Working capital management and financial Performance of Small and medium enterprises in Kampala Central Division, Uganda

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Kampala International University, College of Economics and Management
The purpose of the study was to investigate the effects of working capital management (WCM) on financial performance ofsmall medium enterprises (SME ‘s) in Kampala Central Division with a view to establishing a model directed at improving SMEs ‘performance and it was hypothesized that working capital management practices positively influence SMEs’ financial performance. The dependent variable of the study was profitability measured with ROA and ROE which is used as a proxy for financial performance. Cash management, receivables management, inventory management, and payables management were taken as major components and constructs of working capital management which is the independent variable of the study. Four hypotheses were formulated which are in line with study objectives. Pearson ‘.s linear correlation coefficient and regression analysis were condwied in testing the hypotheses; and the study adopted quantitative approaches with descriptive and correlation designs. The study used a respondent sample of 327 SMEs operating in Kampala Central Division whose managers and owners/managers were the unit of enquiry. The findings in respect of the main purpose of the study indicated that working capital management accountedfor 31.4% qf the variance in profitability ofSMEs. The results from the working capital management components revealed that cash management, receivables management and inventory management had a significant positive relationship with financial performance, while payables management had non-significant negative relationship with financial performance. The study supports the trade-off theory in explaining the financing of SMEs together with agency theory as the theories that help in explaining business performance of SMEs. The study confirmed ~fficient working capital management practices improve financial performance of SMEs. As a result, one of the most prominent findings of the study is that it has provided evidence to support the fact that components of working capital can improve the state ofprofitability of SMEs in Kampala. Policy makers, SMEs owners, academicians and future researchers may use these findings; as it provides a better understanding and deeper insights into working capital management practices and presents recommendations that in turn bring improvements in the financial performance of SMEs in Kampala. Hence, to increase the profitability of SMEs in Kampala Central Division, the study recommended owners and managers of SMEs to plan and control working capital efficiently in such a way to maintain the working capital components in an optimum level to balance the trade-offs between the benefits and costs ofshort termfinancing.
A Thesis Submitted to the College of Economics and Management in Partial Fulfillment of the Requirement for the Award of Master of Business Administration degree in Management of Kampala International University
Working capital management, Financial Performance, Small and medium enterprises, Uganda