WORKING CAPITAL MANAGEMENT AND … · Web viewIn an Ontario survey of small business start-ups, half of new firm owners intended that their business would simply generate enough income

MAKERERE UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES

WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE OF

SMALL BUSINESS ENTERPRISES IN UGANDA

A CASE STUDY: BEST CUTS UGANDA LTD LOCATED IN KAMPALA

DISTRICT

BY

OJARA HERBERT PRICE

05/U/14624/EXT

SUPERVISOR: MR. NUWAGABA GEOFFREY

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF BACHELOR OF COMMERCE DEGREE OF

MAKERERE UNIVERSITY

AUGUST 2011

DECLARATIONI, Ojara Herbert do hereby declare that the research project is entirely my original work,

except where acknowledged and that it has not been submitted before to any other

university or institution of higher learning for the award of a degree.

Signed……………………………………… Date……………………………………..

OJARA HERBERT

i

APPROVALThis report by Ojara Herbert has been under my supervision and is now ready for

submission

Signed………………………...................……… Date …………………………………

MR. NUWAGABA GEOFREY

ii

DEDICATIONThis research is dedicated to my dear father Mzee Hajusu Juma Wilberforce whose total

investment in my education I adore and appreciate, my beloved mother Kharono Juliet

who has always been there for me in all difficult times to support and encourage me, my

Dear Brother Lumonya Patrick for the financial support, my dear friend Odong Justin for

being so close to support me, my employer madam Nyaburu Catherine, my beloved

sisters Stella and Sarah, Brother Hajusu Sam and all my friends and course mates with

whom we shared the great skills of learning.

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ACKNOWLEDGEMENTThe greatest of thanks go to the almighty God who has enabled me to achieve whatever I

have in this world because without him, I would not have reached this level.

I am so grateful to my supervisor Mr. Nuwagaba Geoffrey who whole heartedly

contributed a lot towards the success of this research project. You have always

professionally guided me and given your precious time to correct me whenever I go

astray. Without your supervision and guidance, this research work would not have been

easy to accomplish. May the almighty God bless richly!

Special thanks go to my friend Mr. Odong Justin for all the financial support and putting

a difference to my life through the care and brotherly love you offered to me. Sincerely

you contributed so much towards the accomplishment of this course and may God

continue to bless you and your family.

Dad, the words to describe your importance and contribution to what I am. You have

been such a caring father. You gave your best to make me and my other siblings what we

are now and pray that the almighty God may give you life so that you live to see the fruits

of your effort!

Finally, Mum I sometimes fail to get words enough to express how valuable you are to

me and the entire family. Sincerely without you it would not have been easy for us to get

to where we are and what we are. You have determined our destiny and its my prayer that

God may allow you to see us when we are what you wished we be!

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TABLE OF CONTENTSPage

DECLARATION................................................................................................................i

APPROVAL.......................................................................................................................ii

DEDICATION..................................................................................................................iii

ACKNOWLEDGEMENT...............................................................................................iv

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

LIST OF TABLES..........................................................................................................viii

ABSTRACT......................................................................................................................ix

CHAPTER ONE................................................................................................................1

INTRODUCTION.............................................................................................................1

1.0 Background of the study................................................................................................1

1.1 Statement of the Problem...............................................................................................2

1.2 Purpose of the Study......................................................................................................3

1.3 Objectives of the Study..................................................................................................3

1.4 Research Questions........................................................................................................3

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

1.5.1 Content scope..............................................................................................................4

1.5.2 Geographical scope.....................................................................................................4

1.5.3 Time scope..................................................................................................................4

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

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CHAPTER TWO...............................................................................................................5

LITERATURE REVIEW.................................................................................................5

2.0 Introduction....................................................................................................................5

2.1 Working Capital Management.......................................................................................5

2.2 Financial Performance...................................................................................................7

2.3 The relationship between funds management and Financial Performance.................11

2.4 Conclusion...................................................................................................................13

CHAPTER THREE.........................................................................................................14

METHODOLOGY..........................................................................................................14

3.0 Introduction..................................................................................................................14

3.1 Research Design..........................................................................................................14

3.2 Study population..........................................................................................................14

3.4 Sample Design.............................................................................................................15

3.4.1 Sampling method......................................................................................................15

3.4.2 Sample size...............................................................................................................15

3.5 Sources of Data............................................................................................................15

3.6 Data collection methods and instruments....................................................................16

3.6.1 Questionnaire............................................................................................................16

3.7 Data Processing and Analysis......................................................................................16

3.7.1 Data processing.........................................................................................................16

3.7.2 Data analysis.............................................................................................................16

3.8 Challenges/ limitations during the study.....................................................................16

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CHAPTER FOUR...........................................................................................................18

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS...........................................................................................................................................18

4.0 Introduction..................................................................................................................18

4.1 Demographic Characteristics of Respondents.............................................................18

4.2 Working Capital Management practices in Best cuts Uganda ltd...............................20

4.3 The levels of financial performance of Best Cuts (U) Ltd..........................................23

4.4 The relationship between Working Capital Management and Financial Performance of Best cuts Uganda ltd......................................................................................................28

CHAPTER FIVE.............................................................................................................29

SUMMARY CONCLUSION AND RECOMMENDATIONS....................................29

5.0 Introduction..................................................................................................................29

5.1 Summary of the findings.............................................................................................29

5.2 Conclusion...................................................................................................................30

5.3 Recommendations........................................................................................................30

5.4 Areas for further research............................................................................................31

REFERENCES..................................................................................................................32

APPENDIX 1: QUESTIONNAIRE FOR STAFF MEMBERS........................................35

APPENDIX 2: TIME FRAME..........................................................................................40

APPENDIX 3: BUDGET ESTIMATES...........................................................................41

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LIST OF TABLESPage

Table 1: Sample Size Distribution.....................................................................................15

Table 2: Age......................................................................................................................18

Table 3: Gender of Respondents........................................................................................19

Table 4: Level of education...............................................................................................19

Table 5: Period spent working in the enterprise................................................................20

Table 6: Funds recorded by one person.............................................................................20

Table 7: Daily money received by the Enterprise is banked on that same day.................21

Table 8: All money received by the Enterprise is recorded in the books of accounts.......22

Table 9: Purchase order is first issued for all goods bought..............................................23

Table 10: Capital of Enterprise increased in the year 2010.............................................23

Table 11: Loans borrowed by the Enterprise in the year 2010........................................24

Table 12: Sales made by the Enterprise in the year 2010..............................................25

Table 13: The number of shareholders increased in the year 2010.................................25

Table 14: Rate Retained earnings in the year 2010.......................................................26

Table 15: The Enterprise is the main supplier to most of the supermarkets in Kampala. .27

Table 16: Relationship between Working Capital Management and Financial Performance.......................................................................................................................28

viii

ABSTRACT

The purpose of the study was to establish the extent to which working capital

management practices by small and medium enterprises would impact on the financial

performance of Best cuts Uganda ltd basing on the following objectives; to identify the

various working capital management practices in Best cuts Uganda ltd, to find out the

levels of financial performance of Best Cuts (U) Ltd, and to examine the relationship

between working capital management and financial performance of Best cuts Uganda ltd.

The research involved a cross sectional study using both qualitative and quantitative

research centered on working capital management practices. Simple random sampling

techniques was used, and a sample of 30 respondents from Best Cuts Uganda Ltd who

among others were the employees from different departments, management and clients

who were chosen for the study. Data was collected by questionnaires. the study was

analyzed using statistical techniques and qualitative and qualitative techniques such as

regression and correlation analysis with help of Ms Excel and Ms Word to clearly come

up with the relationship between working capital management and financial performance.

Findings revealed that all funds in Best Cuts Uganda Ltd are recorded by one person,

Daily incomes and expenses are recorded in the cashbook, recorded in the textbook,

Daily money received by the Best Cuts Uganda Ltd is not banked on that same day,

Purchase order is not first issued for all goods bought. Daily recording of funds affect

growth for Enterprise, the days when enterprise makes more money some funds are

withdrawn from the enterprise and this reduces the growth of the business. Besides that

there is a strong positive relationship between Working Capital Management and

Financial Performance

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CHAPTER ONE

INTRODUCTION

1.0 Background of the study Small and medium enterprises play a vital role in the development of the industrial and

business sector. Besides being one of the vehicles of economic progress, these have been

found to be one of the most effective means of avoiding the ever increasing

unemployment which is common and acute in developing countries like Uganda

Broadbent and Cullen (2003).

Small and medium enterprises are not easy to define but in simple terms this is a private

company or one person’s business having less than or slightly higher than 10-20

employees or annual sales turnover of between Uganda shillings 1,000,000-50,000,000

Broadbent and Cullen (2003).

In Uganda today, the foundation to development has to been laid on several pillar keys,

one of which is the establishment and management of small and medium enterprises.

Approximately 80% of all businesses in Uganda are small and medium scale and almost

represent 50% of the employment in the country. Consequently, therefore, the Ugandan

government is looking to the private sector generally and the small and medium

enterprises in particular to take the lead in future industrialization and has given them the

necessary, though not all support to take off Ssekatawa (2010).

This is evidenced in government promoted schemes like the Private sector foundation

Uganda (PSFU), which is Uganda’s umbrella private sector body that offers financial

support in form of sharing grants to micro, small and medium enterprises to enable them

obtain technical or financial expertise for purposes of becoming more productive and

competitive. It achieves this through its development scheme Business Uganda

Development scheme- enterprise Development Support.

1

The Budget speech (2011) highlight that real industrialization and development for a poor

Uganda must be through acquisition of indigenous capacities by adopting policies geared

towards promotion of small-scale enterprises. The 2011-2012 Budget proposals also

highlighted the need to support small-scale businesses. This is evidenced by the 9 billion

Uganda shillings that were proposed for the “Jua Kali” artisans to develop appropriate

industrial sites.

Best cuts (U) Limited is an Agro-Business Farm that is registered under the Small

Business Enterprises (SME’s). It’s owned by Ugandans whose philosophy is to provide

high quality products, be consistent, efficient, and offer personalized services to

customers. The farm concentrates in production, purchase and supply of broilers to both

local and international markets. To ensure this quality, the company produces its own

feed for the broilers and also works with well organized out growers who understand its

quality needs .

The farm’s offices are located in Bweyogerere, Buto zone with farm extension in

Bunyiri-Mukono. The farm’s objective is to be a leading broiler processing and

marketing company in Uganda by 2013 given the competitive edge of quality and

efficiency it has developed with the motivated staff.

1.1 Statement of the ProblemThe success of any business depends on how it manages its resources and most

businesses crave for success and growth. These resources include working capital in form

of cash and other current Assets, among others.

Financial performance levels exhibited in most small and medium enterprises especially

Best Cuts (U) Ltd is not satisfactory. Despite the endeavor to maintain a good working

capital by management, there continues to exist a declining level of working capital in

form of inadequate cash inflow which cannot sustain daily cash needs of the farm. This in

turn has led to inefficient client satisfaction in a way that a low level of working capital in

form of cash receivables makes it difficult to meet short term debt obligations as well as

2

operating expenses. Poor working capital particularly limited liquidity in the long run

causes poor financial performance for the business as it cannot easily pay off creditors.

Therefore, it is upon this inefficiency that the researcher seeks to establish the causes of

insufficient cash inflow for Best cuts Uganda ltd.

1.2 Purpose of the StudyThe study sought to establish the extent to which working capital management practices

by small and medium enterprises would impact on the financial performance of Best cuts

Uganda ltd. The study would subsequently provide recommendations for improving the

financial performance in the small and medium enterprises.

1.3 Objectives of the Study To identify the various working capital management practices in Best cuts

Uganda ltd.

To find out the levels of financial performance of Best Cuts (U) Ltd.

To examine the relationship between working capital management and financial

performance of Best cuts Uganda ltd.

1.4 Research Questions What are the various working capital management practices in Best cuts Uganda

ltd.

What are the levels of financial performance of Best Cuts (U) Ltd.

What is the relationship between working capital management and financial

performance of Best cuts Uganda ltd.

3

1.5 Scope of the Study

1.5.1 Content scopeThe study focused on working capital management as the independent variable and

financial performance as the dependent variable.

1.5.2 Geographical scopeThe study was based in Best cuts Uganda ltd located in Bweyogerere Kampala District.

This has been chosen because of its convenience for the researcher and also the

willingness of staff to provide data to help in the research. Best cuts ltd was chosen

because it’s also among the small business enterprises in Uganda therefore it depicts a

clear picture of such businesses in the country.

1.5.3 Time scopeThe study covered the effect of working capital management on the financial

performance of Best cuts Uganda ltd for period between 2007- 2010. This period has

been chosen because it is when the firm has had serious cash flow problems.

1.6 Significance of the StudyThe study findings will help the management through improving on its working capital

management to improve on its decision making on areas of financial performance,

prompt settlement of claims and further investment.

The study findings will be useful to future researchers to widen their understanding in

matters of working capital management as a tool for career development.

The study findings will be useful to students companies and other interested parties who

may need to understand more about working capital management.

The study findings will be used by Government to promote investment in small and

medium business enterprises in Uganda.

4

CHAPTER TWO

LITERATURE REVIEW

2.0 IntroductionThis chapter discusses the already existing literature about funds management and

profitability. This literature was obtained from textbooks, and publication, periodicals

research reports, the company financial documents and Internet among others.

2.1 Working Capital Management Samuels, (2006), argues that funds management is the planning, controlling and the

effective utilization of funds. Money can be earned not only through manufacture and

distribution but also through the management of all its assets that it employees. The best

funds management policy is through funds budgets. A company can decide on the funds

that it will have available for short-term investment at a particular time depending on the

nature of business and season. If a business is seasonal or trade is cyclical, funds budgets

will show when the surplus funds that will be available and what length of time will

elapse before they are required. Some companies will borrow money in case of deficit

spending to satisfy their seasonal needs.

Kakuru, (2000) argues that every organization must establish funds management policies

or guidelines to ensure that it has optimal funds balance at any time when it requires it.

This can be achieved by implementing the following funds management policies. The

organization must ensure that it speeds up funds inflows through efficient credit policy.

For example timely preparation and delivering of customer invoices, making customers

to pay their outstanding by allowing funds discounts. This will enable the firm to keep in

a liquid position and carry on its operations efficiently.

Firms hold funds for primary reasons but although the first two of these are generally

satisfied by holding actual funds (a checking account balance, the last two requirements

may be meet, instead by holding highly liquid marketable securities. The main reasons

can be explained according to Bodil (1995) as below.

5

Funds inflows and out flows are somewhat unpredictable with the degree of predictability

varying among firms and industries. Therefore firms need to hold some funds (or more

often marketable securities) in reserve for random, un fore seen fluctuations in inflows

and outflows. These ‘safely stock’ of funds are called the precautionary balance and the

less predictable the firm’s funds flows the larger the necessary funds balance.

Funds balance may also be held to enable the firm to take advantage of any bargain

purchases that might arise, these funds are defined as speculative balances. For example

reduction in the price of raw materials, any profitable short-term investment that may

happen, the firm should maintain such balance to take advantage of the investment

opportunities that may arise Campsey (2005).

Lending institutions such as banks, makes money by lending out funds that have been

deposited with it. So the larger its deposits, the better the bank profit position. If a bank is

providing services to a customer, it generally requires the customer to leave a minimum

balance on deposit to help offset the cost of providing the service Campsey (2008).

Funds balances are necessary in business operations because payments must be made in

funds and the receipts are deposited in the funds account. These funds balances are

associated with routine payments and collections are known as transaction balances Knott

(2008).

Although a carefully prepared funds budget is a necessary starting point for managing the

firm’s funds, there are other elements of a good funds management programs. The

primary funds management activities are performed jointly by the firm and its main bank,

but the financial manager is responsible for the effectiveness of the funds management

programs. The most commonly funds management techniques Knott (2008).

One way, in which a firm can keep its funds on hand longer, would simply be by delay

payments, but this would lead to such obvious difficulties as being labeled “a dead beat”.

Firms have always lengthened the collection period for their cheques so as to delay funds

out flows. Payables Centralization permits the financial manager to evaluate the payment

coming, one for the entire firm and to schedule funds transfers to meet the needs of the

6

company wide basis. Centralizing disbursements also permits more efficient monitoring

of payables and float balances Van (2000).

When a firm is actively trying to use floats, it will often arrange with its bank to have the

use of an overdraft system. In such a system, the firm writes cheques in excess of its

actual balance and its bank automatically extends loans to cover funds shortage. The

overdraft is sometime interest free so the firm can use it to carry out its operations, which

can yield a return in the long run Sanford et al (2001).

2.2 Financial Performance A customer is the most important visitor on business premises, he is not dependent on

business. Business is dependent on him. He is not an interruption in business work. He is

the purpose of it. He is not an outsider in business. He is part of it. Business men are

not doing him a favor by serving him. He is doing them a favor by giving them an

opportunity to do so Alm (2000).

He further argued that the profit motive is not only fundamental to our ability to reward

shareholders and pay employees; it's fundamental to excellent journalism. Far from

corrupting the craft, profits enhance it. Expansion drives diversity and diversity protects

and strengthens our craft. Nevertheless Money is only used for two things. One, it’s to

make you comfortable, and the more comfortable you are the more creative you will

become. And the other purpose is it enables you to extend the service you provide far

beyond your own presence.

The country is now universally recognised as a nation on the move and takes its place

amongst the successful economies in the region. The future potential is enormous but the

country's destiny is in our hands. The time has come to move from small increments to

bold, large initiatives. The time has come to stretch the envelope and set goals which

were earlier not seen to be possible. The time has come for performance to be measured

and for allocated funds of the government to reach the people for whom they were

intended Matovu and Ritva (2001).

7

The theories discussed so far all recognize that the attitudes and abilities of the business

owner have an important impact on small firm growth and will be reflected in strategic

choices and the ways in which he or she operates the business. The following section will

draw from a variety of theoretical and empirical sources on small firm growth for the

purpose of developing expected theoretical relationships between particular sets of

variables, or factors of growth, and business growth Matovu and Ritva (2001).

It has been proposed in the literature that women may have fewer opportunities to

develop relevant experiences, may have fewer networks to get assistance and may have

greater difficulty in assembling resources Sexton and Robinson (1989). There is some

evidence that banks may impose more stringent requirements on women business owners

in regard to collateral for loans, and therefore limit their ability to grow Riding and Swift,

(1990). Women may also be more family oriented and be less keen in pursuing economic

goals related to expansion of the firm (Brush, 2002). Cooper et al., (2004) found that

being female had a negative impact on the growth of small ventures but had no impact on

the survival of the firm.

Younger individuals may be more willing to assume risks and grow their business.

Following Davidson's argument, a younger individual may have a higher need for

additional income. The burden of supporting a family and meeting mortgage payments

generally declines with age. An older individual who continues to be the owner- manager

of a small firm is more likely to have reached his/her initial aspirations. However, while

younger individuals have more motivation to expand their business they also may have

fewer financial resources and fewer networks. The limited empirical evidence suggests

that the owner-manager's age tends to be negatively related to growth Boswell (2003).

Evidence from Borjas, (2006) suggests that immigrants are more likely to become self-

employed and that they are more likely to create higher incomes from this activity than

will native entrepreneurs. The explanation for this differential is that immigrants create

enclaves by concentrating in specific geographic areas, which in turn create and expand

opportunities for small entrepreneurial ventures, in particular for immigrants of the same

8

national background as the residents of the enclave. However, it is suggested that there

may be limits to the growth of entrepreneurial ventures owned by immigrants as enclaves

are in poor locations and offer limited access to the general market. It is also suggested

that immigrants may have fewer contacts and more difficulty in obtaining insurance,

credit from suppliers and access to prosperous customers. No study has linked

immigration status to business growth. However, there is some empirical evidence that

suggests that being part of a racial minority is linked to lower probabilities of both

survival and growth Cooper et al (2004).

The effect of education has been widely studied. Education is presumably related to

knowledge and skills, motivation, self-confidence, problem solving ability, commitment

and discipline. Higher education is expected to increase the ability of the entrepreneur to

cope with problems and seize opportunities that are important to the growth of the firm.

Empirical evidence on the effects of education on firm performance is mixed. In ten out

of seventeen empirical studies surveyed, Cooper et al. (2002), found a positive

relationship between prior level of education and firm performance. Cooper et al. (2004)

found that having a Bachelor's degree has a positive impact on both survival and growth

of small ventures.

According to the small business literature, there is a distinct difference between the small

business owner and the entrepreneur. Birch (2007) distinguishes between "income

substituters" and "entrepreneurs", the former substituting paid-employment income with

business income, the latter being committed to the growth of their business. Similarly,

Hay (1994) makes the distinction between "value builders" and "life-stylers." The latter

seek long-term stability instead of growth, and use the business as a means of generating

income sufficient to support a certain "life-style." Canadian evidence supports this

finding. In an Ontario survey of small business start-ups, half of new firm owners

intended that their business would simply generate enough income to make a living for

themselves (Blatt, 2003). Therefore, for entrepreneurial ventures the willingness of the

owner-manager to grow is as important as his ability to foster and manage growth.

9

Entrepreneurial intensity refers to the willingness of the individual to assume risk and be

pro-active as an indicator of commitment to growth McCelland (2001). The level of

active risk taking by the owner-manager may also determine how willing he/she is to tap

the various resources necessary for developing the firm. Active risk taking is

demonstrated by the owner-manager's willingness to accept personal financial risk.

Perren (2000), in sixteen case studies of micro-enterprises, found that active risk taking

was a key factor that conditioned the owner-manager's willingness to tap the physical,

material, financial and intangible resources necessary for firm growth beyond the micro-

enterprise phase.

It is likely that individuals who hold a concurrent paid-employment job may have neither

the time nor the motivation to invest in the growth of their business. It is likely that some

of these individuals are complementing their paid-employment income with some

independent business income, in order to support a certain lifestyle Riding et al (2008).

Management know-how embodied in the entrepreneur may be an important factor in the

growth of the firm. Management know-how may result from having had parents who

were entrepreneurs themselves, or from previous paid-employment experience in a

similar business, or by previous management experience of the owner. Furthermore,

management know-how may be acquired through the owner-manager having access to

professional advisors or a network of contacts such as suppliers, customers, business

associations, etc., or from involvement of partners Matovu and Ritva (2001).

A number of studies have shown that entrepreneurs are more likely to be from families in

which the parents owned a business. It is assumed that young individuals develop

knowledge of what is involved in running a business Dushenseau and Gardner (1988),

and that they are more likely to perceive entrepreneurship as a viable career choice. There

is indeed some empirical evidence to suggest that coming from an entrepreneurial family

background increases the likelihood of survival Cooper et al., 2004, Papadaki et al.,

(2000). However, there is little evidence on the impact of family background on the

growth prospects of an entrepreneurial venture. Though one study has found no

relationship between entrepreneurial background and growth of a small venture (Cooper

10

et al (2004), we will test whether coming from a family of entrepreneurs has a positive

impact on business growth.

2.3 The relationship between funds management and Financial Performance Shaw, (2006), explains that if an organization properly manages its funds and maintains a

positive balance especially on bank accounts in form of funds deposits, it may increase

on the profitability position through the interest earned. Having positive funds balance

enables a firm to take advantage of funds discounts from suppliers, purchases input and

enables the company to carry on further investment in profitable ventures.

Wilkes (2006) and Samuels (2006), share the same view as Shaw (2006), on the

relationship between funds management and the profitability of a firm. Wilkes (2006),

argues that if a firm does not manage its funds properly it can easily go into liquidation as

a result of failing to pay the out standing liabilities (suppliers, wages) and meeting the

day to day operation . This has an adverse impact on the profitability of an organization.

He adds that, a firm which keeps too much funds fore goes a return if it invested in other

profitable ventures. Funds can be lent out even for a short period of time and interest is

earned. Hence impacting on the profitability position of and organization. The

organization must establish and install funds management programs to ensure that there

is a balance between benefits and costs. However, these programs may be expensive to

operate for example use of remote collection and disbursement centers, involve additional

costs and banks involved will require the firm to maintain adequate deposit balance or

pay sufficient fees to justify the services. All these costs impact on the profitability

position of the firm most especially small scale and medium enterprises.

Campsey, (2005) explains that while there are good reasons for holding adequate funds

balances, there is an important reason for not holding excess funds balance. Since funds

is a non-earning asset, excessive funds balances simply lower the total asset turnover

there by reducing both the firms’ rate of return on equity and value of its stock. Therefore

firms are interested in establishing procedures for increasing the efficiency of their funds

management and the higher the level of short-term interest, the greater the opportunity

11

cost associated with holding excess funds. This implies that holding excess funds means

that returns are foregone hence adversely impacting on the profitability position of the

firm.

Khazi (2002), points out the relationship between funds management and profitability by

giving the effect of excess and shortage of funds. Holding excess funds means that there

is an opportunity cost in form of a return foregone because of holding it. On the other

hand funds shortage will disrupt the firms operation for instance failure to acquire

inventory for sale, inputs and meeting customers orders. Such situation requires that an

organization must design an appropriate funds management policy to ensure that the best

is derived from every single coin held at any period of time.

Management of small scale and medium businesses should establish and strengthen the

internal controls over funds and other financial resources to reduce on mismanagement

and misappropriations. The internal controls to be established among others may include;

segregation of duties, approval and authorization, physical controls, accuracy and

arithmetic, supervision of lower employees, and daily banking of funds received to

reduce on theft and mismanagement of funds resources Wilkes (2006).

He further noted that small scale businesses should Introduce motivation incentives for

examples increased salaries, wage and other non-monetary rewards like presents or gifts

to all employees with good performance records. This will reduce on cases of

embezzlement and theft of business funds and develop a heart of commitment hence

efficient management of funds.

Management of small scale and medium businesses should employ competent staffs that

have experience and skill in funds management. Employees must be trained to acquire

the skills to manage businesses funds. The management should acquire funds from

financial institutions so as to supplement its capital base to expand the scale of operation,

since lack of capital is one of the major causes of low performance Knott (2008).

12

Management of small-scale and medium businesses must always prepare funds budgets

and books of account such as; funds book, income statement and the balance sheet in

order to ascertain their financial performance and design ways of making improvements

Kakuru (2000).

2.4 Conclusion

Organizations should hold funds to keep the liquidity level balanced so as to maximize

profitability. However, care must be taken to avoid excess funds because of its effect

such as theft, misappropriation and misallocation and still fore going a return that could

have been earned through investing the funds resources else where in profitable ventures.

13

CHAPTER THREE

METHODOLOGY

3.0 IntroductionThis chapter elaborates the entire design of the study and how it was carried out. It also

explains how the study was conducted, the area of the study, sample size and sampling

technique. It also indicates how the data was collected and analyzed as well as the

limitations encountered during the study.

3.1 Research DesignThe research involved a cross sectional study using both qualitative and quantitative

research centered around working capital management practices. The techniques were

designed in a way that would best suit quick collection of relevant data. The data was

systematically collected and presented to give exploratory analysis to particular

phenomena with emphasis to cover the extent of the problem.

3.2 Study populationThe study was carried out among the staff and customers of Best cuts Uganda ltd who

were drawn from production, marketing, stores and accounts department. Management

was also targeted for the study research.

Both simple random and purposive sampling techniques were used to select the required

respondents so as to minimize bias. Judgmental sampling was used to choose the

respondents to form a sample that represents the study population.

14

3.4 Sample Design

3.4.1 Sampling method The researcher used simple random sampling techniques when selecting the respondents

for the study. The respondents involved among others employees, management and

clients.

3.4.2 Sample sizeThe study encompassed a representation of a sample of 30 respondents from Best Cuts

Uganda Ltd who among others were the employees from different departments,

management and clients who were chosen for the study. This sample size was taken with

consideration of time constraints, convenience and funds among others. A special caution

was taken to ensure gender equality to avoid or minimize biased results.

Table 1: Sample Size Distribution

Department No of Respondents

Production 15

Marketing and distribution 7

Accounts 2

management 2

clients 4

Total 30

Source: Primary Data

3.5 Sources of DataThere were mainly two major sources of data namely;

Primary data which was got from selected respondents by use of self administered

questionnaires, interviews and observations.

Secondary data was the other source of data which was got from related literature like

accounting records of Best cuts Uganda ltd, published text books and internet.

15

3.6 Data collection methods and instrumentsData was collected by the use of questionnaires, as described hereunder;

3.6.1 Questionnaire This was the dominant primary data collection method in the study. Here comprehensive

self administered questionnaires were the main instrument in the study. These were

designed to gather information and explore the key variables addressed to staff and

management. Both open and closed ended questionnaires were used to let the respondents

give their own opinion about the research problem.

3.7 Data Processing and Analysis

3.7.1 Data processingUpon collecting data, several methods were used to process and analyze the data. All the

data collected was checked for results on completion of the procedure, the questionnaires

were handed over to the researcher. This was compiled, sorted, edited, classified and

coded

To improve on its accuracy and relevancy. It was tabulated to reveal the frequencies and

percentage scores of different study attributes. This was then analyzed by calculating the

financial ratios to reveal the financial performance of Best cuts Uganda ltd.

3.7.2 Data analysisTo ease the interpretation of data, the study was analyzed using statistical techniques and

qualitative techniques such as regression and correlation analysis with help of Ms Excel

and Ms Word to clearly come up with the relationship between working capital

management and financial performance.

3.8 Challenges/ limitations during the study Misrepresentation of the research. That is thinking that one is a spy.

16

Huge costs like printing were incurred.

Inadequate literature on past studies conducted on working capital management

and financial performance of SMEs.

Time constraint, finishing in time and private programmes.

17

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS

4.0 Introduction This chapter involves data presentation, analysis, and interpretations the findings of the

study with reference to working capital management and financial performance. This was

done mainly through questionnaire to the selected respondents.

4.1 Demographic Characteristics of RespondentsFindings on the demographic characteristics of respondents were considered and

responses noted there on as evidenced in tables below

Table 2: Age

Response Frequency Percentage

Below 20 yrs 3 10

20yrs-24yrs 7 23

25yrs-29yrs 14 47

30yrs and above 6 20

Total 30 100


From the table above 10% of the respondents were below 20years of age, 23% were

between 20 to 24years of age, 47% were between 25 to 29years, and 20% were 30years

and above. This implies that respondents were mature enough to answer questions in the

questionnaire.

18

Table 3: Gender of Respondents


Male 17 57

Female 13 43

Total 30 100


From the table above, 57% of the respondents were male, and 43% were female. This

implies that there was no gender bias in the study.

Table 4: Level of education


Certificate 12 40

Diploma 10 33

Degree 8 27

Total 30 100


From the table above 40% of the respondents were certificate holders, 33% were diploma

holders, and 27% degree holders. This implies that respondents had the capacity to

answer questions in the questionnaire.

19

Table 5: Period spent working in the enterprise


Less than 3years 9 30

3-5years 11 37

Above 5years 10 33

Total 30 100


From the table above 30% of the respondents had spent less than 3years in the enterprise,

37% had spent 3 to 5years, and 33% had spent above 5years. This implies that

respondents have experience with the enterprise.

4.2 Working Capital Management practices in Best cuts Uganda ltd.Findings on the various working capital management practices in Best cuts Uganda ltd

were considered and can be evidenced in tables below.

Table 6: Funds recorded by one person


Yes 18 60

No 12 40

Not sure 0 0

Total 30 100


20

From the table above 60% of the respondents all funds in Enterprise are recorded by

one person, 40% disagreed, and 7% were not sure. This implies that all funds in

Enterprise are recorded by one person

On the question regarding the people responsible for recording funds in the enterprise

revealed that the owners of the business, some noted for friends of owners of the business

and others noted for relatives and shop attendants.

A question on where daily income and expenses are recorded revealed that daily incomes

and expenses are recorded in the cashbook, others noted for note book. Besides that some

respondents said that daily incomes and expenses are recorded in the textbook.

Table 7: Daily money received by the Enterprise is banked on that same day


Strongly Agree 2 7

Agree 8 27

Not sure 0 0

Disagree 16 53

Strongly Disagree 4 13

Total 30 100


From the table above, 7% of the respondents strongly agreed that Daily money received

by the Enterprise is banked on that same day, 27% agreed, 53% disagreed, and 13%

strongly disagreed. This implies that Daily money received by the Enterprise is not

banked on that same day

21

Table 8: All money received by the Enterprise is recorded in the books of accounts


Strongly Agree 2 7

Agree 16 53

Not sure 4 13

Disagree 7 23


Total 30 100


From the table above, 7% of the respondents strongly agreed that Daily money received

by the Enterprise is banked on that same day, 53% agreed, 13% were not sure, 23%

disagreed, and 3% strongly disagreed. This implies that Daily money received by the

Enterprise is not banked on that same day

On the question regarding how many people have access to the safe were money is kept

for this Enterprise was considered and respondents said that about 3 people have access

to the safe were money is kept, others noted for one person and majority noted for two

people who have access to the safe wee money is kept.

22

Table 9: Purchase order is first issued for all goods bought


Strongly Agree 2 7

Agree 5 17

Not sure 1 3

Disagree 17 57


Total 30 100


From the table above, 7% of the respondents strongly agreed that Purchase order is first

issued for all goods bought, 17% agreed, 3% were not sure, 57% disagreed, and 16%

strongly disagreed. This implies that Purchase order is not first issued for all goods

bought

4.3 The levels of financial performance of Best Cuts (U) Ltd.Findings on the levels of financial performance of Best Cuts (U) Ltd were considered and

can be evidenced in tables below.

Table 10: Capital of Enterprise increased in the year 2010


Yes 19 63

No 11 37

Not sure 0 0

Total 30 100


23

From the table above 63% of the respondents noted that Capital of Enterprise increased

in the year 2010, and 37% disagreed. This implies that Capital of Enterprise increased

in the year 2010 for some business and did not increase for others.

Table 11: Loans borrowed by the Enterprise in the year 2010


Strongly Agree 2 7

Agree 2 7

Not sure 3 10

Disagree 9 30


Total 30 100

Source: Primary Data.

From the table above, 7% of the respondents strongly agreed that there was more loans

borrowed by the Enterprise in the year 2009, 7% agreed, 10% were not sure, 30%

disagreed, and 46% strongly disagreed. This implies that there was no more loans

borrowed by the Enterprise in the year 2009.

The question 13 on the level of technology used in the Enterprise was considered and

respondents said that the technology is too low and they constituted the majority. Others

noted for moderate and few noted for high technology.

24

Table 12: Sales made by the Enterprise in the year 2010


Yes 16 53

No 12 40

Not sure 2 7

Total 30 100


From the table above 53% of the respondents noted that more sales made by the

Enterprise in the year 2009, 40% disagreed, and 7% were not sure. This implies that there

were more sales made by the Enterprise in the year 2009

Table 13: The number of shareholders increased in the year 2010


Strongly Agree 0 0

Agree 3 10

Not sure 4 13

Disagree 11 37


Total 30 100


From the table above 10% of the respondents agreed that the number of shareholders

increased in the year 2010, 10% were not sure, 37% disagreed, and 40% strongly

disagreed. This indicates that the number of shareholders did not increase in the year

2010.

Table 14: Rate Retained earnings in the year 2010


25

Very low 1 3

Low 9 30

Moderate 17 57

High 3 10

Very high 0 0

Total 30 100


From the table above 3% of the respondents noted that Retained earnings in the year

2010 were very low, 30% noted for low retained earnings, 57% noted for moderate, and

10% noted for high retained earnings. This indicates that retained earnings in the year

2010 were moderate.

Survey question 17 on the rate of the number of customers of the enterprises compared to

similar enterprises in Kampala respondents said that they had more customers and

majority said they had fewer customers.

26

Table 15: The Enterprise is the main supplier to most of the supermarkets in Kampala


Strongly Agree 1 3

Agree 1 3

Not sure 4 13

Disagree 10 33


Total 30 100


From the table above 3% of the respondents strongly agreed that the Enterprise is the

main supplier to most of the supermarket in Kampala, 3% agreed, 13% were not sure,

33% disagreed, and 47% strongly disagreed. This indicates that the Enterprise is not the

main supplier to most of the supermarkets in Kampala.

27

4.4 The relationship between Working Capital Management and Financial Performance of Best cuts Uganda ltdFindings on the relationship between working capital management and financial

performance of Best cuts Uganda ltd were considered and can be evidenced in tables

below.

Table 16: Relationship between Working Capital Management and Financial Performance

Correlations

1 .752**. .000

30 30.752** 1.000 .

30 30

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

Working CapitalManagement


WorkingCapital

ManagementFinancial

Performance

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

From the table above, results showed that there is a strong positive relationship between

Working Capital Management and Financial Performance at Pearson correlation

coefficient r=0.752 implying that working capital management affects financial

performance by 75.2% and 24.8% by other factors.

28

CHAPTER FIVE

SUMMARY CONCLUSION AND RECOMMENDATIONS

5.0 Introduction This chapter presents summary conclusion and recommendations in relation to the study

objectives

5.1 Summary of the findings

5.1.1 Working Capital Management Findings revealed that all funds in Best Cuts Uganda Ltd are recorded by one person the

people responsible for recording funds in the Best Cuts Uganda Ltd revealed that the

owners of the business, some noted for friends of owners of the business and others noted

for relatives and shop attendants. Daily incomes and expenses are recorded in the

cashbook, others noted for note book. Besides that some respondents said that daily

incomes and expenses are recorded in the textbook, Daily money received by the Best

Cuts Uganda Ltd is not banked on that same day, and Daily money received by Best

Cuts Uganda Ltd is not banked on that same day

Nevertheless, about 3 people have access to the safe were money is kept, others noted for

one person and majority noted for two people who have access to the safe were money is

kept, Purchase order is not first issued for all goods bought, the owners are responsible

verifying receipts and they constituted the majority. Other respondents noted for relatives

of the owners of Best Cuts Uganda Ltd.

5.1.2 Financial PerformanceFindings revealed that Capital of Best Cuts Uganda Ltd did not increase in the year

2010, there was less loans borrowed by the Best Cuts Uganda Ltd in the year 2010, the

technology is too low and they constituted the majority. Others noted for moderate and

few noted for high technology. Besides that there were more sales made by the Best Cuts

29

Uganda Ltd in the year 2010, the number of shareholders did not increase in the year

2010, retained earnings in the year 2010 were moderate. Nevertheless, respondents said

that they had more customers and majority said they had fewer customers, and the

Enterprise is not the main supplier to most of the retail shops in Kampala.

5.1.3 Working capital management and Financial Performance

Findings revealed that there is a strong positive relationship between Working Capital

Management and Financial Performance at Pearson correlation coefficient r=0.752

implying that working capital management affects financial performance by 75.2% and

24.8% by other factors.

5.2 Conclusion Findings revealed that all funds in Best Cuts Uganda Ltd are recorded by one person,

Daily incomes and expenses are recorded in the cashbook, recorded in the textbook,

Daily money received by the Best Cuts Uganda Ltd is not banked on that same day,

Purchase order is not first issued for all goods bought. Capital of Enterprise increased in

the year 2010, the technology is too low, there were no more sales made by the

Enterprise in the year 2010, the number of shareholders did not increase in the year

2010, retained earnings in the year 2010 were very low, daily recording of funds affect

growth for Enterprise, the days when enterprise makes more money some funds are

withdrawn from the enterprise and this reduces the growth of the business. Besides that

there is a strong positive relationship between Working Capital Management and


5.3 Recommendations Best Cuts Uganda Ltd need to ensure that all funds in Enterprise recorded by two people

in case of one person not being available this would help to reduce on the fraud that

might occur in the enterprise.

30

Daily incomes and expenses need to be recorded in a cash book or accounting packages

like pastel or quick books so that small scale enterprise can detect fraud in the system.

Best Cuts Uganda Ltd need to ensure that Daily money received by the Enterprise is

banked on that same day, to reduce on unnecessarily withdrawal of money from the

enterprise.

Best Cuts Uganda Ltd need to first issue out Purchase order for all goods bought. This

would help in the accountability and also stimulate auditing of their books of accounts

Best Cuts Uganda Ltd need to make a lot of advertisement of their products and services

so as to capture the available market this would increase on their revenue collected.

Much effort and a lot of control need to be emphasized on the funds management to

improve on the growth of the enterprise.

5.4 Areas for further research Further research need to be carried out on the effect of total quality management on the

financial performance of small business enterprise.

31

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34

APPENDIX 1: QUESTIONNAIRE FOR STAFF MEMBERS

Dear respondents

This questionnaire is intended purely for academic purposes. It is for study under the

topic “Working Capital Management and financial performance of Small business

Enterprises”. The findings of the study will be highly treated with confidentially and can

be availed on request.

Please kindly answer those questions either in the space provided or tick the right choice.

Thank you for your cooperation.

Section A: Personal Data

(Tick as Appropriate)

1. Your Age

Below 20 yrs 20yrs-24yrs 25yrs-29yrs 30yrs and above

2. Gender

Male Female

3. Highest Level of education

Certificate Diploma Degree PHD Others (specify) ………

4. For how long have you been working in this Enterprise?

Less than 3yrs 3-5 yrs above 5 yrs

35

Section B: Working Capital Management

5. Are all funds in this Enterprise recorded by one person?

Yes No not sure

If no, who are those responsible for recording funds in the enterprise?

………………………………………………………………………………………………

………………………………………………………………………………………………

6. Were do you record daily income and expenses

………………………………………………………………………………………………

………………………………………………………………………………………………

7. Daily money received by this Enterprise is banked on that same day

Strongly agree Agree Not sure disagree Strongly disagree

8. All money received by this Enterprise is recorded in the books of accounts


9. How many people have access to the safe were money is kept for this Enterprise.

………………………………………………………………………………………………

………………………………………………………………………………………………

36

10. Purchase order is first issued for all goods bought


11. Who is responsible for verifying receipts for the Enterprise?

………………………………………………………………………………………………

………………………………………………………………………………………………

Section C: Financial Performance

12. Did Capital of this Enterprise increase in the year 2010?

Yes No not sure

13. There was more loans borrowed by this Enterprise in the year 2010

Strongly agree Agree Not sure Disagree Strongly disagree

14. What is the level of technology used in this Enterprise?

………………………………………………………………………………………………

………………………………………………………………………………………………

15. Were more sales made by this Enterprise in the year 2010

Yes No Not Sure

37

16. The number of shareholders increased in the year 2010


17. How do you rate Retained earnings in the year 2010

Very low Low Moderate High Very high

18. How do you rate the number of customers of this enterprises compared to similar

enterprises in Kampala

………………………………………………………………………………………………

……………………………………………………………………………………………

19. This Enterprise is the main supplier to most of the super market in Kampala


Section D: Relationship between Working Capital Management and financial

performance of Best Cuts Uganda Ltd

20. Daily recording of funds affects financial performance for this Enterprise.


38

21. How do Current income and expenses recorded in a cash book affect financial performance of this Enterprise?

………………………………………………………………………………………………

…………………………………………………………………………………………….

22. Is financial performance of this enterprise hindered by management of funds? Explain your answer

………………………………………………………………………………………………

…………………………………………………………………………………………….

23. How does money recorded in the books of accounts spent by this Enterprise?

………………………………………………………………………………………………

…………………………………………………………………………………………….

24. How is accountability to people who access the money safe done in this enterprise?

………………………………………………………………………………………………

………………………………………………………………………………………….

25. How does Purchase order issued for all goods bought affect financial performance this Enterprise?

………………………………………………………………………………………………

…………………………………………………………………………………………….

26. How do receipts verified by owners of the Enterprise reconciled by the expenditures incurred?

………………………………………………………………………………………………

…………………………………………………………………………………………….

39

APPENDIX 2: TIME FRAMEMonth Year Activity

March – April 2011 Proposal writing and presentation

May 2011 Data collection

June 2011 Data processing

Data analysis and presentation

Printing draft copy

July 2011 Printing final copy and presentation.

40

APPENDIX 3: BUDGET ESTIMATESITEM QUANTITY RATE (Ug. Shs) AMOUNT

(Ug.shs)

Proposal writingStationery 2 reams 8,000 16,000

Typing 1 copy @ 5 pages 500 @ page 2,500

Printing 1 copy @ 5 pages 500 @ page 2,500

Photocopying 200 copies @ 5 pages 50 @ page 50,000

Sub total 71,000

DissertationPrinting report 4 copies @ 55 pages 500 @ page 110,000

Binding report 4 copies 2,000 8,000

2 drafts of report @ 55 pages 500 @ page 27,500

Transport 21 days 3,000 per day 63,000

Lunch 21 days 5,000 per day 105,000

Access to private libraries

12 days 7,000 per day 84,000

Miscellaneous 5,000

Sub total 402,500

Grand total 473,500

41

Documents

WORKING CAPITAL MANAGEMENT AND … · Web viewIn an Ontario survey of small business start-ups, half of new firm owners intended that their business would simply generate enough income