WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN HOIMA MUNICIPALITY

Table of Contents

DECLARATION

APPROVAL

DEDICATION

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF TABLES ix

LIST OF ACRONYMS x

ABSTRACT xi

CHAPTER ONE 1

INTRODUCTION 1

Background to the study 1

1.1.1 Working Capital Management 2

1.1.2 Financial Performance 2

1 .1 .3 Relationship between WCM and Financial Performance 3

1.1.4 Small and Medium Enterprises (SMEs) in Uganda 5

1.2 Statement of the problem 6

1.3 Purpose of this Study 8

1 .4 Specific Objectives 8

1 .5 Research questions 8

1.6.1 Geographical scope 9

1.6.2 Content coverage 9

1.6.3 Time scope 9

1 .7 Significance of the Study 10

1.8 Operational definition of key terms

CHAPTER TWO 13

LITERATURE REVIEW 13

2.0 Introduction 13

2.1 Theoretical Review 13

2.1 .1 Importance of SMEs in developing countries 13

2.2 Conceptual Review 14

2.3 Related literature Review 16

2.3.1 Systematic Approach of Control .16

2.3.2 Optimal ity Management Phase 16

2.4 Inventory Management and Financial Performance 16

2.4.1 Different Types of Inventory, Different Effects 17

2.5 Accounts Receivable 17

2.6 Cash Management and Financial Performance 18

2.7 Financial Performance 19

2.7.1 Profit Margirr 19

2.7.2 Returns on Assets 19

2.7.3 Returns on Common Stockholder’s Equity~ 19

2.8 Customer Retention 20

2.10 Research gaps 21

CHAPTER THREE 23

RESEARCH METHODOLOGY 23

3.0 Introduction 23

3.1 Research Design 23

3.2 Study Population 23

3.3 Sample size determination 24

3.4 Sampling Techniques 24

3.4.1 Purposive sampling technique 24

3.4.2 Systematic sampling technique 25

3.5 Data Collection Methods 25

3.5.1 Questionnaires 25

3.6 Reliability and Validity 25

3.7 Data Analysis 26

3.7.1 Qualitative data analysis 26

3.7.2 Quantitative analysis 26

3.8 Ethical consideration 27

CHAPTERFOUR 28

DATA ANALYSIS, RESULTS AND DISCUSSION 28

4.1 Introduction 28

4.2 Data Presentation 28

4.2.1 Response Rate .28

4.2.2 Type of Business~ 29

4.2.3: Nature of Business 29

4.2.4 Number of Employees 30

4.2.5 The annual Gross turnover 31

4.2.6 Number of Years in Business 31

4.2.8 Accounting System used by the Firm 33

4.2.9 Cash Management 35

4.2.10 Management of Accounts Receivable 39

4.2.11 Management of Accounts Payable (Creditors) 39

4.2.12 Management of Inventory 39

4.2.13: Descriptive Analysis of WCM practices by SMEs 41

4.2.15 Level of Significance of WCM on Financial Performance 42

4.2.15.1 Return on Assets and average collection period 42

4.2.15.2 Inventory Conversion Period and Return on Assets 43

4.2.15.3 Average Payable Period and Return on Assets 43

4.3 Summary of findings and discussions 43

4.3.1 Working capital Management practices 43

4.3.2 Effect of Working Capital Management on Financial Performance of SMEs 45

CHAPTER FIVE 47

5.1 Introduction 47

5.2 Summary of findings 47

5.3 Discussion of findings 48

5.3.1 Accounts Receivables Effects on Financial Performance 48

5.3.2 Accounts Payables Effects on financial Performance 48

5.3.3 Inventory Management Effects on Financial Performance 48

5.3.4 Customer Retention and Internal Management of Firm and Financial Performance 48

5.3 Conclusion 49

5.5 Recommendations 51

5.5.1 Policy Recommendations 51

5.5.2 Areas for further research 51

REFERENCES 53

APPENDICES .58

Appendix I: QUESTIONNAIRES 58

SECTION A: ORGANIZATION BACKGROUND 58

SECTION B: GENERAL 58

SECTION C: CAST-F 62

C: ACCOUNTS RECEIVABLE 64

SECTION E: ACCOUNTS PAYABLE 65

APPENDIX II: ACTIVITY CHART 68

APPENDIX III: ANTCIPATED BUDGET 69

APPENDIX IV: INTRODUCTORY LETTER 70

ABSTRACT 

Working capital management plays a significant role in better performance of business entities. This paper analyses whether SMEs in Hoima Municipality carry out the recommended working capital management practices and the effect of Working Capital Management (WCM) on the financial performance of these enterprises. The study employs a quantitative research design which is useful in establishing the relationship of working capital management and financial performance. In addition, the study employs a cross sectional survey to establish whether SMEs in Hoima Municipality carry out WCM practices. A sample of 100 SME5 for a period of 2011 to 2016 is to be used. However, a total of 89 responses were received. The study relies on both primary data, collected through a questionnaire, and secondary data collected from annual reports and financial statements of SMEs in Hoima Municipality. The WCM components to be used for the purpose of this study are, Accounts Payable Period (APP), Inventory Conversion Period (ICP) and Average Collection Period (ACP). Return on Assets (ROA) was used as the proxy for financial performance. The study employs a regression analysis and the Pearson ‘s’ correlation analysis is to be used to test the significance of relationship between WCM and financial performance of SMEs in Hoima Municipality. The results of the study indicate that 62.9% of the SME ‘s in Hoima Municipality do not have a written policy on WCM However, they are informally adopting some of the WCM practices. The results further indicated there is a significant positive relationship between WCM components (APP, ACP and ICP) andfinancial performance of SMEs in Hoima Municipality at a 0.05 significance level, A positive correlation coefficient of 0.833 was established between ROA and the ACP indicating a sign~icant positive relationship between ACP and ROA. A positive correlation coefficient of 0. ~O9 was also established between ROA and ICP indicating a significant positive relationship between ROA and ACP. Finally a positive correlation coefficient was established between ROA and APP indicating a significant positive relationship between ROA and APP.