skill and the talent of people without
requiring high level training, much capital and sophisticated technology. This makes the sector
more preferable to business entry, unemployment reduction, income generation, and poverty
alleviation.

The contribution of Micro and Small enterprises (MSEs) to employment, growth, and sustainable
development is now widely acknowledged throughout the world. Micro and small enterprises
(MSEs) are described as the natural home of entrepreneurship. Most large enterprises in Ethiopia
and throughout the world began as MSEs and grew to maturity over time as capital and business
management experience accumulated (EEA, 2015; Ethiopia’s MSED Policy & Strategy, 2016).
MSEs are considered critical to society's overall development. They are at the heart of economic
and social empowerment for citizens, as governments cannot simply generate jobs for everyone.
MSEs are one of the ideal locations for young people to be entrepreneurial, develop new
technology, and develop substitute products to replace imported goods (Gebremariam, 2017).
The importance of micro and small enterprises (MSEs) in a country's long-term growth has
drawn the attention of numerous countries throughout the world. They promote economic
development by reducing poverty, creating job opportunities, increasing self-sufficiency,
increasing industrial production and exports, and making a major contribution to GDP growth
(Baleseng, 2015; Rahel, 2018). MSEs have become key urban economic activities in most
industrialized countries, notably in terms of creating urban jobs. MSEs and the informal sector
are the primary income-generating activities in developing nations in general and in Ethiopia in
particular, and so they contribute significantly to local economic development and are used as a
basic means of survival (Gebre-egiziabher and Demeke 2004 as cited in Rahel, 2018). One of the
primary drivers of economic growth and employment creation is the MSE sector. This is
especially true in several low-income African nations, where MSEs and the informal sector
account for over 90% of enterprises, generate over 50% of GDP, and employ over 63 percent of
the population (Ahmed, 2012 as cited in Rahel, 2018). Micro and Small and enterprises are the
economic activities that separate the developed and developing worlds (El-Khasawneh, 2012 as
cited in Baleseng, 2015). Many academics recognize the importance of micro and small
companies in economic development (Baleseng, 2015; EEA, 2015; Ethiopia's MSED Strategy,
2011; Ethiopia’s MSED Policy & Strategy, 2016; Rahel, 2018).

The micro and small enterprises (MSEs) are described as the natural home of entrepreneurship.
Most big businesses in Ethiopia have started as SMEs and have grown to their maturity over long
period by cumulating capital and business management experiences Ethiopian Economic
Association (2015). In most developing countries MSEs, by advantages of their size, location,
capital investment and capacity to generate greater employment became the main focused area.

According to ILO (2007:16) small and medium enterprises become more important as a
proportion of GDP and informality less important as countries become wealthier. In the OECD
countries over 95% of enterprises are classified as small and medium enterprises and account for
4
60–70% of the working population. MSEs, which account for over 90% of enterprises in all
countries, are an important source of output and employment. They employ 33% of formal sector
workers in low income countries and 62% of such workers in high income countries (ILO,
2009). Micro and small enterprises (MSEs) contribute about 18% of the Gross Domestic Product
(GDP), employ millions of adult Kenyans and also consume and pay for public funded services
through licenses and taxes Kenyan Institute of Economic Affairs (2012:3).

In the Ethiopian context, according to the new Federal Democratic Republic of Ethiopia MSEs
strategy (2011) micro enterprise consist of employees (including the owner or family) not greater
than 5 and total asset is less than 100,000 ETB for industrial sector and less than 50,000 ETB for
2 service sector; while small scale enterprise is an enterprise which has 6-30 employees and total
asset 100,001-1,500,000 ETB for industrial sector and 50, 0001-500,000 ETB for service sector.

The sector has potential to provide the ideal environment for enabling entrepreneurs to optimally
exercise their talents and to attain their personal and professional goals (MoTI, 1997:9). The
country has registered an overall economic growth rate of 11.4 % and 8.5% in 2010/11 and
2011/12 respectively. The average performance of the economy in the first two years of the GTP
period was 10 percent (MoFED, 2012). The micro and small scale enterprise contribution is
undeniable in the development of the country. As indicated by FDRE Ministry of Industry
(2013:2) the construction sector and the priority industries under medium and large-scale
manufacturing and the achievements in micro and small scale enterprises (MSEs) were the major
contributing factors for the growth.

In all successful economies, MSEs are seen as an essential springboard for growth, job creation
and social progress. As documented in MoTI, (1997:9) The small business sector is also seen as
an important force to generate employment and more equitable income distribution, activate
competition, exploit niche markets, and enhance productivity and technical change and, through
the combination of all of these measures, to stimulate economic development. This is not
denying the importance of large industries and other enterprises for the growth of the Ethiopian
economy, there is ample evidence to suggest that the labor absorptive capacity of the MSE sector
is high, the average capital cost per job created is usually lower than in big business, and its role
in technical and other innovative activities is vital for many of the challenges facing Ethiopia.

As indicated in GTP II (2015:29) the implementation of the micro and small scale enterprises
development strategies has to be consolidated in order to unleash the potential of the sector in
revitalizing local economic development, nurturing entrepreneurship and addressing
unemployment and poverty over the coming planning periods. With regard to increasing the
economic benefit of youth, 7.43 million youth will be engaged in small and micro enterprises
and 1.35 million youths will be organized and benefit from social cooperative associations.

In spite of the fact that MSE‟s have been playing their roles in employment creation, poverty
alleviation, creation of entrepreneurship and economic development; the sector has been

5
confronting with many challenges whose severity varies across regions and cities. Therefore it is
3 necessary to identify the determinant factors which influence performance of MSE. Thus, this
study will aim to identify the determinant factors for performance of MSEs in the study area.

1.2. Statement of the Problem

In most developing countries, MSEs face constraints both at start up phases and after their
establishment. In Africa, for example, the failure rate of MSEs is 85% out of 100 enterprises due
to lack of skills and access to capital (Fedahunsi, 1997). It is typical of MSEs in Africa to be
lacking in business skills and collateral to meet the existing lending criteria of financial
institutions (World Bank, 2004). According to micro-econometric studies using enterprise level
data from MSEs by (Mead and Lieadholm, 1998) has indicated that many of these enterprises
have low levels of productivity, produces low quality products and grows only when they were
young.

Ethiopia is one of the developing countries which have taken measures to enhance the operation
of MSEs by considering their contribution. The Government of the Federal Democratic Republic
of Ethiopia has recognized and paid due attention to the promotion and development of MSEs
for they are important vehicles to address the challenges of unemployment, economic growth and
equity in the country (MoTI, 1997:5). Thus it evinced that the government exert much in
ensuring the continuity of the MSEs for the growth and expansion of the enterprise in the sector.

Despite government effort to promote and expand the sector, it is not functioning to its best.
According to Belay (2000 as cited in Eshetu and Mamo 2009), 98% of business firms in Ethiopia
are micro and small enterprises, out of which small enterprises represent 65% of all businesses.
The fact that the majority of firms are micro and small shows that established firms find it
difficult to grow to the next higher level due to lack of an enabling environment for sustained
growth. Moreover the study reveals that the majority of enterprises are micro and small indicates
that established enterprises find it difficult to grow to the next stages of middle and large scale
industries.

According to Mekonnen and Tilaye (2013) also stated that even though country have taken
measures to enhance the operation of MSEs, there are MSE‟s in the country that have shown
deteriorating performance and have been experiencing huge stumbling blocks with no significant
4 graduation from one enterprise level to the next. According to Wubshet (2016) MSEs have
confronted with a number of obstacles and bottlenecks. The major constraints were market
related problems, termination of government projects, institution related problems,
disagreements among members of operators. Similarly as documented in Endalkachew (2008)
regardless of the different promotional efforts made by the government the sector was highly
constrained by poor productivity, poor performance and stagnant growth, these was mainly due
to unfavorable legal and regulatory frameworks, underdeveloped infrastructure, poor business
development service, limited access to finance, ineffective and poorly coordinated institutional
support.
6
Therefore, the findings of study and evidence above clearly state the problem of MSE
performance. The government has surprisingly given strong support in the sector and the
economies are characterized by labor and land abundance that creates favorable conditions to
engage in labor intensive industrial activities. Consequently a question that would arise is that
why the MSE sector has not expanded more by captivating existing policy, the cheaply available
labor force and by adopting production organizations that are suitable for MSEs to expand.
While there is a rich study conducted on MSEs in Ethiopia focusing on factors affecting
performances and the rare studies mostly focus on challenges of MSEs. Thus, critical assessment
of the factors that determine financial performance of the sector is critically needed so as to
enhance the function of the enterprise in economic growth and contribution in employments
opportunity. From this perspective, the main purpose of this study is to identify the factors that
determine performance of the MSEs Nejo Town Administration.

1.3. Research Questions

In light of the above mentioned problem statement, the following basic research questions will
be addressed:

 What does the practice of financial performance in MSEs look like?

 What are the major factors that influence the financial performance of MSEs?
 How do the major factors determine the financial constraints of MSEs?
 What should be done to enhance financial performance of MSEs operation?

1.4. Objective of the study

General Objective

The main purpose of this study was to identify the determinant factors of micro and small scale
enterprise financial performance.

Specific Objective

In order to handle the research questions and realize general objective stated above, the study
deals with the following specific objectives:

 To assess the impact of financial constraints in MSEs

 To identify the major factors that influences the financial performance of MSEs.
 To determine the factors that can help financial performance of MSEs.

1.5. Significance of Study

Findings from this study will assist academicians in broadening of the prospectus with respect to
this study hence providing a deeper understanding of the critical factors that determine the
7
performance of MSE. The findings of this study will help MSEs in Nejo town administration and
others, within an insight into the benefits of using different factors studied in this research to
predict the factors that determine the performance of MSE. The government can use the findings
of this study to assist in policy formulation and development for a framework for critical finance,
marketing, customer relationship, change of technology and other factors that affect the
performance of MSE. Moreover, the findings of this study will help the policy makers and 6
financial institutions how to encourage establishing or expanding MSE. It also enables them to
know what kinds of policies should be framed.

1.6. Scope of the Study

The study is surrounded to individuals operating MSE activities or establishments in four kebeles
of Nejo Town. Moreover, due to limited human, financial and material capital, the study is
restricted to a limited number of individual operators who are participating in the informal sector
activities during the survey period.

1.7. Limitations of the Study

The problem that was encountered during collection of primary data from operator due to
suspicion that disclosing information leads to negative effect on their business. Another problem
during the survey period was most of the documents that are concerned with micro and small
enterprises are written in Afan Oromo and Amharic. It took longer time translate in to the
required instruction language (English) in required period. Because of above factors, it is very
important to note that these limitations had insignificant interference with the outcome of the
study.

1.8. Organization of the Study

The thesis is arranged in five chapters. The first chapter deals with the introductory part of the
study. Here, the background of the study, Statement of the problem, Research questions,
Objective of the study, Significance of the study, Organization of the study, and Scope and
limitation of the study are included.

Discussion on the related literature is covered in chapter two. Here different theories applicable
to the study, empirical review and theoretical framework are presented. In the third chapter, the
research design and methodology is presented. Under this chapter the study setting, the research
design, population and sampling procedures, sources of data, method of data collection, method
of data analysis are discussed separately. Chapter four is deals with data presentation, discussion
and analysis. Finally, research finding, conclusion and recommendation are presented in the last
chapter – Chapter five.

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 Chapter Two

Review of Related Literature

2. Introduction
The growth of micro and small enterprise is a major economic driver as MSE contributes to
employment growth at a higher rate than larger businesses do. The important economic
9
contribution of MSE has aroused significant interest from both international organizations and
academic researchers, whose goals include using national policies to generate growth in the MSE
sector.

Despite the considerable attention paid to MSE growth, no theories have been able to effectively
explain why certain MSEs grow and others fail (Farouk & Saleh, 2011:2). Overall, the
performance of MSEs is considered as an essential ingredient for long term success, since the
failure of having a culture of performance is seen as a source of competitive disadvantage
(Eccles et al., 2012).

MSEs are considered to play a pivotal role in promoting grassroots economic growth and
reasonable sustainable development. High prevalence of economic growth contributes to
economic and social development. The quality of growth is also important and includes the
composition of growth, the spread and distribution and the degree of performance and therefore
it is important to understand various factors responsible for quality growth and the performance
of MSEs (Pandya, 2012:427).

2.1. Definition of MSEs

The term MSE covers a wide range of definitions and measures, varying from country to country
and varying between the sources reporting MSE definitions. Also based on the economic activity
sectors the definitions are different. In the words Broom (1983) specifying any size standard to
define small business is necessary arbitrary, for people adopts different standards for different
purposes.

Some of the commonly used criteria are the number of employees, total net assets, sales and
investment level, number of annual working hours, annual turnover, annual balance sheet or
production volume, and independence of the company (Harjula, 2008). Among the various
criteria, the number of employee and the annual turnover seem to be the most important criteria
used to define MSEs (Peacock, 2004), and also (Broom, 1983) argues criteria number of
employees is most widely used, the best criterion in only given case depends upon the user‟s
purpose.

United Nations Industrial Development Organizations (UNIDO) gives alternative definition for
developing countries. Accordingly, it defines micro enterprises as the business firms with less
than 5 employees and small enterprises as the business firms with 5-19 employees (UNIDO,
2002:53).

According to Kenya‟s Micro and Small Enterprises Act (2012), micro enterprises are defined as
a firm, trade, service, industry or a business activity whose annual turnover does not exceed
Kshs. 500,000 and whose total employees are less than 10 people. The same statute defined a
small enterprise as that which has an annual turnover of between Kshs 0.5 - 5 million, with the
number of employees in the range from 10-50 people. In essence, the law classifies these
enterprises based on employment and the annual turnover.
10
Similarly, in Ethiopia there is no uniform definition at the national level to have a common
understanding of the MSE sector. Ministry of Trade and Industry (MoTI) and the Ethiopian
Central Statistics Authority (CSA) have defined MSEs separately. While the definition by MoTI
uses capital investment, the CSA uses employment and favors capital intensive technologies as a
yardstick. The definition used by MoTI, which uses capital investment as a yardstick, has been
developed for formulating MSEs development strategy in 1997 (MoTI, 1997:8-21). The recent
definition of MSE development strategy of 2011 has improved the definition of the previous by
taking into account number of employees‟ and current inflation rate after 13 years. The
definition given on that time was only based on paid capital or capital investment as most
business were confined to family man power basis and lack of availability of manpower
information of the sector(MSEs strategy, 2011:28).

After gathering experience the Federal Democratic Republic of Ethiopia MSEs strategy,
(2011:28 -31) taking number of employee and total assets as criteria and dividing the sector into
industry and service by considering the coming 5 years inflation and fluctuation/irregularity of
currency improved the definition as follow. Micro enterprise of industry operator is an enterprise
which operates with not greater than 5 people including the owner and/or their total asset is not
exceeding Birr100, 000 and for service an enterprise which operates with not greater than 5
persons including the owner and total asset is not exceeding Birr 50,000. Small enterprise for
industry operators is an enterprise which operates with 6-30 persons and/or with a paid up capital
of total asset Birr 100,000 and not exceeding Birr 1.5 million and for service an enterprise which
operates with 6-30 persons or/and total asset, or a paid up capital is with Birr 50,001 and not
exceeding Birr 500,000 (Federal Democratic Republic of Ethiopia MSEs strategy, 2011:28 -31).

2.2. The Role of small businesses for the economy

According to Edmiston (2007:87) the small businesses indeed create a substantial majority of net
new jobs in an average year. On the same document it argues that small businesses are largely
thought to be more innovative than larger firms for three reasons: a lack of entrenched

bureaucracy, more competitive markets, and stronger incentives (such as personal rewards). The
hope is that some of the small businesses can grow to become the large firms of tomorrow and
offer the kinds of benefits that typically come with employment in a large firm. The small
business sector is regarded as a fundamental ingredient in the establishment of a modern,
progressive and vibrant economy. The presence of small firms in an economy is an expression of
10 healthy and necessary competitions against the excesses of big business and monopoly power
and exploitation (Anca, 2014: 170). According to (Asrat, 2014: 19) the importance of micro and
small enterprises, which usually constitute the majority of the informal sector, has long been
recognized, and increasingly support programs have emerged in Ethiopia to leverage the
economic growth potential of this sector.

According to Ethiopia country Report (2014:19) the importance of micro and small enterprises,
which usually constitute the majority of the informal sector, have long been recognized, and
11
increasingly support programs have emerged in Ethiopia to leverage the economic growth
potential of this sector.

The MSEs sector have great roles in improving economy, especially in creating employment
opportunity, improving the income level, empowering women capacity, making people intends
to save money, developing the operators‟ skills and knowledge, improving people’s living
conditions and social issues, and contributing to integrating different business levels,
establishment of larger businesses and partnership for the people in the study area (Shiferaw,
2013:134)

2.3. MSEs National Policies and Implementing Bodies of the Strategy Ethiopia
2.3.1. MSEs National Policies

The importance of small business is recognized internationally, and therefore countries can
coordinate the relevant activities and prioritize goals by positioning the sector development
policy against national targets. According to (OECD, 2004:7) some of the risks and complexities
can be addressed by governments as they relate to the differing regulatory, administrative and
policy environments that governments create. The barriers and impediments which inhibit an
entrepreneur’s access to international markets will be reviewed, along with the policy
implications which they give rise to.

Specific objectives can be set regarding the MSE contribution to job creation, poverty reduction,
the welfare of specific group and growth to add value. The focus of new small business
development projects may also be improved by setting targets for MSE relative to
competitiveness.

By recognizing the role of MSE‟s, Ethiopian government on the socio-economic development of

the country and, giving due attention to the sector, MSE strategy and policy was formulated and
has been implemented in the past years entitled - Federal Democratic Republic of Ethiopia MSE
strategy (2011: 6). The government gives further attention to the sector as indicated, in GTP II
(2010:36) as it is stated, the government will continue to initiate, promote and strengthens micro
and small scale enterprise development through industrial extension services. So far, agencies
have been established at both Federal and Regional levels. Strengthening the capacity of these
institutions in implementing the initiation, promotion and strengthening activities will continue
in a more coordinated manner. These developments are believed to create additional employment
opportunities in the private sector.

2.3.2. Micro and Small Enterprise Development Strategy

The Ethiopian government released the country’s first MSE development strategy in November
1997 E.C. The primary objective of the national strategy framework is to create an enabling
environment for MSE. In addition to this basic objective of the national MSE strategy
framework, the MoTI has developed a specific objective which includes, facilitating economic
12
growth and bring about equitable development, creating long term jobs, strengthening
cooperation between MSEs, providing the basis for medium and large scale enterprises,
promoting export, and balancing preferential treatment between MSEs and bigger enterprises
(MoTI, 1997:8-27).

The strategy outlines the policy framework and the institutional environment for promoting and
fostering the development of MSEs and stimulating the entrepreneurial drive in the country. The
second Micro and small enterprise strategy has released after 13 years in 2011 having similar
objectives but with some additions. Enabling the sector to be competent, facilitate economic
growth and lays foundation for industry development and expanding the sector ’s development in
urban areas by creating developmental investors (GTP II, 2016:15).

2.3.3. The Implementing Bodies of the Strategy

The institutions that are involved in implementation of the strategy are identified in the strategic
document briefly. The implementing bodies of micro and small enterprise development agency
were established from federal to woreda levels. With national approach implementation, the
federal and regional state executive bodies had undertaken their roles in identified and integrated
ways (Federal Democratic Republic of Ethiopia MSE strategy, 2011:61). The second five year
Growth and Transformation Plan (GTP II) has given particular attention to the expansion and
strengthening of micro and small scale enterprises. As mentioned in GTP II (2016:148) ) based
on the small and micro enterprises development strategy, supporting frameworks and
implementation strategies intensive work will be undertaken to organize Small and micro
enterprises (SMEs) operators and support them to start business.

2.3.4. The Concept of Business Performance

According to Martin (2010:67) performance is defined simply in terms of output terms such as
quantified objectives or profitability. Performance has been the subject of extensive and
increasing empirical and conceptual investigation in the small business literature (Bidzakin,
2009:31). The issues that remain unresolved are the goals against which performance should be
assessed and from whose perspective the goals should be established (Etzioni, 1996: 128).

According to Rami and Ahmed (2007:6-13) the most commonly adopted definition of success
good performance is financial growth with adequate profits. Other definitions of success good
performance are equally applicable. For example, some entrepreneurs regard success good
performance as the job satisfaction they derive from achieving desired goals. However, financial
growth due to increasing profits has been widely adopted by most researchers and practitioners
in business performance models.

Owner-managers pursue a range of goals, emphasizing in particular survival and stability of the
firm (Jarvis et al., 2000). Other goals pursued include efficiency, market share, liquidity, size,
leverage, growth, customer satisfaction, quality of products, contribution to community
development and employment of family members (Murphy et al., 1996). Assessment of
13
performance in small firms must therefore take account of a range of goals, both financial and
non-financial. Since research interest in the small business sector derives from its contribution to
13 economic developments, performance of individual firms in the sector can be assessed by the
extent to which they add value to the economy (Kotey & Meredith, 1997).

A business enterprise could measure its performance using the financial and non- financial
measures. The financial measures include profit before tax and turnover while the non-financial
measures focus on issues pertaining to customers‟ satisfaction and customers‟ referral rates,
delivery time, waiting time and employees‟ turnover. Recognizing the limitations of relying
solely on either the financial or non-financial measures, owners-managers of the modern small
business has adopted a hybrid approach of using both the financial and non-financial measures
(H Gin Chong, 2008:13).

2.3.5. Factors Determining Financial Performance of MSEs

MSEs are affected and influenced by a number of constraints that impede them to be financially
performed well and competitive enough in the market in which they operate. Factors that
determine the financial performance of MSEs are the management and expertise skills, customer
relationship, marketing skills, entrepreneurship, finance, politico-legal, technological change,
product/service features are outlined in the following section:

Management and expertise Skills

SME owners or managers with more experience (managerial, sector or previous small
businesses experience) tend to have more growth potential than with a lack of expected potential
and also the higher the level of education attained by the owner/manager, the higher the
likelihood of growth of the enterprise (Woldie, et al., 2008). Managerial skills and experience
affects businesses performance at certain level (Mbugua, et al., 2014).

Customer Relationship
Well focused sales methods and attention to individual detail are likely to encourage customers
to become more loyal towards a business. Establishing coherent relations with consumers by
keeping their records following up on behavior patterns, knowing what they want and improving
knowledge of their characteristics. According to Forbes (2014) the basic problem of customer
service is that many companies either don‟t know how to offer customer service, forget to 14
monitor the customer services its employees provide or identify the attributes that comprise
customer service

Marketing skills

Marketing activities such product/service marketing, marketing research and information and
promotion impact negatively on the performance of MSEs due to lack of marketing skills by
SMEs owners. Most SMEs in Ethiopia lack marketing skills such as market surveys or analysis

14
hence they rely on their immediate daily community demands (Gebeyehu and Assefa, 2004).
However, if the marketing analysis is done it is done on a limited scale because of scarce
resources. Because SMEs at times compete for the same customers with large enterprises,
sometimes it is difficult for SMEs to secure markets for their products. Hence resulting in
obsolete inventory and ultimately leading to collapse of the business ventures.

Finance

MSEs are faced with a challenge of accessing financial means to get their businesses off the
ground and make them grow and be sustainable. According to (Simeon and Lara, 2005:72)
MSEs appear to be disproportionately afflicted by the underdeveloped nature of financial
institutions in developing countries. For various reasons ranging from a lack of collateral to bias
against small firms, MSEs tend to face greater financial constraints than do larger firms. In
Ethiopia nearly half of micro enterprises, 40 percent of small firms, and 18.5 percent of medium
firms reported access to finance to be a major constraint to daily operations (World Bank,
2015:35).

Entrepreneurship

Entrepreneurship is the phenomenon associated with entrepreneurial activity, which is the

enterprising human action in pursuit of the generation of value, through the creation or expansion
of economic activity, by identifying and exploiting new products, processes or markets (OECD
(2016).

Technological Changes

According to Noghor (2015:77), the small business owner that recognizes the dynamic trend,
with a strategy implemented for the application and insertion of technological tools in his or her
business would be in an advantageous position to be competitive in the 21st century business
environment. MSEs are facing challenges brought about by changes in technological
environment; hence they are failing to keep abreast of these changes. Large businesses, because
they have the advantage of being technologically advanced, end up poaching the MSEs market
niche and resulting in MSEs being kicked out of the game. Failure not to employ the latest
technology means producing at higher cost than do competitors in the market thus, eventually
exiting the market due to tough competition.

Products and services

In many businesses‟ mission statements, a statement is included stipulating that the business
will contribute to the costumers‟ satisfaction through the use of its products and/or services and
customer services are an important concept that needs to be integrated in all types of businesses‟
operations (Bickle, 2012).

15
2.3.6. Empirical Literature Review
Study done in South Africa by JS Wiese (2014:100) on determinant factors of sustainability
shows owners or managers with more experience (managerial, sector or previous SME
experience) tend to have a greater inclination towards growth and was also considered essential
criteria for sustainability. Woldie, et al., (2008:12) and Mbugua,et al., (2014:17) argue that SMEs
owners or managers with more experience (managerial, sector or previous small businesses
experience) tend to have more growth potential than those with a lack of expected potential and
also the higher the level of education attained by the owner/manager, the higher the likelihood of
growth of the enterprise. Managerial skills and experience affects businesses performance at
certain level. Since small businesses account for sizeable proportions of economic activity,
therefore, and since they are an importance source of dynamism and innovation, small business
management skills should be a primary focus for economic policy in general and for innovation
strategies in particular (Keith, 2001:41). 16 SMEs are faced with a challenge of accessing
financial means to get their businesses off the ground and make them grow and be sustainable.
According to Simeon and Lara (2005:72) MSEs appear to be disproportionately afflicted by the
underdeveloped nature of financial institutions in developing countries. For various reasons
ranging from a lack of collateral to bias against small firms, MSEs tend to face greater financial
constraints than do larger firms. The study done in Kenya related to financial management of
MSEs identified the heavy investment in inventory ties up capital which in the end reduces firm‟
profitability therefore, there is need for a tradeoff between receivables and holding inventory if
the firm is to attain the required profits (Charles et al., 2014:14).

Marketing activities such as product/service marketing, marketing research and information and
promotion impact negatively on the performance of SMEs due to lack of marketing skills by
SMEs owners. The study conducted in Nigeria by Ebitu et al., (2015:75) identified most of
problems encountered MSEs are marketing related some of which include inability to apply
modern marketing techniques and strategies, difficulty in managing the firm‟s advertising and
other promotional tools, competition from large firms, lack of adequate research, poor and
mundane production technology, lack of adequate financing of marketing activities, poor quality
products and problems of standardization, warehousing, inventory control, and poor
transportation facilities, branding/packaging, financing and credit facilities, and risk bearing
among others. These problems are capable of impeding, disrupting and hindering the growth,
development and expansion of the firms in its effort to satisfy its target market and also create
value for the organizations.

According to Noghor (2015:77), MSEs are facing challenges brought about by changes in
technological environment; hence they are failing to keep abreast of these changes. Large
businesses, because they have the advantage of being technologically advanced, end up poaching
the MSE market niche and resulting in MSEs being kicked out of the game. Failure not to
employ the latest technology means producing at higher cost than do competitors in the market
thus, eventually exiting the market due to tough competition.

16
Though MSEs are considered an important source of job creation and economic growth, their
survival is a difficult task for managers for they have typical characteristics that end up 17
becoming barriers to their development. According to Olawale, (2014:926) reason for failure are
lack of management experience, lack of functional skills, poor staff training and development,
poor attitudes towards customers, unavailability of a logistics chain and a high cost of
distribution, competition, rising costs of doing business, lack of finance and crime. The reason
for failure of MSE identified by Mariana, (2014:8-9) lack of customer, previous experience in
the field of business, lack of knowledge or managerial experience, lack of government policies to
support small business, the lack of bank credit.

A study has been conducted by Abera (2012:75-76) on Factors Affecting the Performance of
Micro and Small Enterprises by using stratified random sampling of 261 MSEs from two major
sub cities of Arada and Lideta in Addis Ababa. According to this study, the main internal factors
identified were management factors which include poor selection of associates in business, lack
of strategic business planning, and costly and inaccessible training facilities. The major
entrepreneurial factors include lack of persistence and courage to take responsibility for one‟s
failure and absence of initiative to assess ones strengths and weakness. He further noted that the
contextual factors such as financial, workings premises, marketing and infrastructure had very
high effects on the performance of MSEs compared to other factors in the research area andis
prevalent to the businesses.

In a survey conducted on MSEs in selected cities in Ethiopia by MUDC (2013:104), they

identified a number of factors including inadequate coverage of the support services, low level of
education among the operators, limited relevance of the trainings and exclusion of the most of
the private MSE operators from the support services provided by the government. The other
study which has similar finding indicates Drbibe et al., (2013:25) poor infrastructural facilities,
lack of access to finance, lack of knowledge and skills, lack of working premises, lack of access
to market, lack of necessary support from relevant institutions, shortage of raw materials, and
regulatory problems as major challenges.

The major constraints identified by various studies on MSEs in Ethiopia are associated with
market and finance problems. According to Gebreyohannes (2015:85) Market is the major
constraint that highly hinders the firms‟ performance for all sectors in the manufacturing MSEs.
About 43% of the enterprises‟ sales performance is below their expectation level and in few 18
cases there is no sale at all.

This problem is attributed to lot of factors as the location of the working premise and the display
facilities is away from the main road, burden of tasks in the entrepreneurs, lack of competitive
business skill, lower price of product offered by the informal sector and promotion of the sector
is focused more on its role in poverty reduction than its business role as quality products and thus
the customers came with expectation of lower price than to get quality products with fair price in
the market. As clearly stated in Terfasa et al., (2016:30) the access to finance appears to be a
17
very severe or major obstacle as reported by about 55% and 64% of micro and small scale
enterprises respectively. The problem of access to finance is more severe for small enterprises
compared with micro enterprise as the latter often have access to microfinance institutions
(MFIs) as their loan requirement is within the capacity of MFIs. A large proportion of both micro
and small enterprises have not applied for a loan or credit due to cumbersome bureaucracy,
limited working premises, and high collateral requirement.

As indicated in survey of Assefa et al., (2014:18-19) the MSEs were inquired to identify the
major business constraints hampering their business. Access to finance tops the constraint list
where 37.7% of the MSEs reported it as a key constraint. The financial constraints facing MSEs

is one of the critical bottlenecks for the growth of MSE. Some of the more common problems
facing MSEs include failing to get the loan they applied for and when they do, it is after a very
long loan procedure. Repeated delays in loan delivery affect their business. The upper loan limit
set by the MFIs falls short of the loan requisite of MSE. Especially matured MSEs usually find it
very hard to meet their loan requirements from MFIs. The MSEs feel that the interest rate and
service charges are very high given the business environment MSEs operate with.

Literatures on MSEs, particularly those done in Nejo are not conducted on financial performance
aspects of the sectors. This research is therefore, meant to address the factors determining the
financial performance of MSEs in a holistic way by targeting and deeply investigating those
operators engaged in construction, service, manufacturing and trade activities by capitalizing on
Management and
Internal
operators in Nejo town administration.
expertise skills
Factor
2.3.7. The Conceptual Framework
Since business performance is influenced by many different factors, operators need to understand
Entrepreneur factors
factors that influence businesses performance of its operation as intended. Li et. al. (2005) uses
three indicators to measure business performance, namely; efficiency, growth and profit. The
company's performance is a multi-facetedMarketingphenomenon
skills which is difficult to measure
(AragonSanchez and Sanchez-Marin, 2005).

Factors that affect the performance of MSEs

Customer include management and expertise skills,
Relationship Performance
entrepreneurial factors, customer relationship, marketing skills, finance, technological change,
of MSEs
politico-legal, working place and product/service features. Nevertheless, the factors must be
(Profitability
closely monitored to ensure that stringent measuresChange
Technological are taken within the best time to either take
)
advantageExternal
of the opportunities or combat their threats. The relationship of independent and
dependentFactor
variables can be expressed and shown in the figure below.
Resource and finance

Politico- legal

Product and service

18
features

Working Place Factors

 Figure 2.1. Conceptual frameworks (Own Model)

CHAPTER THREE
3. RESEARCH METHODOLOGY

3.1. Research design

The study adopted a descriptive research design, in view of the facts that, it is a study of
relatively short duration and it involves a systematic collection and presentation of data to give a
clear picture of a particular situation. Descriptive research has three main objectives which have
made it the most appropriate research design for this research which are: helps discover whether
a relationship exists between variables, helps determine the frequency of occurrence and finally
describes the state of a variable (Cooper and Schindler 2013). It will aimed at getting relevant

19
information related to factors affecting working capital management of small and medium scale
enterprises in Oromia regional state in case of Nedjo town.

3.2. Data Type and Collection Methods

Both primary and secondary data will be collected to facilitate the realization of the study
objections. Secondary data will be obtained from SMEs reports, annual financial statements,
budgets and monetary records, Cash-flow statement, Asset register, Tax schedule among others.
On the other hand, primary data will be collected using a structured questionnaire. The
questionnaire is self-administered to all the respondents in the sample size and has both open
ended and closed ended questions. Whereas the closed ended questions were necessary for ease
of coding, closed ended are necessary for purposes of clarification.

3.3. Population and Sampling Design

3.3.1. Population
According to Saunders, Lewis and Thornhill (2012), population is the complete set of cases or
group members. The total population of the study consisted of small and medium scale
enterprises registered with the Oromia Private Sector ’s alliance under the micro and small
enterprise federation (MSEF). According to Nedjo city Administration MSEs development office
there are 2,185 micro and small scale enterprises (MSEs). The focus was on the association
members in the commercial business district of Nedjo and categorized the sample into sectors
based on the nature of their operations.

3.3.2. Sampling Design

The total population of the study will be all Micro and Small Enterprises operated in Nedjo City.
Simplified scientific formula provided by Yamane (1967), if the population size is known, there
is no need for mean and standard deviation. Formula:

ny = N / (1 + Ne2)

Where; N = population size, and e = alpha level, i.e. e = 0.05 if the confidence interval is 95%.
The total sample frame of the study 2,185, and using, 0.95 confidence intervals the sample size
is: 2,185 / (1 + 2,185 (0.05) = 2,185 / 6.46 = 338

20
Hence, based on this technique researcher will select systematically 338 samples of MSEs from
the list of total population 2,185 registered in Nedjo town MSEs Development Office.

3.3.3. Data Analysis Methods

The collect data will be analyzed using both quantitative and qualitative data analysis approach.
The data gather from the field of study will review to ensure accuracy and completeness.
Thereafter, it will be coded and analyzed using SPSS to obtain both descriptive and inferential
statistics. These are in terms of frequency tables, charts, means and regression statistics.

3.3.4. Definition of Research Variables

This study undertakes the issue of identifying key variables that influence working capital
management of Nedjo city MSEs and to explore and examines the impact of working capital
management on Micro and small performance. As a result the study employed a number of
variables stated below have been used to test the hypotheses of the study. They include
dependent, independent and some control variables.

3.3.5. Linear Regression Analysis

The study used multivariate regression analysis to establish relationship between the independent
variables and the dependent variable by use of the following regression formula:

Y= β 0 + β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + β 5 X 5 + β 6 X 6 + β 7 X 7 + β 8 X 8 + β 9 X 9 +є

Where:-

Y = Financial performance (Dependent Variable)

X 1 – X 9 = Independent Variables

X 1 = Availability of Management Experience

X 2 = Availability of entrepreneurial skills

X 3 = Customer relationship

X4 = Availability of marketing

X 5 = Access to Finance

X 6 = Politico-legal

X7 = Availability of technology

X8 = suitability of working place

21
X9 = product/service features

β 0 = Coefficient of the model

β 1 – β 9 = Beta Coefficient of Determination

є = Stochastic Error Term

3.3.6. Reliability
The reliability of instruments measures the consistency of instruments. Creswell (2009)

considers the reliability of the instruments as the degree of consistency that the

instruments or procedure demonstrates. In this study each statement rated on a 5 point

likert response scale which includes strongly agree, agree, undecided, disagree and strongly

disagree. Based on this an internal consistency reliability test was conducted in Najo town with a

sample of 12 operators and the Cronbach's alpha coefficient for the instrument was found as

0.68which is reliable. Although an alpha value of 0.80 or higher is taken as a good

indication of reliability for others, Cohen et al.( 2007) suggested that it is acceptable if it is 0.67

or above. Since instruments were developed based on research questions and objectives, it is

possible to collect necessary data from respondents. Then instruments are consistent with the

objectives of the study.

3.3.7. Validity

Validity is the degree to which a test measures what it supposed to measure (Creswell,

2009). It is the degree to which results obtained from the analysis of the data actually

represents the phenomena under study.

A pilot study was conducted to refine the method and test instrument such as a

questionnaire before administering the final phase. Questionnaires was tested on potential

respondents to make the data collecting instruments relevant and suitable to the problem

and reliable as recommended by John Adams et al. (2007). Issues raised by respondents
22
 were corrected and questionnaires were refined. Besides, proper detection by an advisor was

also taken to ensure validity of the instruments. Finally, the improved version of the

questionnaires were printed, duplicated and dispatched.

3.3.8. Ethical Considerations

All the research participants including in this study were appropriately informed about the

purpose of the research and their willingness and consent was secured before the

commencement of filling questionnaire and asking interview questions. Although all

interview sessions has tried to tape-record, it was impossible as the respondents were not

voluntary. Regarding the right to privacy of the respondents, the study maintained the

confidentiality of the identity of each participant. In all cases, names are kept confidential thus

collective names like ‘respondent’ were used.

Chapter Four

Work Plan
No Steps in research plan Deadline
2023-2024/2016E.C
J J A S O N D J F M A M
1 Topic Selection X

2 Review of Related Literature X

3 Design of the research plans X
4 Preparing the first round proposal X X
5 Submission of the Research Proposal X

6 Editing the Proposal comment X

23
7 Submission of the final Proposal X

8 Defense the Proposal X

9 Gaining Permission to the Work Place X

10 Prepare questionnaires X X
11 Distribute questions, Conducting FGD & X
Interview
12 Analyze & interpret the questions X X
13 Incorporate advisor’s feedback X
14 Incorporate advisor’s second feedback X
15 Preparation of the edited Thesis Paper X
16 Final Thesis Submission X
17 Thesis Examination Period X

4. BUDGET BREAKDOWN
No Unit Price Total Price
Activity/Item Unit Quantity Birr Cent 0 Cent
1 Printer Paper Pkt 1 200 00 200 00
2 Flash disk No 1 450 00 450 00
3 Lap top No 1 14000 00 14050 00
4 Bic Pen No 10 30 00 300 00
5 Internet Service Hour 15 30 00 1500 00
6 Copying Materials No 200 1 00 300 00
7 Binding Proposal No 2 100 00 300 00
8 Binding Final Thesis No 4 200 00 1500 00
9 Payment for data collection. No 4 _ _ 1710 00

24
10 Per diem _ _ 5270 00
11 Transportation _ _ 3050 00
Total 28455
12 Contingency - - - 00 3000 00
Total _ _ 31455 00

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APPENDIX
APPENDIX

QUESTIONNAIRE
GREAT LAND COLLEGE
COLLEGE OF BUSINESS AND ECONOMICS
MBA POGRAM
1. Introduction
I am a graduate student in the department MBA program, Great Land College. Currently,
I am undertaking a research entitled „Factors Determining the Financial Performance
of Micro and Small Enterprise in Nejo Town Administration‟. You are one of the
respondents selected to participate on this study. I would like to express my warm
33
 appreciation in advance for the cooperation you will show in completing the
questionnaires. Your identity will be maintained strictly confidential and your response
will be merging and analyze with the other respondents for better result. Your support in
answering the questionnaire is helpful for doing the right and meaning full problem
solving research. Thank you in advance!
Part Two: Biographic details
1. State your gender:-Male Female
2. In what age group below do you belong?
Under 20 years 36 - 50 years 21 – 35 years over 50 years
3. Indicate your educational qualification below:
Read and Write Diploma High School Complete

Degree and above Certificate

4. Marital status
Single Married Divorced Widowed
5. How many years work experience do you have?
0-5 11-20 6-10 20 above

Part Three: Status of the enterprise

1. In which sector your business is operating?
Manufacturing Service
Construction Trade

2. Indicate the number of employees working in your business

0-5 6 – 30 above 30
3. How did you raise funds to start-up your business?

A.Personal Saving B.Family

C.Banks D.NGOs E. Friends F. Iqub/Idir

The major factors that determine the financial performance of MSEs are listed below. Please
indicate the degree to which these factors are affecting the financial performance of your
business enterprise. After you read each of the factors, evaluate them in relation to your business
and then put a tick mark (√) under the choices below. Where, 5 = strongly agree, 4 = agree, 3 =
undecided, 2 = disagree and 1= strongly disagree.

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 4. Please indicate the degree to which you agree with the following statements concerning
Management and expertise skills factors.

No Management and expertise skills 5 4 3 2 1

4.1 Lack of clear division of duties and responsibility among
employees
4.2 Poor organization and ineffective communication
4.3 Lack of well trained and experienced employees
4.4 Lack of low cost and accessible training facilities
4.5 Lack of strategic business planning
5. Please indicate the degree to which you agree with the following statements concerning
Entrepreneur factors.

No Management and expertise skills 5 4 3 2 1

5.1 Lack of motivation and drive
5.2 Lack of tolerance to work hard
5.3 Lack of persistence and courage to take responsibility for
one’s failure
5.4 Absence of initiative to assess ones strengths and weakness
5.5 Lack of entrepreneurship training
5.6 Lack of information to exploit business opportunities

6. Please indicate the degree to which you agree with the following statements concerning
Marketing skills factors.

No Marketing skills 5 4 3 2 1
6.1 Inadequate market for my product
6.2 Searching new market is so difficult
6.3 Lack of demand forecasting
6.4 Lack of market information
6.5 Absence of relationship with an organization that conduct
marketing research
6.6 Lack of promotion to attract potential users
7. Please indicate the degree to which you agree with the following statements concerning
Customer Relationship factors

No Customer Relationship 5 4 3 2 1
7.1 Lack of previous experience in the business
7.2 Lack of cares about customer satisfaction
7.3 Poor relationship building
7.4 Lack of making use of customer feedback

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8. Please indicate the degree to which you agree with the
following statements concerning Resource and finance factors.
No Resource and finance 5 4 3 2 1
8.1 Inadequacy of credit institutions
8.2 Lack of cash management skills
8.3 Shortage of working capital
8.4 High collateral requirement from banks and other lending
institutions
8.5 High interest rate charged by banks and other lending
institutions
8.6 Loan application procedures of banks and other lending
institutions are too complicated
9. Please indicate the degree to which you agree with the following statements
concerning Technological Change factors

No Technological Change 5 4 3 2 1
9.1 Lack of appropriate machinery and equipment
9.2 Lack of skills to handle new technology
9.3 Lack of money to acquire new technology
9.4 Unable to select proper technology

10. Please indicate the degree to which you agree with the following statements concerning
Politico- legal factors.

No Politico- legal 5 4 3 2 1
10.1 Bureaucracy in company registration and licensing
10.2 Lack of government support
10.3 Lack of accessible information on government policy and
regulations that are relevant to my business
10.4 Corruption is as facilitator in business
11. Working Place Factors

No Working Place Factors 5 4 3 2 1

11.1 Absence of own premises
11.2 Current working place is not convenient
11.3 The rent of house is too high
12. Product and service features factors

No Product and service features factors 5 4 3 2 1

12.1 Lack of product quality

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12.2 Service delivery problem
12.3 Lack service after sale
13. How do you rate the profitability of the MSEs

No Indicator of financial performance 5 4 3 2 1

13.1 The business is Profitable in Nejo
13.2 There is a good Sales turnover
13.3 There is capacity to pay obligations
14. Please indicate the degree to which you agree with the following factors that have a direct influence
on the financial performance of your business?

No General Factors 5 4 3 2 1
14.1 Management and expertise skills
14.2 Entrepreneur factors
14.3 Marketing skills
14.4 Customer Relationship
15.5 Resource and finance
15.6 Technological Change
15.7 Politico- legal
15.8 Working Place Factors
15.9 Product and service features factors

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