Cash Flow Management Practices and Financial Performance of Small Medium Enterprises in Fort-Portal City Uganda

Abstract

Purpose: Small and medium enterprises have great significance to the continued survival of the global economy; however, they have continued to face heightened challenges world over. The study was conducted to examine the relationship between cash flow management and financial performance of SMEs in Fort Portal Tourism City.

Material and Method: The research study employed a cross-sectional design and used both quantitative and qualitative approaches. It surveyed a sample size of 113 SMEs from the target population of 160 SMEs in Fort Portal tourism city, as unit of analysis. The unit of inquiry were SMEs staff and shareholders including accountants, managers, financial managers, owners and directors. Data collection utilized structured questionnaires and interview guide for primary data. Purposive and stratified random sampling techniques were used to select firms and respondent. Using SPSS version 23, a hierarchical regression model was employed in data analysis and testing of the hypothesis.

Findings: The study identified a relatively strong positive relationship between cash flow management and financial performance (r = 0.416, p < 0.01).

Implication to Theory, Practice and Policy: Many theoretical frameworks exist regarding liquidity optimization and its effect on financial performance, and this study adds to them validating and extending liquidity preference theory, pecking order theory and trade off theory empirically in the context of SMEs in a developing country. This study’s contributions to existing literature is three-way focused: 1) in relation to liquidity preference theory, this study argues that since money is considered as a medium of exchange, SMEs should hold their wealth in liquid forms such as cash rather than investing in bonds or other securities, especially in uncertain economic times. This way it’s hoped that they can improve their financial performance by meeting their immediate financial obligations, invest in growth opportunities and avoid costly borrowing. In view of other perspectives that push for holding wealth in other forms i.e investing in bonds or other securities which offer higher returns but less liquidity, future researches can critically evaluate these competing alternatives to contextually validate which one is better; 2) findings of this study strengthen pecking order theory in regard to financing options that firms may consider. The study evidences empirically that in view of avoiding cost implications associated with external financing, SMEs should opt for usage of internal funds, debt and lastly consider equity when financing their business plans; 3) another significant contribution this study makes is derived from trade off theory demonstrating that maintaining an optimal level of liquidity pays off. The study emphasizes that SMEs should balance costs and benefits either holding liquidity assets or cash in kind. The study envisages power in up keeping optimal liquidity levels that enable it to meet short term operational requirements and overcome financial distress or bankruptcy which is as a result of inability to meet basic obligations like staff payroll, payment of suppliers and loan servicing.