Financial management practices and financial performance of Small and Medium Enterprises (SME) in Masaka Municipality

Abstract

This study was done to examine the effect of Financial Management Practices on the Financial Performance of Small and Medium Enterprises in Masaka Municipality of Uganda. This study was guided by the following specific objectives: To examine the relationship between Financial Planning and Financial Performance of SMEs, to assess the relationship between Financial Control and Financial Performance of SMEs and to examine the relationship between Financial Reporting and Financial Performance of SMEs. The study had Financial Management Practices as the independent variable with dimensions being; Financial Planning, Financial Control and Financial Reporting. It had Financial Performance as the dependent variable with its dimensions being; Return on Capital Employed, Return on Assets and Return on Investment. The study adopted the Agency theory as the lead theory, with the Stewardship theory and the McClelland’s Need for Achievement theory. The study adopted a simple random sampling technique with a questionnaire being the data collection instrument to gather data from 101 out of 103 respondents giving a response rate of 98% in a population of 144 employees of registered SMEs in Masaka Municipality. Data was analyzed using SPSS version 21 software. Correlation and Regression analysis were conducted to obtain answers in relation to the research objectives. The study findings revealed that there was a strong uphill (positive) linear relationship between financial planning and financial performance where r=0.701 with p<0.000 implying that financial planning is significant in explaining financial performance with a correlation coefficient of 0.701**, significant at 0.01 level of a two tailed test with 101 degrees of freedom. The study also revealed that there was a very strong uphill (positive) linear relationship between financial control and financial performance where r=0.759 with p<0.000 implying that financial control is very significant in explaining financial performance with a correlation coefficient of 0.759**, significant at 0.01 level of a two tailed test with 101 degrees of freedom. The study further revealed that there was a strong uphill (positive) linear relationship between financial reporting and financial performance where r=0.618 with p<0.000 implying that financial reporting is quite significant in explaining financial performance with a correlation coefficient of 0.618**, significant at 0.01 level of a two tailed test with 101 degrees of freedom. This implies that Financial Control is the best predictor of Financial Performance. It was therefore recommended that the management of SMEs in Masaka Municipality should consider implementing the recommended steps for each financial management practice discussed, seen as probable ways of ensuring that their financial management practices are improved further for the best financial performance.