CHAPTER 2

REVIEW OF RELATED LITERATURE

This chapter presents the related literature and studies that help the

researchers identify issues that serve as a basis to have ideas and to define

the study. And the related literatures provide the researchers insights to be

included in the study.

Related Literature

Planning

Manivel (2001) analysed the management accounting practices in

selected cooperatives in Tamilnadu. The management accounting practices

were evaluated by the extent of application of budget and budgetary control;

cost control, internal audit, management reporting and decision making. He

found that the large sized 5 cooperatives are found to have introduced a

few tools of management accounting; but they do not normally serve the

purpose. They are neither used for planning and controlling the operations

of the business nor they are used for the decision making process.

Mishra (2001)12 analysed the financial management in public

enterprises. He evaluated the investment management, working capital

management, financing and capitalization and financial control in the public

enterprises. He identified that the public enterprises have to go a long way

to shore up their financial functioning. There is an immense scope to

economics on the front of fixed assets and working capital. There is a need

to strengthen financial control mechanisms. Revathy (2001)13 examined

the financial management practices of small business units. She revealed

that the efficiency of the units are low in terms of return on investment and

capacity utilization and fixed assets to net worth. The efficiency of the use of

assets is not up to the mark in the sample enterprises. There is practically

no conscious effort towards efficient management of working capital. The

funds flow analysis reveals that the share of internal sources of finance to

total sources stood at 33.8 per cent. The factors like age, size of investment

and turnover significantly influence the capital structure planning in the

units.

Financial management is an important element of the management

of any business. It is a key part of the management function focusing on the

management of a business' assets. In the long term, the type of assets

owned by a business charts out the direction of that business during the life

of these assets. A business might not see its long term if it cannot carefully

plan and lay out a policy to effectively manage its finances. As a result,

ineffective financial management altogether is the main cause of the

underlying problems facing Small and Medium Enterprises (SME) financial

management (Jindrichovska, 2003). Many, if not all of those who start a

business do not engage themselves in financial matters. This is because

they do not have enough knowledge about recording transactions,

preparation and analysis of financial statements. Sometimes they get

deeply engrossed in other aspects of business like managing people, sales

purchasing and production to have any interest in carefully managing

finances. Such entrepreneurs end up relying on their accountants to run the

financial side of their business. Otherwise, they decide to do the

management themselves making the business vulnerable to collapse (Atic,

2010). Financial Management is about planning, organizing, directing and

controlling the financial activities in a firm. Such activities involve the

procurement and utilization of funds of the enterprise. Financial

management refers to the application of general management principles to

financial resources of the enterprise (Weston and Brigham, 1996).

Financial management is an important element of the management

of any business. It is a key part of the management function focusing on the

management of a business' assets. In the long term, the type of assets

owned by a business charts out the direction of that business during the life

of these assets. A business might not see its long term if it cannot carefully

plan and lay out a policy to effectively manage its finances. As a result,

ineffective financial management altogether is the main cause of the

underlying problems facing Small and Medium Enterprises (SME) financial

management (Jindrichovska, 2003). Many, if not all of those who start a

business do not engage themselves in financial matters. This is because

they do not have enough knowledge about recording transactions,

preparation and analysis of financial statements. Sometimes they get

deeply engrossed in other aspects of business like managing people, sales

purchasing and production to have any interest in carefully managing

finances. Such entrepreneurs end up relying on their accountants to run the

financial side of their business. Otherwise, they decide to do the

management themselves making the business vulnerable to collapse (Atic,

2010). Financial Management is about planning, organizing, directing and

controlling the financial activities in a firm. Such activities involve the

procurement and utilization of funds of the enterprise. Financial

management refers to the application of general management principles to

financial resources of the enterprise (Weston and Brigham, 1996).

Controlling

The financial management field is becoming increasingly concerned

with the consumer behavior of young adults. It has been argued that these

individuals, who are beginning to make more complex financial decisions

and are in the process of establishing financial management practices

(Henry, Weber, & Yarbrough, 2001; Parotta & Johnson, 1998), have grown

up in a consumer culture and are accustomed to debt and easy availability

of credit (Roberts & Jones, 2001).

In adults, one of the most common factors examined by research is

whether or not the way in which individuals manage their personal finances

is a major factor contributing to financial hardship or satisfaction. Financial

management generally refers to a set of behaviors in the areas of cash

management, credit management, financial planning, investments,

insurance, and retirement and estate planning (Godwin, 1994; Parotta &

Johnson, 1998).

In recent years, financial management practices of youth have

received the increasing attention of a wide range of organizations, such as

government agencies, community organizations, college and universities,

etc. The youth are growing up in a culture of debt facilitated by expensive

lifestyles and easy credit (Dugas, 2001). However, young adults often begin

their college careers without ever having been solely responsible for their

own personal finance (Borden et al., 2008). It was also pointed out that the

young generation rarely practiced basic financial skills, such as budgeting,

developing a regular savings plan or planning for long term requirements

(Birari and Patil, 2014).

Organizing and directing

Financial management behavior is considered one of the key

concepts on the financial discipline. Many definitions are given with

regarding to this concept, for example, Horne and Wachowicz (2002)

propose financial management behavior as the determination, acquisition,

allocation, and utilization of financial resources, usually with an overall goal

in mind while Weston and Brigham (1981) describe financial management

behavior as an area of financial decision-making, harmonizing individual

motives and enterprise goals. Joo (2008) indicates that effective financial

management behavior should improve financial well-being positively and

failure to manage personal finances can lead to serious long term, negative

social and societal consequences.

Failure in managing an individual’s finance can lead serious long-

term consequences not only for that person but also for enterprise, society

(Ismail et al., 2011). Hence, personal financial management behavior has

received an increasing concern of researchers in recent years. In the study

by Deacon and Firebaugh (1988), personal financial management is

defined as the set of behaviors performed regarding the planning,

implementing, and evaluating involved in the areas of cash, credit,

investments, insurance and retirement and estate planning. Xiao and Dew

(2011) take into account the personal financial management with regard to

cash flow, credit, saving and investing management. There are many

studies in Vietnam before which examining only one dimension of financial

management behavior such as credit card (Nguyen and Lai, 2013; Vuong

and Nguyen, 2013).

Decision making

. The financial management is defined as all aspects of administrative

activity or administrative function necessary for the organization of the movement

of funds to achieve the project objectives efficiently high productivity and fulfilling

their obligations owed to them in a timely manner (Kharaga, 2002).

Determination the objective accurately it helps to achieve quickly and requires a

rational decision-making. In order to determine the objective to be achieved the

financial management must be highlight goals that seek it and that can be
achieved in light of its potential (Abdel Hamid, 1992). In general, the best guess

for the economy is the assumption that the project aims to maximize profits, and

that assumption seems reasonable. Also, as we find most of the businessmen to

have a definite and clear desire to make profits, but also in the increase to the

maximum extent possible. However, the goal of profit maximization raises a

number of questions and faced with a range of criticism makes him the honor is

not the only objective of some projects, and thus there is a set of objectives that

seek financial management to achieve, including the businesses as public

projects or private (Abdul Hadi, 2000).

One area that has received little attention in the establishment of

strategies, especially in the study of micro, small and medium-sized

enterprises, is that of financial decisions, even though it is a determinant of

business competitiveness. Financial analysis and planning, which represent

basic features that support organizational strategy, are nonetheless virtually

non-existent in micro and small enterprises, which impose a constraint on the

kind of financial decisions businesspeople can take. Financial strategy

represents a path to achieve and maintain business competitiveness and position

a company as a world- class organization. Financial strategies are goals,

patterns or alternatives designed to improve and optimize financial management

in order to achieve corporate results (López, 2006).

Financial strategy consists of three interrelated kinds of decisions:

investment, funding and working-capital decisions (Ross, Westerfield & Jordan,

2000). Investment decisions relate to the allocation of capital to carry out

investment opportunities that are valuable (bring value) to the company, taking

into account the magnitude, opportunity and risk of the future cash flows of

investment. Funding decisions concern the specific mix of long-term debt and

capital that the company uses to finance its operations,i.e., optimal capital

structure. Working-capital decisions include the management of short-term

assets and liabilities in a way that ensures the adequacy of resources for

company operations. Assuming the corporate aim is to maximize profits, it is

important for businesses to seek the optimum combination of the three kinds of

financial decisions. Mallette (2006) argues that an organization's financial

strategy is so important to the company that it must be evaluated and adjusted

as frequently as the operational strategy. He also says that the evaluation of

financial strategies must be consistent with operations, needs and specificities of

the business.

Jog and Srivastava (1994) conducted a study that looked at financial

decision-making processes that Canadian companies followed, as well as

techniques they used to make decisions on capital budget, financing costs and

sources, and dividends. Their results show that investment decisions are

closely related to funding opportunities, and that the method used for the capital

budget is the internal rate of return and the net present value. They also found

that most Canadian companies determine an optimal debt and equity ratio. With

regard to dividends decisions, present and future earnings represent the most

relevant factors enterprises consider when deciding on dividend policy.

Challenges

According to the study of Gichuru, CarolyneNyokabi (2015) Challenges

Faced by Life Insurance Companies in Implementation ofMarketing Strategies to
gain Competitive Advantage in Kenya which seek to determine challenges faced
by life insurance companies in implementation of marketing strategies. This study
of Gichuru was guided by the following objectives in establishing the challenges
faced by the insurance companies in implementation of marketing strategies and
in establishing whether life insurance companies have a controlled and feedback
system to assess the effectiveness of the implementation process. Gichuru’s
study employed a survey design and the survey was appropriate as it sought to
ascertain the challenges faced by life insurance companies in implementation of
strategy in Kenya. The population of the study comprised all Life insurance
companies in Kenya which was 23 life insurance service providers estimated in
Kenya. As a result of the study, the findings indicate that competition in the
insurance industry was driven by various elements which included; Profitability,
Market share, Customer Satisfaction, competitive position and other in-house
strategies. Finding indicates that organizations face various challenges and
threats in their effort to implement marketing strategies. There are elements of
organizational operations that have a correlation with the strategies.

This study is related to the current study because Gichuru’s research also
investigates the challenges encountered by Insurance companies which is the
goal of the current study. Also, it seeks to know the challenges in implementing
the marketing strategies in some Insurance Companies in Kenya.

According to the study of Nthenge, Philip Kilonzo (2015)

Challenges Facing the Success of Insurance Services Provision in Tanzania
which looks at the challenges facing the insurance services provision in
Tanzania. The study of Nthenge was conducted on the insurance companies
registered and licenced by the Tanzania Insurances Regulatory Authority as at
31st July 2012. The Data of the study was collected using questionnaires which
were hand delivered to insurance companies targeting business development
executives in self-addressed envelopes. Some questionnaires were emailed to
the officers in the different companies to the convenient of the
respondents.Nthenge’s research findings shows that insurance services
provision in Tanzania face myriad of challenges that are inhibiting advancement.
Due to these challenges the industry continues to register low penetration at as
many people remain uninsured. Many challenges have been outlined in the study
need to be addressed by the stake holders if the industry is to achieve a
penetration increase from its current 0.84%. The challenges include awareness,
immature legal framework, and lack of strong market -led initiative, claims fraud
and corruption, undercapitalization. Legal constraint to new' channels of
distribution such as banc assurance, weak supervision and lack of vocational
training facilities leading to shortage in skills needed in the industry.

This study of Nthenge was related to the current study because it also
focused on the challenges that encountered by the insurance company in
Tanzania which is also the main variable of the current study. Also, both studies
are interested in the same topic that knows the challenges face by the insurance
companies.

According to the study of Akinbola, OluwakemiEjide and Isaac,

LikaliTsowa (2015) Ethical Issue: A Problem in Nigeria Insurance Companies
which aimed to investigate and critically analyze claims management, an ethical
issue in insurance companies in Nigeria, to find out if these insurance companies
recognize it to be an ethical issue and also to find out how they handle insured’s
claims. Akinbola and Isaac’s study gathered data through interviews and by
secondary data using literatures from books, journals, articles, and electronic
websites. The researchers used purposive sampling to select some top
insurance companies in Nigeria; in these insurance companies basically
personnel working in the claims department were interviewed, also sales agents
from two of these insurance companies were interviewed. Data was sourced
from two insurance broking firms in Nigeria by interviewing their top personnel,
and also some of the insuring public with and without insurance policies was
interviewed. As a result of the study, researchers find out that insurance
personnel in claims administration who take decision on insured’ claims in
Nigeria recognize that there is a moral dilemma in their act and they discharge
this responsibility professionally and ethically sticking to the rules of the business.
Also the characteristics that constitute moral intensity model; proximity, social
context, probability of effect, concentration of effect and magnitude of
consequence offered by Jones (1991) influence the moral decision making
process and moral behavior of claims personnel in Nigeria insurance companies.
But due to some challenges faced by these personnel in discharging their duty
and some lapses from their side and the insured’s there have always been
complaint on claims.

According to the study of Otieno, Otedo Stephen (2017) Insurance

Employees Perception on the Challenges Affecting Performance of Insurance
Companies in Kenya which determine the challenges affecting the performance
of insurance companies in Kenya. This study of Otiono used descriptive survey
approach in collecting data from the respondents and used a questionnaire as a
primary data collection instruments. Also, descriptive statistics such as means,
standard deviation, and frequency distribution was used to analyze the data and
qualitative data was analyzed using content analysis. As a result, the researcher
concluded that fraud, inadequate skilled human resource, cybersecurity risk and
inflation are the major challenges affecting performance of insurance companies
in Kenya with fraud largely affecting composite and general insurance as
compared to life insurance. Also, the study shows that lack of innovation,
inadequate access to information technology and effective marketing strategy
moderately affect the performance of insurance companies in Kenya.

According to the study of Brau, James, Merrill, Craig and Staking, Kim
(2015) Insurance Theory and Challenges Facing the Development of
Microinsurance Markets which examines some of the critical elements of
insurance theory that may help understand the challenges facing microinsurance
markets and how these markets can better serve the needs of their customers.
This study gathers its data through observations and interviews with
microinsurance institutions and insured microenterprises. As a result of the study,
Brau, Merrill and Staking’s study shows that while the basic elements of
insurance theory have much to offer in the design of microinsurance products,
the unique nature of risks that exist at the based on the economic pyramid
require a careful consideration of the multiple risks in order to most effectively
target this marketing segment.