Financial Management Challenges Faced by Microenterprises in Somalia

This report delves into the financial management challenges confronting microenterprises in Hargeisa, Somalia. It examines the critical issues these businesses face, including effective budgeting, access to microfinance, financial planning, and budget implementation. The study explores the specific problems related to financial management that hinder business growth and profitability, such as the difficulties in securing funding, the absence of sound financial planning, and the challenges in managing expenses. The research investigates the characteristics of microenterprises, their performance management, and the factors contributing to their failure. Furthermore, it assesses the sources of finance available to these enterprises, the potential economic benefits they offer, and the impact of factors like business age and location on their performance. The report also addresses the sustainability of microenterprises and provides recommendations for improving their financial management practices. The methodology includes a literature review, outlining the research philosophy, method, data collection, and analysis techniques, while also addressing ethical considerations. The goal is to provide valuable insights and recommendations for the improvement and sustainability of microenterprises in Hargeisa, Somalia.

Running head: ENTREPRENEURIAL FINANCE
FINANCIAL MANAGEMENT CHALLENGES FACING MICROENTERPRISES
IN HARGEISA, SOMALIA
Name of the Student:
Name of the University:
Author Note

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Table of Contents
1. Introduction........................................................................................................................3
1.1 Background of the Study..................................................................................................3
1.2 Rationale of the Study.................................................................................................5
1.3 Statement of Problems.................................................................................................6
1.4 Aim of the Study and Research Questions.......................................................................6
1.5 Specific Objective of the Study...................................................................................7
1.6 Research Outline and Chapter.....................................................................................7
2. Literature Review...................................................................................................................8
2.1 Microenterprises...............................................................................................................8
2.2 Financial Management in Transitional Countries..........................................................10
2.3 Micro – Enterprises access of the fund and its Difficulty..............................................12
2.4 Effective Budgeting and Spending Plan for Micro – Enterprises..................................14
2.5 Micro – Enterprises Budget Implementation and Spending..........................................16
3. Methodology........................................................................................................................17
3.1 Research Philosophy......................................................................................................18
3.2 Research Method............................................................................................................19
3.3 Data Collection Method.................................................................................................20
3.4 Data Analysis Method....................................................................................................21
3.5 Ethical Consideration.....................................................................................................22
4.1: Introduction...................................................................................................................22

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4.2: Characteristics of Microenterprise:...............................................................................23
4.3: Performance management of Microenterprise:.............................................................23
4.4: Determining factors for the failure of microenterprises in Somalia.............................24
4.5: Source of finance for Microenterprises.........................................................................25
4.6: Promoting the economic benefits through microenterprise..........................................26
4.7: Age of the firm over the business performance............................................................26
4.8: Business location and its performance..........................................................................27
4.9: Challenges for microenterprises of Somalia:................................................................27
4.10: Sustainability to Microenterprises.............................................................................28
Chapter 5: Conclusion and Recommendation..........................................................................29
5.1: Conclusion....................................................................................................................29
5.2 Recommendation:..........................................................................................................32
References:...............................................................................................................................34

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1. Introduction
This research is aimed to analyse the financial management challenges faced by the micro
– enterprises in Hargeisa, Somalia. The micro – enterprises sector of Somalia is the largest
income as well as employment producer of the Somalia. The micro – enterprises sectors of
Somalia self – employed the thousands of workers and emerges as the one of the biggest
business sector of the country (Warsame and Ireri 2017). The micro – enterprises of Somalia
mainly deals in the foods, consumables, agricultural products, clothes, gold, cigarettes,
beverage and fruits those are easily visible in the road of Somalia though out the countries.
These small traders of Somalia support their families by performing the business hence they
find several financial management related challenges that might decrease growth of their
business as well as their profitability. The main issues related to the financial management
faced by these business organisations are the effective budgeting, availability of
microfinance, financial planning and the budget implementation to decrease the cost as well
as to increase the profitability.
1.1 Background of the Study
The Federal Government in 1960, recognised that more than 500,000 small business
administration or the microenterprises has been started every year and also show the highest
failure rate of nearly 400,000 firm in one year. Further, it is stated that the most of the small
business administration or the microenterprises fail within the period of the three years.
Although the major industries of the United States is in the declining trend, the Gross
National Product of the United States continued to increasing rapidly in each year (Manaye

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2018). This increases in the Gross National Product has resulted the tremendous growth in
the small business in last few decades. Here, the small businesses or small business
administration or the microenterprises refers to those organisation which does not have more
than 50 employees in their organisation.
The government always put their effort to assist the small firm to overcome the
difficulties faced by these firm in the initial stage of their business operation. The first
assistance from the government has arrived as the Small Business Institutes for the
development through the small business administration or the microenterprises (Alam 2018).
Near about more than 500 Small Business Institutions are in their operation in the form of the
colleges and universities through - out the country. In each of these Small Business Institute,
graduate, undergraduate, students both senior and junior at Department of Business
Administration, Colleges and School as well as the faculty advisory to provide on - site
management counselling to the small business administration or the microenterprises facing
difficulties. The counselling provided by the institutes cover the wide area of the business,
specially focuses on the financial, marketing, management and the accounting problems of
the firm. The small business administration also get help from these institution to develop the
Small Business Development Centres.
As per the Herbert and Charles, “It is inexcusable for skilled external Accountants to
permit clients to fail because of indifference. Small business owners have enough problems
with which to content without having to consider the competency and motivation of an
accounting. The role of the accountant is to represent the financial team for the small business
owner and to reduce the pressures, problems and hurdles facing small business owners in this
difficult competitive U.S. economy (Vovchenko 2017). Basic accounting principles practiced
by the competent and caring professionals can be the main source of strength which can
enable small business success.”

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The American Institution of Certified Public Accounting (AICPA) in 1941, defined the
accounting as “the art of recording, classifying and summarizing in a significant manner and
in terms of money, transactions and events which are, in part at least, of financial character,
and interpreting the result.” In 1966, the American Accounting Association (AAA) defined
the accounting as “the process of identifying, measuring and communicating economic
information to permit informed judgement and decisions by users of information.”
Basically, the accounting is an information system which provides accounting as well as
the economic information to the decision maker. Accounting is the financial information
system that provides direction, guidance and the support to the business growth.
Hence, this study uses the “accounting as the art of recording, classifying and
summarizing in a significant manner and in terms of money, transaction and events which are
in part at least, of financial character, and interpreting the results.”
1.2 Rationale of the Study
As it is known that without proper financial management, the business cannot achieve
success. As mentioned above, the more than 500,000 small firms started their business each
years but more than 400,000 become fail within the first 3 years. The failure rate of the small
size organizations are very high. These firm faces the various issue in their operation which
decrease the profitability as well as growth rate of the firm. “The third step of commencing
every business, if not the second is generating money or funds." In absence of the proper
financial management, any business cannot achieve success. Hence, it is important to analyse
the financial management challenges to recommend corrective measures of organisation to
generate more profit and grow the business more through effective financial management.
This study is important for the small business for it provides a base for accounting
development. It is hoped to be helpful for the small size enterprises and micro enterprises

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industry of Somalia and local firms. The findings and the recommendations of the research
will help the small firms of the Somalia in the business context. The study is also helpful for
the other researcher who want to study further in this area as literature.
1.3 Statement of Problems
Small business managers should be prepared in a timely manner being available soon
enough to assist management in making proper decisions. However, in order to make
these decision, management must be knowledge as to what the statement are portraying.
This is also important to remember that the often management does not have the skill to
interpret the statements. It became difficult for the small business firm to prepare a proper
business plan including the financial, marketing, managerial components. The small
business also suffers the lack of money for surviving in the adverse business conditions
and a serious deterioration of financial condition can take place in a short period of time.
Unfortunately, number of owners and managers are not willing or do not have the
time and expertise to create such tool, even though assistance in preparing planning
instruments is usually available at little or no cost. Small business seems that they have
grown extensively over the last two decades, in most instances accounting related
problems surface as a major cause of deficiencies.
Hence, this research study investigates financial management problems encountered
in small businesses as well as this study examines the effects of accounting problems on
company performance.
1.4 Aim of the Study and Research Questions
As the report title suggests the main objective of the research is to investigate
financial management challenges faced by micro – enterprises in Hargeisa, Somalia, to

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full fill the lack of knowledge in this area and try to helping the organisation of these area
by recommending the proper measures.
This study is designed to assess and evaluate financial management challenges faced
by micro enterprises in Hargeisa. This study will help to understand what is actually
practiced in relation to legislation and basic theoretical assumptions. In context of the aim
of the study, this study answer the following basic questions as well as research study
questions that is what are the main financial management challenges of micro –
enterprises that are based on Hargeisa, Somalia in relation to their access of budgeting,
finance and spending?
1.5 Specific Objective of the Study
More specifically, this research answer the following aims:
 To investigate how micro – enterprises, access their finance
 To assess whether micro – enterprises budget or plan their spending
effectively
 To examine How well do the micro – enterprises implement their budget
1.6 Research Outline and Chapter
This research study is based on the five different chapters with their own important
and significance. The first chapter of the research study is the introduction. This
illustrates the introduction of the research study along with the background of the study
and briefly explains the each and every details of the research like research objective,
research question and likes. The second chapter of the research is the literature review,
which analyse the theoretical as well as empirical aspects of the topic studying findings of
the other researcher. The chapter three of the research study is all about the methodology
of the research work which also describe the technique used in the research for the data

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collection as well as data analysis to answer the research objectives and questions. The
fourth chapter of the study report discuss about the application of the chosen techniques,
methodology for analysing the data to reach the conclusion of the research which is the
last and fifth chapter of this research study. Lastly, the chapter concludes and summarises
the finding of the study.
2. Literature Review
2.1 Microenterprises
Microenterprises are considered as the small business that engages small number of
employees. Usually the microenterprises operate with less than 10 employees and started
with small amount of capital. Most of the microenterprises are specialized in delivering
services or goods for local areas. Microenterprises are generally found in western European
and constitutes rapidly into the countries those are former communist for central and Eastern
Europe. These firms serve vital purpose to improve life quality for the people in the
developing countries. Generally the microenterprises are helped by microfinance through
loaning of small amounts of the capital to these enterprises (Park and Ghauri 2015). It enables
poor individuals or the families to start with own businesses, earning incomes and eventually
benefitting the communities. For instance, ladies under developing country may use the
microcredit for taking out loan and purchasing sewing machine. She may use the same for
establishing the microenterprise that will be specialized in tailoring. The ladies will increase
the wealth and will assist her community through providing services. Although the research is
presented in detail regarding the microenterprises in developing countries and in the
transitional countries, their patterns vary that leads to diversification of microenterprises
under the same region.

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While the microenterprises are small in respect of scope and sizes, collectively it
represents the substantial proportion of economy as well as the employment. Types of the
businesses those are generally considered as the microenterprises includes landscaping and
lawn companies, carpenters, street vendors, plumbers, operators of machine shop and
independent mechanics are few to be named. Caterers and bakery owners can also be
considered as microenterprises like dry cleaners, seamstresses and the private tailors can also
fall under this category (Del Giudice et al. 2017). Understanding and operation of
microenterprises under the transitional countries are crucial as they contribute towards
formation of new firm under transitional economies and as they raise the distinct strategizing,
operating and financing challenges as well as opportunities for microenterprise owners. As
depicted by Romano and Barrera (2019) microenterprises have special type of importance
under the transition countries for number of reasons. These reasons are that they are able to
deliver economic benefits apart from individual enterprise in aspect of experimentation,
learning and adaptability. Under the transitional economies, these reasons are considered as
vital to undergo radical changes and for the transformation that took place in former countries
those are centrally planned.
Presumption regarding the microenterprises is that these firms are not expected to
grow to significant size unless any aggressive strategy is implemented. For example, the
street vendor may operate the cart to make and sell gyros under busy corners. Unless these
vendors have required assets for acquiring more of the carts, it is challenging for them in
scaling up businesses in the way in which the quick-serve franchise may have (Hillary 2017).
Owing to the fact that the operation scope is focused tightly, operation may face difficulties
in growing into larger operation. With regard to the resources and size, microenterprises are
limited in accessing the expertise and financial advisors that can assist them in managing
their businesses in better way. While they are in the position to afford operating and

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providing income to staffs and themselves, they may not have required level of liquidity to
procure the other services that may assist in development.
As per the research conducted in transition countries if new jobs are not created by the
microenterprises, they condense the erosion of human capital through proving the
employment opportunities for the workers who are comparatively skilled yet are unemployed.
Further, the microenterprises are riskier and face wide extent of difficulty while borrowing
money from the financial institutions. The reason behind this is that it is difficult for the
banks to analyze the microenterprises as often they do not have the proper accounting
systems. Further, number of microenterprises from Asia borrows through paying high interest
rates or through offering the costly collateral (Margaretha and Supartika 2016). Apart from
that, most of the banks prefer lending to the large enterprises and not to the microenterprises.
Reason behind the same is that the financial statements of large enterprises are audited and
presented in clear manner. Conversely, the start-up entities face difficulties in borrowing
money from the banks as requirement of Basel capital is strict. The microenterprises also face
difficulties in borrowing from banks as they do not have system for the solid accounting.
2.2 Financial Management in Transitional Countries
All the countries in some extent under transition from lower to higher intense
economic development from the agricultural to the industrial wealth creation from the male
dominated or white societies towards offer of the equal opportunity for all. However, the
sense under which the transition term is applicable is the transformation of economic system
from the centralized administration to the decentralized market. In past decades, it is
observed that economic history regarding most extensive experiments to be called as
centrally planned economies to economies are the market economies (Legg et al. 2015).
Hence, transitional nation’s reforms have encompassed the economy virtually and each single

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sector, the budgeting practices and modernization practices as well as the techniques for
fiscal management that is identified widely as critical for the experimental success of
economic transition. However, fiscal management as well as breath under transitional
countries did not meet the expectations. Even after the decade under transitional economy,
none of CITs are eligible to adopt the technique of modern fiscal management or the modern
budgeting that is similar to western nations. Public sector that is less efficient and less
controllable raised the level of risk for macroeconomic management and in overall aspect
recovery of the economy has been retarded and the growth under transitional countries
(Uwonda and Okello 2015).
During the initial period that is during early transition period economies had more
transitions inclusive of some prominent reforms associated with economies, however they
lack reforms associated to budgeting and fiscal management. Either the budget officials are
comfortable with little pressure and with status quo for changing the budget system that is
inherited from socialist regime or actively sought for preserving institutions for inherited
budgets. Tools for timings of the budget process transformation from the pure accounting
mechanisms during communist era to the tool for true fiscal management were not at all same
in all the transitional countries. Further, the processes of reforms as well as its evaluation are
able to be broken into 3 different periods. Under the period of 2nd transition fiscal policy and
fiscal management are set in the place that responds towards macroeconomic crisis that is
initially bought by fiscal management and lack of the reforms. As discussed by Van Hoa and
Mai (2018) these reforms during the 2nd transition period generally were of emergency nature
and it does not become successful in establishing the framework of fiscal discipline and the
policies for accountable and effective expenses. As the result, renewed financial crisis
stimulated more efforts for the structural reforms during the 3rd that is ongoing transitional
period.