MAKERERE UNIVERSITYcees.mak.ac.ug/sites/default/files/publications/Caral.doc · Web viewProfitability focuses primarily on the relationship between operating results as reported

MAKERERE UNIVERSITYTOPIC: INVENTORY MANAGEMENT SYSTEMS AND PROFITABILITY OF

SMALL AND MEDIUM SCALE ENTERPRISES (SME’s) IN KAMPALA

A Case Study of Kikuubo Trading Street

BY

NAKINTU CAROLINE

REG.NO. 07/U/12220/EXT

SUPERVISOR

DR.KAMUKAMA NIXON

A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES IN PARTIAL FULFILLMENT FOR THE

AWARD OF BACHELOR OF COMMERCE DEGREE, MAKERERE UNIVERSITY,

KAMPALA.

JUNE 2011

1

DECLARATION

I Nakintu Caroline, hereby declare that this is my own original work and has never been

submitted in part or full to any university or institution of higher learning at anytime for the

award of a Diploma or Degree.

Sign…………………………..

NAKINTU CAROLINE

(Student)

Date…………………………

i

APPROVAL

I certify that this piece of work has been carried out at Makerere University under the topic,

Inventory Management systems and Profitability under my supervision and it’s ready for

submission.

Signature…………………. Date……………………..

Dr. KAMUKAMA NIXON.

ii

DEDICATION

This book is dedicated to my Late Dad Mr. Kasibante Grace Steven and my mum Mrs. Kasibante

Nanziri Annette, my brothers JJamba Godfrey, JuliusCeaser Ssemanda, Bbukka Washington and

my sister Diana whose support and devotion have never failed me.

iii

ACKNOWLEDGEMENT

It is my desire and gift to acknowledge and thank God for my life. Thanks be to God.

My greatest acknowledgement goes to my parents Mr. and Mrs. Kasibante Grace, all my brothers

for the material, moral and financial assistance they offered to me while pursuing my Bachelor’s

degree at Makerere University.

I also acknowledge my supervisor Dr. Kamukama Nixon of Makerere University for his support

and guidance during the course of carrying out the research study

I am grateful to all his substantive comments, suggestions and the general supervision of the

research. His valuable time, guidance and effort at every stage have been very useful to me.

Special thanks go to my grandfather Engineer Ssempa James and family for the support, care, and

help they extended to me and helping me undertake this course. I also thank my grandfather Mr.

Makumbi .A and Dr Isaac Mugwano for all the care and advice he extended.

Lastly much gratitude goes to my friends Abdu, G.Fred, Sylvia, Paul, and Charity, Faisal, Diana,

and Stella, Jacob, Ronald, my discussion group mates chairman Mugoya Charles, Abram,

Norbert, Maya, Allan, Julius, Sam, Vuziga, and Ms. Hope for typing my work.

TABLE OF CONTENTS

iv

DECLARATION……………………………………………………………………………………………………………….i

APPROVAL……………………………………………………………………………………….ii

DEDICATION…………………………………………………………………………………….iii

ACKNOWLEDGEMENT………………………………………………………………………...iv

TABLE OF CONTENTS………………………………………………………………………..…v

LIST OF TABLES…………………………………………………………………………..……vii

ABSTRACT……………………………………………………………………………………..viii

CHAPTER ONE......................................................................................................................4

1.0 Background to the Study.....................................................................................................................4

1.1 Statement of the Problem...................................................................................................................4

1.2 Purpose of the Study............................................................................................................................4

1.3 Objectives of the Study........................................................................................................................4

1.4 Research Questions..............................................................................................................................4

1.5 Scope of the Study................................................................................................................................4

1.5.1 Study Scope........................................................................................................................................4

1.5.2 Geographical Scope..........................................................................................................................4

1.6 Significance of the Study......................................................................................................................4

CHAPTER TWO...................................................................................................................4

LITERATURE REVIEW...................................................................................................................................4

2.1 Concept of Inventory Management System......................................................................................4

2.1.1 Components of an Effective Inventory Management System:....................................................4

2.2 Profitability............................................................................................................................................4

2.2.1 Profitability Measures:.....................................................................................................................4

2.2.2 Profit Planning...................................................................................................................................4

2.2.3 Essentials Profit Planning.................................................................................................................4

2.2.4 Other Factors Affecting Profitability of Small Scale Enterprises..................................................4

2.3 Relationship between Inventory Management System and Profitability......................................4

CHAPTER THREE...................................................................................................................4

METHODOLOGY..........................................................................................................................................4

3.1 Research Design....................................................................................................................................4

3.2 Study Population...................................................................................................................................4

3.3 Sampling Size........................................................................................................................................4

v

3.4 Sampling Method.................................................................................................................................4

3.5 Source and Type of Data......................................................................................................................4

3.6. Data Collection Methods:...................................................................................................................4

3.7 Data Processing, Analysis and Presentation.....................................................................................4

3.8 Limitations to the Study.......................................................................................................................4

CHAPTER FOUR....................................................................................................................4

ANALYSIS AND PRESENTATION OF FINDINGS.........................................................................................4

4.1 Response on Demographic Characteristics of the Respondents.....................................................4

4.2 Findings on whether small and medium scale enterprises in Kikuubo have appropriate inventory

management system...........................................................................................................................4

4.3 Findings on the profitability levels of small and medium scale businesses in Kikuubo...............4

4.4 Findings on the relationship between inventory management and profitability of small and medium

scale enterprises...................................................................................................................................4

CHAPTER FIVE......................................................................................................................4

SUMMARY, CONCLUSION AND RECOMMENDATIONS...........................................................................4

5.1 Summary of Findings............................................................................................................................4

5.1.1 Findings on inventory management techniques of small and medium scale enterprises in

kikuubo trading area………….

………………………………………………………………………..…...4

5.1.2 Findings on the profitability of small and medium scale enterprises in Kikuubo......................4

5.1.3 Findings on Relationship between Inventory Management and Profitability...........................4

5.2 Conclusion..............................................................................................................................................4

5.3 Recommendations................................................................................................................................4

REFERENCES........................................................................................................................ 4

APPENDICES........................................................................................................................ 4

APPENDIX 1: QUESTIONNAIRE..............................................................................................4

APPENDIX II: LETTER FROM THE CASE STUDY........................................................................4

APPENDIX III: INTRODUCTORY LETTER..................................................................................4

vi

LIST OF TABLES

Table1: Trend of profitability of SMEs in Kikuubo between 2008-2010..........................................4

Table2: Showing Sample Size Considered.......................................................................................4

Table 3: Gender of respondents......................................................................................................18

Table4: Age of the respondents……………………………………...…………………………...18

Table 5: Response on how long respondents have worked in the business………………………19

Table 6: Response on Education level of respondents…………...……………………………….19

Table 7: Response on whether the business has an effective inventory management system……20

Table 8: Response on whether the business keeps inventory…………………………….………20

Table 9: Response on whether there is regular stock taking……………………………….……..21

Table 10: Response on whether all orders are authorized by relevant authorities………………..21

Table 11: Response on whether situations of excessive stock exist…………………………...…22

Table 12: Response on whether deliveries are often made in time………………………………22

Table13: Response on whether there is segregation of duties…………………………….……...23

Table 14: Response on whether goods are inspected when received and before being stored…...23

Table 15: Response on techniques used to manage inventory………………………………..…..24

Table 16: Response on whether the firm consistently makes profits……………………………..24

Table 17: Response on whether actual profits made are the budgeted………………………...…25

Table 18: Response on whether there are measures in place to determine profits……………….25

Table19: Response on whether there is high stock out and ordering costs……………………….26

Table 20: Response on whether the business experiences high carrying costs…………………..26

Table 21: Response on whether the business has lost sales due to late deliveries………………..27

Table22: Response on whether inventory related costs affect profitability………………………27

Table23: Relationship between inventory management and profitability…………………….….28

vii

ABSTRACT

The study was carried out under the topic “Inventory Management Systems and Profitability”.

The objectives of the study were to establish the different inventory management techniques used

by small and medium scale enterprises in Kikuubo and to establish the relationship between

inventory management and profitability within Small and Medium scale Enterprises in Kikuubo.

The researcher reviewed various existing literature on inventory management and profitability to

equip him with the core principles about inventory management and profitability.

The study employed both analytical and descriptive design based on results from, questionnaires

and interactive interview carried out during the process of collecting data. A sample of 50

respondents was used stratified Random sampling method was to be used to collect data from

respondents.

From the findings of the study Small and Medium Enterprises in Kikuubo use three forms of

inventory management techniques to control inventory.

These include Economic order quantity, just in the system and the ABC system. However goods

are lost when received from suppliers during offloading and also from stores, there is no stock

taking, inventory purchased is not recorded. The result also showed that there was decline in

profits of most business for the past three years. And there was a positive relationship of 0.45

between inventory management and profitability.

Management should use just in time technique of inventory management to manage their

inventory for it minimizes costs.

The researcher also recommended management to make inventory management across functional

responsibility.

viii

CHAPTER ONE

1.0 Background to the Study.

Inventory management is defined as the process of maintaining optimum levels of inventory

investments, through, controlling costs related to stock on hand, work in progress and finished

goods (IM Pandey, 1995).

According to Saleemi (1993) inventory management refers to various techniques used to insure

that the right quantity of an item is used at the right time and place. And according to him the

objective of inventory management is to maintain a minimum investment in inventories to

maximize profitability. The task of the business is to consider the costs, returns and risk factors

while establishing the inventory control systems that may home negative effects on the enterprise

profits (Walgembach, et al., 1982).

Small scale business enterprises are enterprises that employ a limited number of employees with

a reason to minimize costs of operations, have small capital structure and annual scales turnover

of less than 50 million shilling (Ekpoyong and Nyong, 1992), their main objective is to maximize

profit and they thus vary from industry to industry in terms of capital employed, locators and

nature of goods they deal in.

Most small scale enterprises in Uganda have not survived to celebrate their first birthday, due to

their low levels of profitability. Although they have been recognized in the recent years as the

most important employment generation factor in Africa (Lettice, 2000), according to Calvin

(2000) most small scale businesses are myopic and have that continues to perform poorly.

Different scholars define profits in different ways organization is the excess of income over

expenditure at a particular period of time usually a year.

Economists define profits as the ability of a firm or business to maximize revenues and minimize

its costs (Lipsy, 1983). Profitability refers to how well a firm is doing it can also be a company’s

ability to generate revenues in excess of costs incurred in producing those revenues.

1

According to Stanford (1991) the most important thing is justification for profit.

It also a measure of business success though comparing profits made with the amount invested

(www/tutor2u.net/economics/revisionotes.htm) profitability is affected by lack of inventory

management, quality control, and customer care.

Since inventories constitute a large portion of the organization’s budget, there is need to have a

proper inventory control system to ensure profitability of the company as a result minimizing

costs associated with inventory (Lucy, 1996).

Most small scale and medium for expenses in Kampala are closing and new ones open up every

year and the possible cause of their fall is to low profit margin. Kikuubo is a trading street in

Kampala with a number of small scale business set ups and businesses here have suffered the

same problems as many others in Kampala, Businesses here include General merchandise,

Garments and clothing, retail shops dealing in stationary, Grocery stores and others. There are

about 6 employees in each business and the owners working as the manager.

The inventory arrangement system in place includes: occasional stock taking, store keeper order

for the stock, warehouse activities are properly documented, presence of staff with clearly

defined job description, authorization of purchase requisitions.

1.1 Statement of the Problem

In almost all organizational settings there is a direct correlation between inventory management

and overall business performance (Walgembach, 1982)

Small scale businesses in Uganda are privately owned with a major objective of maximizing

profits which have kept declining. For example for the case of Kikuubo, many business have

made attempts to increase their profitability through focusing on increasing their sales, dealing in

a variety of products, reduced expenditure, putting up inventory management policies to control

costs related to inventory, still their profitability has not improved as expected. This can be seen

in the three identified small scale and medium enterprise selected from Kikuubo which had

reducing profit levels as reflected in their profit and loss accounts for the periods 2005-2010.

2

Table1: Trend of profitability of SMEs in Kikuubo between 2008-2010.

Name of business Net Profits per year

Name of Business

F & D Traders

Fair Price Traders

Wakiso Enterprise

2008 2009 2010

57,682,250 40,356,48 21,220,050

52,258,000 52,200,500 38,000,600

36,100,800 20,500,650 18,125,000

Source: Financial reports of the businesses

1.2 Purpose of the Study

The study aims at establishing the relationship between inventory control and profitability of

small and medium scale enterprise in Kikuubo.

1.3 Objectives of the Study

To assess the effectiveness of inventory management system used by small and medium

scale enterprises in Kikuubo.

To establish the relationship between inventory management system and profitability.

To establish the level of profitability of SMEs in Kikuubo.

1.4 Research Questions

Do Small and Medium Enterprises in Kikuubo have an effective inventory management

system?

What is the relationship between inventory management and profitability?

What is the level of profitability of small and medium scale enterprises in Kikuubo?

3

1.5 Scope of the Study

1.5.1 Study Scope

The study is to focus on the current inventory management system in place and profitability of

small and medium scale enterprises in Kikuubo.

1.5.2 Geographical Scope

The study is to be conducted on small and medium scale enterprises along Kikuubo trading area a

street in Kampala.

1.6 Significance of the Study

The study will help the owners and managers of small and medium scale enterprises in

Kikuubo to identify loopholes in their inventory management system.

The research will help the researcher to improve his or her understanding of inventory

management in relation to profitability.

The study will help in building on the existing literature about inventory management and

profitability.

The study will help the researcher to be awarded a degree of bachelor of commerce.

4

CHAPTER TWO

LITERATURE REVIEW

Literature review involves getting information from already written literature. These resources

may include recognized text books, magazines, workshop paper materials, periodicals and

journals among other like internet.

2.1 Concept of Inventory Management System

Inventory is a term used to indicate the merchandise held for sale in the normal course of

business and materials in the process of production or held for production (Warren Reeve & Fes,

1994).

However Render & Stair (1994) says inventories are any resource used to satisfy a current or

future need.

While Van Horne (1995) says that inventory is defined as a link between production and sale of a

product defined as stock of a product a firm is manufacturing for sale and the components that

makeup the product.

According to Pandey (1995) an inventory management system is a process of maintaining

optimum levels of investment in inventory, through controlling costs associated with stock on

hand, work in progress, and finished goods.

Inventory in a management involves having in place material control systems, proper and

systematic recording of inventory and storage of right amount of inventory (Drury, 1995).

Inventory management also includes various techniques used to ensure that the right quantity of

an item is used at the right time and place (Saleemi 1993). According to him the objective of

having an effective inventory management system include:-

To maintain a large size of inventory for efficient and smooth production and sales operations.

5

To maintain a minimum investment in inventory to maximize profitability.

Inventory management ensures inventory of adequate quantities, goods quality and four prices

are produced, stored properly and issued with minimum amount of capital tied up (Jordan H.

Henry, 1997)

2.1.1 Components of an Effective Inventory Management System:

According to Baluwnywa (1998), inventory refers to physical assets of an organization which are

stocked by an organization either for further processing or for final sale.

Amey and Egginton (1993) suggested three general factors for holding inventory and those

include the transaction motive, precautionary and speculative motives.

Requirement for an effective inventory management system include;

As stated by Lucey and Drury (1995) for an effective inventory management system to operate, a

number of pre-requisites should be in place, and these include the following:-Proper control of

inventory through fixing of minimum, maximum and re-order levels so as to avoid stock outs

(shortages) or over stocking of stock. There must be adequate documentation and authorization

for material transactions. Proper inspection of materials to check their quality, quantity and

specification.

The following include the detailed inventory management aspects which are geared towards

enhancing its efficiency in details.

Inventory recording system and Stock valuation.

It is important to have accurate inventory records which help an organization to plan for

uncertainties. The accuracy must at least be 95% for critical or high market value items (Jordan,

1997). He added that, it is important to maintain the cycle counting system.

Inventory recording is undertaken to reduce the error relating to inventory accountability and

accuracy.

6

It should be noted that the value of stock held by an organization has an implication on the

operating profits and tax liability (Bazalilaki, 1997)

First in First out system (FIFO)

This is where goods, that were first stored are the first to be issued out of the warehouse or store,

thus is seen more logical because materials are issued in the order in which they were purchased

and they leave the warehouse in a chronological order according to their age. Therefore closing

stock value is not understated.

Last in First Out (LIFO)

This is the opposite of the first in first out approach to inventory management, it involves letting

out first good, that entered the warehouse last, the batches of good or units purchased are issued

first. Therefore it affects accompany facing unstable prices (inflation) as closing stock will be

made of old items and they will be priced using new prices.

Inventory level control models:

There are a number of models that can be used to determine the level of inventory to be kept by

an organization (Drury, 1992).

However, all these model aim at maintaining a level that will minimize costs at the same time

allowing a firm to meet production requirements and customer demands and some of these

models include:

Economic order Quantity

The Economic order quantity is the quantity that must be purchased to ensure that inventory

holding costs are kept at minimum (ACCA, 1996).

Pandey (1995) also asserts that ordering costs always decline and handling costs increase when

the quality ordered is increased.

7

According to him EOQ is a point where ordering costs are equal to handling costs at the

minimum level of total cost.

ABC Analysis

As noted by Nair (1990), ABC analysis is a system giving attention to matters according to the

degree of their importance instead of giving equal attention to all matters. Under this model items

will be divided into 3 categories.

A, B, C,

“A” items will be of high value

“B” will be medium values items

“C” will be low value items

Just in Time system: (JIT)

It’s a system where inventory of goods to be used or sold are just in time for that purpose

(Baluwnywa 1998). Drury (1995), goods are purchased so that delivery immediately precedes

their use. Holding costs are therefore, eroded and possibilities of improving the profitability of

the organization are high.

Stock taking

This is the process of determining the quantity of each kind of inventory owned by the enterprises

and listing the description and quantity. Various stock taking methods include; continuous stock

taking where items are regularly counted and monitored. It’s done where materials are of high

value.

Periodic stock taking where monitoring and counting of stock is done at the end of the period.

2.2 Profitability

According to Stanford (1999) the accountants define profit as the difference between total

revenue and total costs.

8

However, economists view profitability as the ability of a firm or business to maximize its

revenue and minimize costs (Lipsy, 1983).

It is also a measure of business success, though company profits made with the amount invested

(WWW.tutor2u.net/Economics/revisionnotes.htm)

Campsey (1999) explains that the ability of a business to earn profits depends on the

effectiveness and efficiency of its operation as well as the resources available to it.

Profitability focuses primarily on the relationship between operating results as reported in the

financial statement and the resources available to the business as reported in the balance sheets.

Horne (2000), argues that frequently maximization of profit is regarded as the proper objective of

the firm but its not as an inclusive goal as that of maximizing shareholders value. Van Horne

(2000), has a different view from Campsey (1999) and explains that a firm could raise profit by

using stocks and using the proceeds to invest in treasury bills, his argument was based on big

organizations that raise capital through shares and debentures.

2.2.1 Profitability Measures:

Bescos and Mendoza, (2000) noted measures of profitability and they included Earnings before

interest and Tax margin, Earning before interest and Tax to A asset percentage, Effective Tax

percentage, gross profit margin percentage and Return on Equity percentage as stated below:

Earnings before interest and tax to Asset percentage: it’s a ratio of the net income plus interest

plus tax all divided by total assets. This ratio is correspondingly excellent measure of asset

utilization efficiency.

Earnings before interest and tax margin (EBIT) percentage: This is the ratio of Earning (before

interest and tax) to scales. It’s a measure of profitability on sales most useful compared against

other business in the same industry.

9

Gross profit margin: This is measured as sales minus cost of sales, divided by sales.Net profit

margin percentage: This is net income (before extraordinary gains or losses) as a percentage of

sales.

Return on Equity percentage: This is the return on equity expressed in percentage (http: power

investor.Com/profitability-measures htm).

2.2.2 Profit Planning.

A profits plan as a short term financial plan .It is an action plan to guide managers in achieving

the objectives of a firm (Pandey, 2002). A profit plan is a comprehensive and coordinated plan:

exposed in financial terms for the operations and resources of an enterprise for some specific

period in future.

Objectives of Profit Planning

The major purposes of profit planning according to (Talemwa.R, 1987).

To communicate expectations to all concerned with the management of the firm so that they are

understood, supported and implemented.

To state the expectation in clear and formal terms to avoid confusion and facilitate their

attainability.

To coordinate the activities and efforts in such a way that the use of resources is maximized.

To provide means of measuring and controlling the performance of individuals and units and

supply on information on the basis of which the necessary corrective action can be taken.

2.2.3 Essentials Profit Planning

Successful and sound planning and budgeting system is based upon certain pre-requisites. These

pre-requisites represent management attitude, organization structure and management approaches

necessary for effective and efficient application of the budgeting system.

10

The following are some of the important essentials of fundamentals of successful profit planning

or budgeting top management support, clear and realized assignment of authority and

responsibility, creation of responsibility centers, effective communication, Budget education,

flexibility (Vanhorn, 1995).

2.2.4 Other Factors Affecting Profitability of Small Scale Enterprises.

A part from poor inventory management there are factors that affect profitability of small scale

enterprises, which are noted by (Zechariah, 1996) and these include:-

Managerial problems where managers of small scale enterprises, lack the skills and expertise to

run their businesses. This is coupled with the ineffective internal control over the limited

financial resources.

High costs of capital obtained from financial institutions such as the high interest rate charged on

the loan funds which erodes the little earnings made by small scale enterprises (Brigham E. F.

and Gaspensiki, 1997).

2.3 Relationship between Inventory Management System and Profitability

The relationship between inventory management and profitability can be seen from the cost point

of view. Since profits equal to total revenue less total costs, (Jordan H. Henry, 1997). Here total

costs is summation of all costs that a firm incurs in its operation of which inventory management

is included.

Therefore, the effect of inventory management will be looked at by considering different

associated costs of inventory management and how they affect profitability. (Aguti, J. N. 2000).

Stock-out Costs

These occur due to being without stock in the firm (Pandey, 1995) Examples of these costs

includes:

11

(i) Redundancy costs: certain costs are fixed with or without production taking place, such

costs include; rent, heat, lighting, air conditioning. So if stoppages in production occur

these costs will continue being incurred. These will therefore affect profitability in that

production will be low and costs will be high.

(ii) Loss in future sales:

Customer may decide to go elsewhere if an organization continually faces problems of

stock outs. This means loss of customers and loss of future sales yet the firm continues

paying fixed expenses and low sales mean low profit for the organization.

(iii) Extra costs associated with urgent and often small quantity replenishment orders: Due to

urgency of some materials as a result of stock out, a firm will be forced to order for small

quantity to fill the gap .This however means foregoing larger quantity purchase discount

(Ssebina B.C, 1990).

Ordering Costs

These are costs of obtaining inventory from suppliers. Ordering costs include: clerical and

administrative costs of purchasing, accounting and goods receiving transport costs (Lucey, 1996).

If inventory management is not effectively handled, it will increase on the ordering costs and

therefore reduce profits of the firm.

Holding Costs

As observed by Drury (1995), there are costs of holding inventory in an organization and such

costs consist of: Interest on capital invested in stock, storage charges that is to say; rent, lighting

and heating, equipment maintenance and running costs, material handling costs and Audit, stock

taking and stock recording.

Such costs increase on the total costs of the firm and hence reducing on the profit of the firm.

Conclusion

12

It should therefore be noted that inventories is a representative of investment and therefore they

should be kept at an absolute minimum as they have an influence on the firm’s profitability.

Inventory management is also an important area of financial control which is often neglected not

knowing that a small percentage saving on inventory cost will present millions of shillings on

sales.

13

CHAPTER THREE

METHODOLOGY

This section describes the methods that were used for data collection and techniques that were

used in the analysis of data. This covers the research design, study population, sampling

technique, data type and sources, data collection methods, data presentation and analysis.

3.1 Research Design

The study was descriptive where the inventory management systems in place were described in

detail, it was also cross sectional and explanatory in nature and both qualitative and quantitative

data collected to get an in depth understanding of inventory management systems and

profitability.

Cross sectional design was considered appropriate because of time constraints and also cross

sectional studies has the advantage of taking some phenomena at a time and analyze the section

carefully to derive generalities to the total population.

3.2 Study Population

The population under study comprises of business owners, managers storekeeper and shop

attendants, from 20 businesses in Kikuubo and a total number of respondents of 60 people.

3.3 Sampling Size

From the study population, a sample size of 50 respondents was chosen from 15 businesses, this

was considered both manageable and representative of the study.

14

Table2: Showing Sample Size Considered

Business category No. of firms No of respondents

General merchandise 3 10

Stationary Retail shop 4 15

Garments and Clothing 3 10

Groceries 3 10

Restaurants 2 5

Total 15 50

3.4 Sampling Method

These were grouped in strata using stratified random sampling, with strata of small scale business

owner, managers, store keepers and shop attendants and simple random sampling was conducted

in each strata.

3.5 Source and Type of Data

Primary Data

The researcher collected data using questionnaires, which were sent to the respondents in the

chosen SMEs in Kikuubo concerning how they manage their inventory. Data was collected from

50 respondents, the researcher used point like scale ranging from strongly agree, agree, not sure,

disagree and strongly disagree with 1,2,3,4,5, scale respectively and a box on each where the

respondents will be required to tick their appropriate choice. The questionnaire was designed to

capture, concise and precise responses. This was achieved by use of an introduction letter from

Makerere Institute of Adult and Continuing Education, faculty of economics and management for

identification purposes.

Secondary Data

The researcher collected data from sources like news papers, UMA trade fair magazines,

workshop research papers and other research materials.

As these helped the researcher to appreciate the link between theory (literature) and practice.

15

3.6. Data Collection Methods:

Questionnaire: The researcher used self administered questionnaires to collect data from the field,

this served convenient for the researcher.

Interview: This is a face to face interview where by the researcher arranged the interview

questions related to inventory management system and profitability of SMEs.

Procedure:

The researcher began with getting a letter of introduction from Makerere university institution of

Adult and continuing education that was to be attached to the questionnaires. This was intended

to minimize on the resistance of some respondents who would refuse to release information to the

researcher. And these questionnaires were distributed to the respondents and there after picked

from them after filling them. The correctly filled questionnaires were sorted and considered

adequate data qualifying for analysis by the researcher.

3.7 Data Processing, Analysis and Presentation

Data Processing

After collecting data, the researcher organized the well filled questionnaires and processed data

with the aid of Microsoft word by typing the work on a computer.

Data Analysis

Data was collected; results compiled, sorted, edited, classified and analyzed using, frequency

distribution table, percentages and regression analysis for better analysis.

Data Presentation

Data was presented in tabular form with frequencies and percentages for simple classification of

response.

16

The inferential statistics was derived by using Statistical Package for Social Scientists (SPSS)

computer program and the relationship between the two variables was derived through

correlation analysis.

3.8 Limitations to the Study

There was a limitation of lack of proper records and even non existence of some due to the fact

that most SMEs do not keep or do not have records. However the researcher tried to get the

necessary information for the study.

Also some respondents could not release some information because they expected to get no

return for their information.

Another limitation was getting wrong information due to excitement of respondents.

There was also financial constraint to facilitate the study. However the researcher adjusted the

budget to fit in the resources available.

17

CHAPTER FOUR

ANALYSIS AND PRESENTATION OF FINDINGS

This chapter covers the analysis and presentation of findings. It provides typical analysis of the

effect of inventory management systems and profitability. The data presented and analyzed was

collected .from traders of small and medium scale enterprises in Kikuubo trading area, hence

primary source information. Tables, figures, frequency and percentages were used to present the

findings. The findings have been presented and discussed in accordance with the objectives of the

study.

4.1 Response on Demographic Characteristics of the Respondents.

From the above table it’s evident that male respondents were more than the female because most

of the workers and business owners in the approached businesses were male.

According to table 4, the biggest number of respondents is above 30years at 48%, the next group

lies between 20-30 years at 40% and below 20 years at 12%.40% of respondents included the

energetic workers.

18

Table 3: Gender of respondents

29 58.0 58.0 58.021 42.0 42.0 100.050 100.0 100.0

MaleFemaleTotal

Frequency Percent Valid PercentCumulative

Percent

Source: Primary data

Table4: Age of the respondents

6 12.0 12.0 12.020 40.0 40.0 52.024 48.0 48.0 100.050 100.0 100.0

Below20years20-30yearsAbove30yearsTotal


Percent


According to the table 42% of the respondents have worked in the approached small and medium

scale businesses for more than 5 years, 36% between 3-4 years, 16% between 1-2 years and 6%

less than 1 year. This means that the biggest number of respondents approached had enough

experience in the business because of staying in the business for over 5 years and therefore

provided reliable information about the study.

From table 6, the biggest number of respondents just have experience and these are represented

by 42% of the total, 38% have certificates, 10% diplomas and 10%degree.Meaning that most

small and medium scale businesses in Kikuubo are operated by people who have no or low levels

of education because of not requiring highly educated people but basic knowledge and experience

by especially the lower level staff, while the few with degrees and diplomas include the upper

staff who are few.

19

Table5: Response on how long respondents have worked in the business

3 6.0 6.0 6.08 16.0 16.0 22.0

21 36.0 36.0 58.018 42.0 42.0 100.050 100.0 100.0

Lessthan1year1-2years3-4yearsMorethan5yearsTotal


Percent


Table 6: Response on Education level of respondents

5 10.0 10.0 10.05 10.0 10.0 20.0

19 38.0 38.0 58.021 42.0 42.0 100.050 100.0 100.0

DegreeDiplomaCertificateJust experienceTotal


Percent


4.2 Findings on whether small and medium scale enterprises in Kikuubo have appropriate

inventory management system

Table 7 shows that 58% strongly disagree that their businesses have effective inventory

management systems 22% disagree, 20% not sure; this shows that most businesses do not have

an effective inventory management system.

From table 8, 48% of the respondents strongly agree that the business holds inventory, 46%

agree, 6% disagreed. This shows that among the businesses approached most of them hold

inventory. This explains the high carrying costs incurred by most businesses.

20

Table 7: Response on whether the business has an effective inventory management system

10 20.0 20.0 20.011 22.0 22.0 42.029 58.0 58.0 100.050 100.0 100.0

Not sureDisagreeStrongly disagreeTotal


Percent


Table 8: Response on whether the business keeps inventory.

24 48.0 48.0 48.023 46.0 46.0 94.03 6.0 6.0 100.0

50 100.0 100.0

Strongly agreeAgreeDisagreeTotal


Percent


According to table 9, 4% of the respondents agree that there is regular stocktaking, 12% were not

sure, 28% disagree and 56% strongly disagree. Meaning that most businesses do not carry out

regular stock taking for their businesses, this explains the high levels of stock loss due to theft

and damage.

According to table 10, 16% agree, 16% were not sure, 44% disagree, 24% strongly disagree,

about all orders being authorized by relevant authorities. Meaning that there is no proper

authorization of all orders made in most businesses. This is clearly shown by a higher percentage

of those who disagreed.

21

Table 9: Response on whether there is regular stock taking.

2 4.0 4.0 4.06 12.0 12.0 16.0

14 28.0 28.0 44.028 56.0 56.0 100.050 100.0 100.0

AgreeNot sureDisagreeStrongly disagreeTotal


Percent


Table 10: Response on whether all orders are authorized by relevant authorities.

8 16.0 16.0 16.08 16.0 16.0 32.0

22 44.0 44.0 76.012 24.0 24.0 100.050 100.0 100.0



Percent


Tabl

e 11 shows that 58% respondents strongly agreed, 26% agreed and 16% were not sure. This

means that businesses keeps excessive stock than necessary this explains the high costs of

carrying stock incurred by most small and medium scale businesses operating in Kikuubo which

have adversely affected their businesses.

A

ccording to table 12, 10% of respondents agree that deliveries are always made in time to

customers, 18% were not sure, 26% disagreed and 46% strongly disagreed. This means that

deliveries to customers are not made in time explaining the increasing amount of lost sales

reported in most businesses due to disgruntled customers.

22

Table 11: Response on whether situations of excessive stock exist

29 58.0 58.0 58.013 26.0 26.0 84.08 16.0 16.0 100.0

50 100.0 100.0

Strongly agreeAgreeNot sureTotal


Percent


Table 12: Response on whether deliveries are often made in time

5 10.0 10.0 10.09 18.0 18.0 28.0

13 26.0 26.0 54.023 46.0 46.0 100.050 100.0 100.0



Percent


Table13 shows that 28% of respondents were not sure, 26% disagreed, and 46% strongly

disagreed. This means that there is no segregation of duties explaining the unauthorized access to

the stores by all staff and constant loss of stock due to theft.

A

ccording to table 14, 8% respondents agreed, 12% were not sure, 60% disagreed and 20%

strongly disagreed. This implies that once goods are received from suppliers, they are not

inspected for quality, this leads to sell of substandard goods to customers and also taking

damaged goods into the store which are loss to the business.

23

Table13: Response on whether there is segregation of duties.

14 28.0 28.0 28.013 26.0 26.0 54.023 46.0 46.0 100.050 100.0 100.0



Percent


Table 14: Response on whether goods are inspected when received and before being stored

4 8.0 8.0 8.06 12.0 12.0 20.0

30 60.0 60.0 80.010 20.0 20.0 100.050 100.0 100.0



Percent


From table 15, 66% of respondents in businesses approached use Economic order quantity, 10%

use just in time system and 24% use ABC analysis, this shows that most businesses use economic

order quantity to manage inventory as clearly shown by the high percentage, however though the

method of keeping minimum inventory is used, its not effectively applied due to the fact that

there are situations of excessive stock in most businesses.

4.3 Findings on the profitability levels of small and medium scale businesses in Kikuubo.

From table 16 it’s shown that, 32% of respondents disagreed, 68% strongly disagreed. This

shows that businesses do not consistently make profits, thus losses are made in some periods, and

this was attributed to the high operating costs including carrying costs and high levels of stock

loss due to theft.

24

Table 15: Response on techniques used to manage inventory

33 66.0 66.0 66.05 10.0 10.0 76.0

12 24.0 24.0 100.050 100.0 100.0

Economic order quantityJust in time systemABC analysisTotal


Percent


Table 16: Response on whether the firm consistently makes profits

16 32.0 32.0 32.034 68.0 68.0 100.050 100.0 100.0

DisagreeStrongly disagreeTotal


Percent


Table 17: Response on whether actual profits made are the budgeted

5 10.0 10.0 10.024 48.0 48.0 58.021 42.0 42.0 100.050 100.0 100.0



Percent


Table17 shows that 10% of respondents were not sure, 48% disagreed and 42% strongly

disagreed. This indicates that the business owners and managers do not achieve their planned

profit targets, and most of them attributed the variance to the unplanned for costs incurred by the

business like inventory related costs that affect profits.

From table 18, it’s shown that 8% of respondents were not sure, 44% disagreed, 48% strongly

disagreed, meaning that most enterprises in Kikuubo do not have measures in place to determine

their profitability and this makes it hard to ascertain performance of the business.

4.4 Findings on the relationship between inventory management and profitability of small

and medium scale enterprises.

25

Table 18: Response on whether there are measures in place to determine profits

4 8.0 8.0 8.022 44.0 44.0 52.024 48.0 48.0 100.050 100.0 100.0



Percent


Table19: Response on whether there is high stock out and ordering costs

8 16.0 16.0 16.02 4.0 4.0 20.0

24 48.0 48.0 68.016 32.0 32.0 100.050 100.0 100.0



Percent


According to table 19, 16% agree, 4% were not sure, 48% disagree and 32% strongly disagree.

Implicating that most businesses do not experience stock out and ordering costs due to the fact

that there is always more than enough stock available so there are low or no stock outs. Costs of

ordering are also low because orders are made once in predetermined period.

From table 20, 56% of respondents strongly agree, 20% agree, 4% were not sure and 20%

disagreed on incurring carrying costs. This implicates that most businesses in Kikuubo incur

carrying costs due to holding excessive inventory, such costs include storage, and theft and this

negatively affect profits.

According to table21, 68% strongly agreed, 32% agreed that they have lost sales due to failure to

deliver in time; this is explained by the number of disgruntled customers due to late deliveries

which negatively affects sales.

26

Table 20: Response on whether the business experiences high carrying costs

28 56.0 56.0 56.010 20.0 20.0 76.02 4.0 4.0 80.0

10 20.0 20.0 100.050 100.0 100.0

Strongly agreeAgreeNot sureDisagreeTotal


Percent


Table 21: Response on whether the business has lost sales due to late deliveries

34 68.0 68.0 68.016 32.0 32.0 100.050 100.0 100.0

Strongly agreeAgreeTotal


Percent


Table22, 12% were not sure, 44% agreed and 44% strongly agreed, this implies that inventory

related costs highly affect profitability of the business.

From table 23 above, findings revealed that there is a weak positive relationship between

inventory management and profitability at Pearson correlation coefficient r=0.445(**). This

implies that a change inventory management would slightly affect profitability by 44.5%.

27

Table22: Response on whether inventory related costs affect profitability

6 12.0 12.0 12.022 44.0 44.0 56.022 44.0 44.0 100.050 100.0 100.0

Not sureAgreeStrongly agreeTotal


Percent


Table23: Relationship between inventory management and profitability

1 .445 **. .001

50 50.445 ** 1.001 .

50 50

Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N

INVENTORY

PROFITABILITY

INVENTORYPROFITA

BILITY

Correlation is significant at the 0.01 level (2-tailed).**.

CHAPTER FIVE

5.0 Summary, Conclusion and Recommendations

The chapter covers the summary, conclusion and recommendation of the findings. The summary

covers the findings in relation to the objective of the study. The summary is followed by the

conclusion which is based on the findings of the study. And recommendations to improve on the

management of inventory among small and medium scale business in Kikuubo

5.1 Summary of Findings

The study was mainly concerned about the effects of inventory management policy on

profitability of small and medium scale enterprises. This summary based on the objectives of the

study.

5.1.1 Findings on inventory management techniques of small and medium scale enterprises in

Kikuubo trading area

It was found out that most businesses hold inventory. And the most used inventory management

technique is Economic order quantity, done through holding minimum stock levels however the

method of holding inventory has not been used effectively by most businesses. Other techniques

used are the just in time system, and the ABC system.

28

It was also found out that there is loss of stock, from stores, during transfers and after storage.

There is no regular stock taking done which has led to maintaining of irregular stock levels thus

carrying and stock out costs.

There is handling of excessive stock by businesses, no segregation of duties and goods are not

inspected when received thus storage of poor quality goods consequently leading to sale of poor

quality goods to customers this adversely affects sales.

5.1.2 Findings on the profitability of small and medium scale enterprises in Kikuubo

The study findings showed that businesses in Kikuubo have been experiencing inconsistencies in

growth levels where sales and profits have been fluctuating over time.

There are no measures in place to determine profit of the business because most owners use basic

knowledge to calculate profits for their businesses.

Actual profits made vary from the budgeted and most businesses attributed losses made in certain

periods to high operating costs. This has been due to not catering for inventory related costs that

negatively affect the returns.

Another weakness on the aspect of growth observed was the lack of existence of proper way of

gathering data and making forecast of growth levels

5.1.3 Findings on Relationship between Inventory Management and Profitability

It was found out that there is a positive relationship of 0.44 between inventory management and

profitability of small and medium scale enterprises. This means that if a business is to increase its

profits, it should maintain an optimal level of inventory.

The business should also consider other factors affecting their profitability apart from inventory

management because the relationship between inventory management and profitability is

imperfect.

29

5.2 Conclusion

Small and medium scale enterprise in Kikuubo use inventory management techniques like

Economic Order Quantity, ABC system and just in time system. Also profits of the business have

been inconsistent for the past three years and there is a positive relationship of 0.44 between

inventory management and profitability.

However it should be noted that the relationship between inventory management system and

profitability is weak, indicating that there are other factor to be considered that affect the profits

of the small and medium scale enterprises.

5.3 Recommendations

Basing of the study carried out which led to the conclusion above the following recommendation

were forwarded.

Small a medium scale enterprise should not concentrate on inventory management as the only

factor that affect the profitability, but other factors like quality control, competition, tax planning

to avoid paying unnecessary taxes, are other factors that should also be given consideration.

Small and medium scale enterprises in Kikuubo should opt to use Just in Time system as an

inventory management technique by ordering for specific quantities according to customers need

at a particular time. As this will help to reduce on the amount of stock held and thus leading to

reduction in carrying costs incurred due to the fact that there is Zero inventory handling.

Inspection will also be made easier as small quantities are ordered for at a time and thus are

easily inspected for quality

Internal controls

Management of small and medium scale enterprises should establish and strengthen the internal

controls over inventory and other financial resources to reduce on mismanagement and

misappropriations.

30

The internal controls to be established among others include; segregation of duties, approval and

authorization, supervision of lower employees and stock taking on regular basis of received

inventory to reduce on theft and mismanagement of inventory.

Motivation incentives

Introduction of motivation incentives for example increase of salaries, wage and other non-

monetary rewards. This will help reduce on the theft of inventory from business and give them a

heart of commitment hence efficient management of resources.

Competent Staff

Management of small and medium scale enterprises should employ competent staff that has

experience and skill in Inventory Management. They should also consider training their

employees on inventory management practices and the system in place.

Preparation of Books of Accounts

Small and medium scale enterprises should consider recording their inventory and preparing

books of accounts not only for controlling inventory but also for other financial resources this

will help in ascertaining performance.

Computerization

They should computerize their inventory management system to avoid any manipulation and

encroachment by unauthorized users; this will lead to faster processing of transactions and reduce

on fraud errors and mistakes in books of accounts.

There should also be measures put in place to determine profits made by the businesses, through

analyzing different profits for example profits before interest and tax, after cost of sales and also

doing profit planning for the business.

Conclusion

31

Inventory control and management should however not be the responsibility of only the

purchasing personnel but for all involved workers and management of the small and medium

scale business to be able to control inventory related costs.

REFERENCES

IM Pandey (1995). “Financial Management”7th edition revised edition, Vikas Publishing House

PVT Ltd.

Ekpeyong D.B and Nyong M.O (1992). Small and medium scale enterprise in Uganda. ‘The

characteristics, problems and source of finance”, African Economic Research Consortium,

Research paper 16. Dec. 1992.

Saleemi N.A. (1993). “Business Finance” Simplified 2nd edition Nairobi. N.A. Saleemi

Publishers.

Lettice(2000). “A study of small scale enterprise in Africa”

Lipsey (1983). Financial Management, Third edition, Macmillan Press Ltd. Britain.

Stanford.D. Godon and George G. Danson, (1991). Introductory Economics 7th edition. D.C.

Heath and company Canada.

Lucey. T. (1996). Cost and Management Accounting, 6th edition, prentice Hall. International

Copper P. and Drury, C. (1996). Management accounting practice in Universities. CIMA

Management, Accounting, Feb. 1996. p.28-30, Vol. 74, No. 2.

32

Lucey T. and Collins Drury, (1995). “Costing” 4th edition D.P .publications

Wasswa Balunywa (1998). “A hand Book of Business Administration”

Jordan H. Henry (1997). “Inventory Management” IBS.

Ammey and Egginton (1993). “Effective Inventory Management System” 2nd Edition. Harcourt

Brace College Business.

Raghubur, Dayal.P.Zechariah and K.Rajpal (1996). Inventory and credit management “Eric. Vol.

II New Delhi Mittal Publications.”

www.tutor 2u.net/Economics/revisionnotes.htm.

Campsey; B.J (1999). “Financial Management Accounting” Six edition South Western College

Publishing Company Ohio, USA.

Van Horn (2000). “Financial Management and Policy”, Eleventh edition, Prentice Inc. USA.

Bescos P and Mendoza. C. (2000). “Management Accounting and Decision Making”. Why

managers Need information, a paper presented at the 23rd Annual Conference of the European

Accounting Association in Munich, Germany, March 29-31 2000.

Talemwa R. (1987). “Comparative study on profitability”, special project Report, MUK..

Van Horn (1995). “Financial Management and policy” 10th Edition Prentice Hall Inc. New

Jersey.

Brigham, E.F. and Gaspensiki, (1997). “Financial Management Theory and Practice”.

Ssebina B. C. (1990). “Commercial Production Manual for Uganda”

Warren Reeve and Feds 4th Edition, Financial and Management Accounting.

Render and Stair M.R (1994). Quantitative Analysis of Management, 5th Edition

33

http://www.tutor/

APPENDICES

MAKERERE UNIVERSITY

APPENDIX 1: QUESTIONNAIRE ON EVALUATION OF THE IMPACT OF

INVENTORY MANAGEMENT SYSTEMS AND PROFITABILITY OF SMALL AND

MEDIUM SCALE ENTERPRISES

Dear Sir, or Madam,

Am by names NAKINTU CAROLINE, I am a student of Makerere University pursuing a

bachelor of commerce degree and as a pre-requisite for the award, I am undertaking a study on

inventory management systems and profitability of small and medium scale enterprises in

Uganda.

The questionnaire is purely an academic research and all the information obtained will be held in

strict confidence and any assistance extended will be appreciated.

Please circle the appropriate figure or code which best suits you view and fill in the blanks where

necessary.

SECTION A: PERSONAL INFORMATION

1. Title ………………………………………………………………………………

2. Gender Male 1 Female 2

3. Age: Below 20 years 20-30 years Above 30 years

34

4. How long have you worked in the Business

Less than 1 year 1- 2 3 - 4 More than 5

5. Education level

Degree Diploma Certificate Just Experience

Others specify. ……………………………………………………………………

SECTION B. INVENTORY MANAGEMENT

Strongly Agree Agree Not sure Disagree Strongly

Disagree

6. The business holds inventory

7.There is an effective inventory

management system

8.There is regular stock taking

9. All orders are authorized by

relevant authorities.

10.Situations of excessive stock

exist

11. Deliveries are often made in

time.

12. There inspection of goods

when received and before

storage.

35

13. The inventory management system used by the business is

Economic order quantity

Just in Time system

ABC system

PART C. PROFITABILITY

1

Strongly agree

2

Agree

0

Not sure

3

Disagree

4

Strongly disagree

15. The firm consistently makes profits.

16.There are measures in place to determine business’s profitability

17. Actual profits made are the budgeted

PART D: Impact of inventory management system used on profitability.

Strongly Agree

Agree Not sure Disagree Strongly Disagree

18. The business experiences high stock out costs and ordering costs.

19. The business experiences high carrying.

36

20. Inventory related costs highly affect profitability of the business.

21. The business has lost sales due to failure to deliver in time.

37

APPENDIX II: LETTER FROM THE CASE STUDY

38

APPENDIX III: INTRODUCTORY LETTER

39

Documents

MAKERERE UNIVERSITYcees.mak.ac.ug/sites/default/files/publications/Caral.doc · Web viewProfitability focuses primarily on the relationship between operating results as reported