Working capital management and financial Performance of Small and medium enterprises in Kampala Central Division, Uganda
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Date
2018-05
Authors
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Journal ISSN
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Publisher
Kampala International University, College of Economics and Management
Abstract
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.
Description
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
Keywords
Working capital management, Financial Performance, Small and medium enterprises, Uganda