The effect of working capital management practices on the financial performance of small and medium enterprises in Uganda

Abstract

The study investigated the e effect of working capital management practices on the financial performance of SMEs in Uganda taking Nakawa Market. The study objectives were to establish the effect of cash management on financial performance of SMEs in Uganda, to evaluate the effect of receivables management on financial performance of SMEs in Uganda and assess effect of inventory management on financial performance of SMEs in Uganda. The research was conducted by using quantitative approach and adopting a case study design. Data was collected using questionnaires, as well as review of day to day business records. A total of 130 respondents who included business owners and staff working in retail SMEs in Nakawa Market. Data was analysed using Statistical Package for social scientists to generate descriptive and inferential statistics. Analyzed data was presented in tables, graphs and charts. The study found out that working capital management in SMEs was undertaken through cash, receivables and inventory management. It was established that number of SMEs had cash related problems; most of their cash was tied in debts, and had little or no savings in the cash and at the bank. A positive relationship was established between cash management and financial performance. It was further established that SMEs give credit to their customers, although a number of these clients did not pay back affecting the sales volumes. It was also found out that trade receivable management enhanced financial performance. More so, the firms held various inventories depending on their lie of business, although there were a few records related with inventory management. There was a strong positive relationship between inventory management and financial performance. The study concluded that there was a strong relationship between working capital management and financial performance of SMEs. Recommendations included that SMEs proprietors and Owners need to employ skilled and well trained staff, regulate their cash needs, have a policy that guides them in granting of debts to customers, improve on their scope of savings and investments, and also have regular inventory management to regulate inventory flow and related costs. The effect of saving and investment culture on financial performance as well as effect of inventory flow record keeping on the financial performance of SMEs were recommended for further research.