FINANCIAL MANAGEMENT SYSTEMS AND BUSINESS PERFORMANCE

A CASE STUDY OF MINISTRY OF FINANCE

BY

TAMUSUZA AHLAM

420-033021-04410

A RESEARCH PROPOSAL SUBMITTED TO THE FACULTY OF MANAGEMENT

STUDIES IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE
AWARD OF BACHELORS DEGREE IN BUSINESS
STUDIES OF ISLAMIC UNIVERSITY
IN UGANDA

MARCH 2023
1.0 Introduction
This chapter contains the general background of the study, statement of problem, objectives of
the study, which includes the general objectives and the specific objectives, research questions,
scope of the study, content scope, geographical scope and time scope, significance of the study,
conceptual framework, definition of key terms and conclusion.

1.1 Background of the study

In financial affairs of companies, working capital management is a very important factor, which
has a direct positive effect on profitability as well as liquidity of the company. Liquidity and
profitability are both the two different sides of same coin. Optimum level of liquidity guarantees
a firm to meet their short term debts and the proper management of flow can be promised by a
profitable business. Liquidity shows the ability of company in responding to short-term
obligations. A firm ought to optimize its liquidity and profitability while conducting its daily
business operations. Working Capital management contains proportion balance of working
capital components i.e. – debtors, inventory and payables and the use of cash effectively for daily
business operations. Proper optimization of working capital management balance means
minimizing the working capital requirement and realizing maximum possible revenues
(Ganesan, 2007). There is a strong linear relationship between profitability of the firm and its
working capital efficiency. The ability of the company to earn profit can be referred to as the
profitability of that company. Profit is determined by deducting expenses from the revenue
incurred in generating that revenue. The amount of profit can be a good measure of the
performance of a company, so we can use profitability as a measure of the financial performance
of a company, as well as, profitability is the promise for a company to remain a going concern in
the world of business. Proper Working capital management ensures that the company increases
its profitability. Effective working capital management is very important due to its significant
effect on profitability of company and thus the existence of company in the market. If a firm
minimizes its investment in current assets, the resulting funds can be invested in value creating
profitable projects, so it can increase the firm’s growth opportunities and shareholders return.
However, management can also face liquidity problems due to underinvestment in working
capital management. The ability of financial managers to effectively and efficiently manage their
receivables, inventories, and payables has a significant impact on the success of an organization
and on profitability as well. The study attempts to enhance the knowledge of organizations by
identifying the ways that Pharmaceutical organizations manage their working capital
management in order to increase profitability.

Stoner (2005) reveals that profitability has been the most widely used measure of financial
performance. Profitability is the measure of an organization's profit relative to its expenses and
this can be expressed by ratios of Gross Profit Margin (GPM), Net Profit (NP) and Return on
Capital Employed (ROCE).
This research however, will aim at determining the impact of working Capital management on
profitability of Movit Product Company Ltd. The company is a cosmetic manufacturing
company established in 1997 and officially started manufacturing of quality body and hair care
cosmetics and beauty products in 1999 when it was incorporated into a fully registered company
in Uganda. The company is headed by the Executive Director (CEO) and employs over 900
contracted workers of various professions. The company is arranged into 6 directories with each
having other departments and sections under them, these are Business growth, Finance and ICT,
Production and supply chain, Directorate of governance, legal and Compliance, Directorate of
Human capital and directorate of Reach and Development.
1.2 Problem Statement

Proper working capital management plays a vital and key role for any business to prosper.
Although it is of great importance a number of organizations cannot afford its complexity even if
they would have. Due to this, most of the organizations tend to use the simple and at times in
efficient means of managing all aspects of both current assets and current liabilities to minimize
the risk of going bankrupt and at the same time increasing returns to capital. In this they use
simple means like single entries in their books and in some cases incomplete records.
Professional accountants have found audits of organizations and businesses in Uganda
problematic mainly because of poor working capital management. Organizations and businesses
hardly give serious thoughts to the process of working capital management, they only do it when
they are legally required to do so, yet the inadequacy and ineffectiveness of accounting processes
have been responsible for untimely collapse of a host of them (Mukaila and Adeyemi, 2011)
even Kazooba, (2006) and Keough, (2002) supported this by revealing that most of the Uganda
businesses never celebrate their first anniversary. It’s on this ground therefore that this research
will examine the impact of working capital management on profitability of Movit Products
Company Ltd.
1.3.0 The objectives of the study
This will consist of the general objective and specific objectives of the study.

1.3.1 General objective

The research will intend to establish the impact of working capital management on profitability
of Movit products Ltd.

1.3.2 Specific objectives of the study

1. What is the effect of cash management on profitability of Movit Products Ltd?
2. What is the effect of inventory management on profitability of Movit Products Ltd?
What is the effect of debtors’ management on profitability of Movit Products Ltd?

1.5 Scope of the study

This will cover the content scope, geographical scope and time scope

1.5.1 Content scope

The study will focus on working capital management as the independent variable and
profitability as the dependent variable and it based on these objectives; to establish the effect of
cash management on profitability of Movit Products Ltd, to establish the effect of inventory
management on profitability of Movit Products Ltd and to establish the effect of debtors’
management on profitability of Movit Products Ltd.

1.5.2 Geographical scope

The study will be carried out at Movit Products Limited. Movit Products Limited is located in
Kampala, Uganda, Plot 4454 & 4455 Zana - Bunamwaya, Off Entebbe Road

1.5.3 Time scope

The study will cover the impact of working capital management on profitability of Movit
Products Ltd for the period between February to March. This period was considered relevant and
applicable for the study’s purposes and objectives basing on available time and finance
resources.
1.6 Significance of the study

i. The findings will be used for future reference for those intending to start and establish
companies like Movit Products Ltd.
ii. The study will also intend to add literature to the already done studies by other authors
and this may help future researchers as reference.
iii. The study findings will help the management of Movit products Ltd to improve on its
working capital management so as to improve on its decision making on areas of
performance in profits.
iv. 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.
v. The study is useful for cashiers, accountants and professionals in financial management
by providing to them real business experience about proper working capital management
to yield better financial performance.
vi. The study will also lead to the award of a bachelor’s degree in business studies at Islamic
University in Uganda-Females' campus.

1.7.0 Conceptual framework

Figure 1: showing the conceptual framework

INDEPENDENT VARIABLE DEPENDENT VARIABLE

Working Capital Management Profitability

 Cash management  Liquidity

 Inventory management  Capital intensity
 Debtors’ management  Capacity utilization

INTERVENING VARIABLE

 Political stability
 Interest rates
 Inflation
Source: Gitman, Nyakundi et al (2013)

Figure 1 shows the conceptual framework which shows the relationship between the dependent
and independent variables. In this case the independent variable will be working capital
management whose parameters include: cash management, inventory management and debtor’s
management.

The dependent variable will be profitability whose parameters includes liquidity, Capital
intensity and Capital utilization

If the above independent variables are well designed and implemented to meet the organization
needs, they will lead to excellent performance in profits (Gitman, Nyakundi et al 2013),
however, these could only occur if there was favorable political stability, low interest rates.

Working capital management creates good cash management, inventory management, and
debtors’ management leading to capital investments, expansion and increased profitability and
others hence an indication of effectiveness and efficiency by the company on working capital
management and above all, this was the basis for the company to get more profits.

However, amidst the independent and dependent variables, there were also other factors that
intervene and affect the effectiveness of the independent variables which otherwise affect the
dependent variables for example government political stability, interest rates and inflation.

1.8. Definition of key terms

Working capital : This refers to the value of the business in excess of list short term
Claims. It is an investment of owner as difference between current
Assets and its current liabilities
Inventories : This may consist of different things for example raw materials,

Work in progress or finished goods

Debtors : These are customers who have not yet made payment for goods or

Services that the firm has provided

Cash : The term cash refers to the most liquid of assets, including demand
 Deposits, money market accounts and currency holdings

Cash management : This involves planning for cash inflows and outflows, and

Determining the optimal balances of cash and near-cash accounts

Such as marketable securities

Liquidity : This is the company's ability to convert assets to cash or acquire

cash-through a loan or money in the bank-to pay its short-term obligations or liabilities
 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction
This chapter will present a review of literature in relation to the variables of study it is arranged
in subsections which include the conceptual review, empirical review and conclusion. They are
reviewed in line with the research objective. This literature was obtained from textbooks,
periodicals research reports, the company financial documents and Internet among others.

2.1. Conceptual review

2.1.1 Working Capital Management

Walker & Munderson (2008) reviewed working capital management as a very important
component of corporate finance. It directly affects liquidity, profitability and growth of a
business and is important that the financial health of the business of all sizes as the amounts
invested in working capital are often high in proportion to the total assets employed. Lamberson
(2015) also added that working capital management involves planning and controlling of current
assets and liabilities in a manner that eliminates the risk of inability to meet short-term
obligations and avoid excessive investments in these assets. All this gives an idea of what
working capital is and how relevant it is in day-to-day business operations.

Abor & Biekpe (2009) also pointed out that working capital management is as important as the
management of long-term financial assets in firms since it directly contributes to the
maximization of a business’s profitability, liquidity and total performance. Working capital is a
managerial and financial practice which in most cases is rudimentary practiced especially in the
informal sector. Thomas & Evanson (2014) study shows that firms whose working capital
management is not well instituted and practiced fall a prey to different challenges including
financial insolvency, bankruptcy and indebtedness.

2.1.1.1 Cash Management

According to Reuer et al., (2012) Cash management is vital tool of management, if the firm is to
have a positive working capital position. Therefore, cash management provides a highlight of
cash flow of the firm. Cash is used to pay suppliers when raw materials are obtained on credit or
raw materials are bought with cash, the raw materials are turned into finished goods which are
either sold for cash or credit. Kwame (2007) also asserts that cash management practices focused
on cash budgeting and target cash balance determination, occurrence of cash surplus or shortage
and investment of cash surpluses. Working capital is very important for financial efficiency and
growth in the small business sector.
Aryeetey (2014) reveals that cash management practices are still low amongst companies and
majority have not adopted records of cash in terms of only how much is spent, received and or
claimed by the firm. Despite this, a few firms base and use the efficiency of cash management
practice as their key financial management practice (Lindsay & Keitherson, 2013). In this case,
keen interest is on how much cash is readily available as liquid. Liquidity of cash is based on the
extent to which the firm requires having cash at hand and whether cash is needed for future
transactional motives (Sowa, 2010). This study based on the views of Kwame (2007) as they
give an elaborate view of cash management, but in this context the study focused on Movit
Products Ltd.

2.1.1.2 Inventory Management

According to Steel & Webster (2012), inventory also remains one of the key areas that determine
the working capital of the organisation. Walker & Munderson (2008) further shows that it is very
critical that in each day, the firm should ascertain the flow of its inventory for purposes of proper
control and management of its activities. In addition, Lazaridis & Dimitrios (2005) found out that
firms that pursue a planned inventory management are able to fast moving products, keep in
business, increase their profitability, sales and market share. Deloof (2013) also asserted that
inventory management is key and the type of inventory held and how it is managed, is key in
determining the production scope, output levels and general earnings of the firm. All these are
key in influencing how the firm operates and the position it takes in the market and financial
progress. Reflecting on the views of the above authors, attention was put on how relevant then is
inventory in performance of the firm.

Shahwan & Al-Ain (2008) reveals that large number or volume of inventory in the business
means high level of cash tied in inventory and may be significant on profitability of the firm.
Several times a firm should experience high rate of turnover (ROT) if its operations are so
successful. The essence of focusing on working capital management in form of giving attention
to the efficiency of inventory control is very important (Atrill, 2006). Each and every business
whether company or not, should pay strong attention to its inventory. This study will refer to the
views of Shahwan & Al-Ain (2008) which focus on the ways in which inventory control
management is one of the widely used approaches in undertaking working capital management
techniques in firms, giving particular attention to Movit Products Ltd.

2.1.1.3 Debtors’ Management

In business, the firm can hardly deal on cash alone, and this gives rise for debtors’ (Shahwan &
Al-Ain, 2008). In the view of Shahwan & Al-Ain (2008) debtors’ are all values that the firm
anticipates to receive from its potential clients arising from the credit sales made. Atrill (2006)
added that there is evidence that many companies are not very good at managing their working
capital in their debtors’ management and this is a challenge in their working capital environment.
Despite their high investments in current assets, some companies keep increasing sale by credit,
elevating the level of receivables which can cause the firm to stagnant at times yielding to
business failure (Thomas & Evanson, 2014).
Majority of the companies operate without credit control department implying that both the
expertise and the information required to make sound judgments concerning terms of sales may
not be available (Lamberson, 2015). This makes it hard for these companies to work without
Credit Sales. Efficient debtors’ management augmented by a shortened creditor’s collection
period, low levels of bad debts and a sound credit policy often improves the businesses’ ability to
attract new customers and increase financial performance (Ross et al., 2008). Firms that are
efficient in debtors’ management should determine their optimal credit which minimizes the total
costs of granting credit (Ross et al., 2008). This study adopted and based its inquiry on the
premise of Ross et al., (2008) since they stressed clearly what brings about debtors’ management
and how they can be influential in determining the performance of the organization, but with
particular emphasis to Movit Products Ltd.
2.1.2 Conceptual review of profitability

Profitability is the core aim of each and every business (Ishungisa, 2013). According to Lazaridis
& Dimitrios (2005), a profit is a return to the business arising from the sales made by the firm. It
is the excess of the costs that has been generated as sales proceeds. These scholarly reflections
on profits make profits and profitability a key score measure for businesses whether small or big
as it undertakes its different transactions and activities. When the profits are growing, it is
synonymous to saying the financial performance of the firm is good (Kotut, 2013). Profitability
of the firm determines attainment of effective financial performance. It is a primary goal of all
business ventures Glendinning, (2013). Without profitability the business will not survive in the
long run. So, measuring current and past financial performance of the organization is a basis of
firms’ profitability. Profitability is one of widely used measures of success in an enterprise
(Kotut, 2013), though this may not necessarily apply to and for all business categories. This
study examined scope of financial performance in relation to profitability of Movit Products Ltd.

2.1.2.1 Liquidity

Walker & Munderson (2008) define liquidity as cash or cash equivalents in the organization.
Most firms to date still cherish their cash position to evaluate their financial performance
measures. In the study by Fu (2009), Profitability can be evaluated basing on liquidity state of its
operations. In the view of Bobinski (2016), liquidity in financial terms is the firm’s ability to
meet its short-term obligations–to pay its bills. The firm’s cash position can offset prevailing
financial claims onto the business, and remain with cash/bank balance, when in such a scenario
then it is considered as a business with a good liquidity position. According to Kenyon &Tilton
(2006) liquidity in many firms is considered by examining the cash current ratio and working
capital turnover levels. The financial position of the firm is in most firms exhibited in liquidity
indicators. The firm, whose efforts are directed at their cash positions and liquidity levels, is able
to provide a financial position of business in terms of adequacy, availability and their current
assets and current liabilities. The firm’s liquidity levels are examined in relation with the current
ratio and solvency. Financial performance in terms of liquidity levels can be examined in relation
with the fairly liquid asset, market liquidity as potential of an enterprise to keep transacting in
cash as on-going market prices. This varies and may not be easily considered uniform giving
those different businesses have varying opportunities and challenges in cash and cash equivalents

2.1.2.2 Capital intensity

Capital intensity measures the amount of spending on assets necessary to support a certain level
of revenue. It is calculated by dividing gross tangible fixed assets to full-time equivalent
employees.

Capital intensity ratio is very important to any company because it shows how many assets a
company needs to generate a certain amount of revenue. If a company has relatively few assets,
it will likely need a lot of revenue to cover those costs and make a profit.
2.1.2.3 Capital Utilization
Conceptually, capital utilization is the proportion of the physical capital which is used in every
period by the company. In other words, capital utilization captures how much of the existing
capital stock is being used (Betancourt and Clague, 1981).

Capital utilization can be the ratio of capital services to the stock of capital (Schworm, 1977 and
Hulten, 1986). Thus, it refers to the relationship between actual output produced and potential
output that could be produced with installed equipment, if capacity was fully used.

Potential output can represent the maximum amount of output that can be produced short term
with the existent stock of capital. As such, a standard definition of capacity utilization is the
weighted average of the ratio between the actual outputs of firms to the maximum that could be
produced per unit of time, with existing resources. Output could also of course be measured in
physical units or market values.

Many companies may experience an increase in their average cost of production as output
increases and before the absolute physical limit of capacity is reached. This can happen even in
the absence of additional resources being used. An alternative approach, sometimes called the
“economic” utilization rate, is therefore to measure the ratio of actual output to the level of
output, beyond which the average cost of production begins to rise.

2.2 Empirical review

2.2.1 Cash management and profitability

The management of the cash utilization is a critical component of the working capital
management. According to Nyabenge (2009), cash management is the process of planning and
controlling cash flows into and out of the business, cash flows within the business, and cash
balances held by a business at a point in time. On the other hand, Kiprotich (2013) defines cash
management as the collection, concentration and disbursement of cash. Organizations need to
ensure the delivery of goods or services to the customer and must therefore have investments in
current assets (Luchinga, 2014). However; there is a fundamental need to manage the current
assets with a view of having the desired effect on either profitability or liquidity.

Malombe,( 2010). The blocking of resources at different supply chain stages results in prolonged
cash operating cycle hence a probability of increased profits due to increased sales. However,
this may affect the profitability if the costs tied up in working capital exceed the benefits of
holding more inventories and/or granting more trade credit to customers Apuoyo, (2010). The
previous studies did not operationalize working capital management in terms of aggressiveness
and conservatism as measured by the proportion of current liabilities to total assets and total
liabilities that it was what this current study was trying to look for.

Cash is a critical current asset since it is the basic input for business operations and it is the
ultimate output of the business activities (Kiprotich, 2013). Cash consists of the currency,
demand deposit and time deposits (Nyambiro, 2011). However, the main sources of cash in a
business are the accounts receivables and equity (Kiprotich, 2013) looked at currency, demand
deposit and time deposits. Runyora,(2012). The account payable refers to the money the firm
owes it suppliers or trade credit the customer gets from the supplier of goods or services (Okinyi,
2014). Whereas equity is defined as the owner’s claim against business entity, which keeps on
changing, and the amount payable is determined upon the firm’s liquidation (Nyandemo, 2012).
There is need for prudent management of cash because cash shortage disrupts the business
operations while excess cash means existence of idle money that does not contribute to the firm’s
profitability.

Kiarie, (2012) one way of dealing with excess cash is using marketable securities which
contribute to the profitability of the business. Mitau, (2013) the marketable securities also
referred as near cash items or bank time deposit notes are characterized by their ability to be
readily converted to cash. Therefore, the ultimate aim of cash management is the managing of
cash flows into and out of the firm, cash flows within the firm, and cash balances held by the
firm at a point of time by financing deficit or investing surplus cash. Mwaniki, (2012) the
ultimate aim of cash management is maintenance of adequate control over cash position to keep
the firm liquid and to use excess cash in some profitable way. Owele & Lilian, (2014) The
standard measure of cash management is Cash Conversion Cycle (CCC) which refers to the time
period from buying raw material, converting to finished goods, sales products, and collecting
account receivable CCC is calculated as ACP + ICP – APP.

In Europe and North America Shin and Soenen 1998 used a net trade cycle (NTC) as a measure
of working capital management in their study and they found a negative relationship between a
marginal operating cycle of the company and profitability. Deloof (2003) used cash conversion
cycle (CCC) as a measure of working capital management for a sample of 1000 Belgian non-
financial companies in a period of 1992 -1996 and also found a negative relationship between a
gross profit and operating receivable collection period, inventory period and payable period.
Lazaridis and Trifonidis (2006) also found a negative relationship between cash conversion cycle
and gross profit margin on a sample of 131 companies listed on Athen’s stock market in the
period of 2001-2004. The efficiency of working capital management is necessary and plays an
important role in corporate governance activity and therefore it should be included in the
financial plans of companies. The studies used the cash conversion cycle to measure working
capital.

The present study, however, seeks to measure working capital management practices in terms of
aggressive financing and aggressive investing working capital management practices.

Wilkes and Samuels (2006), share the same view as Shaw (2006), on the relationship between
cash 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
outstanding liabilities (suppliers, wages) and meeting the day-to-day operation. This has an
adverse effect 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 effecting on the profitability position of the
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 effect on the profitability position of the firm most
especially small scale and medium enterprises.

However, this study only looked at the liquidation and profitability of the firms as the only
advantages of capital management while ignoring other aspects like investment in short term
assets.

A study by Vahid, Mohsen and Mohammadreza (2012) investigated the effect of working capital
management policies (aggressive and conservative policies) on the firms’ profitability and value
of listed companies in the Tehran Stock Exchange. The study uses panel data and operationalizes
working capital management policy as conservative/aggressive, the results of the study show that
application of a conservative investment policy and aggressive financing policy has a negative
effect on a firm’s profitability and value. The study adopted the model used by Nazir and Afza
(2009) to investigate the relationship between the working capital management policies and
profitability of firms listed in the Karachi Stock Exchange (KSE). In their study, Nazir and Afza
(2009) found a negative relationship between a firm’s profitability and its financing policies.
Thus, firms that adopt an aggressive working capital policy generate a lower rate of return than
those adopting a conservative working capital policy.

The present study borrowed the operationalization of working capital management as applied in
the two studies since Uganda has a different economic setting from Iran and India where the two
studies were carried out.

2.2.2 Inventory management and profitability

Efficient inventory management practices involve knowing how much should be ordered and
when should it be ordered. This relates to determining the economic order quantity and analysis
of the costs of maintaining certain levels of inventory (Ross et al. 2008). The costs involved in
inventory management are those of holding too much stock and those of holding too little, hence
the need to put in place an effective inventory management system to ensure reliable sales
forecasts to be used in inventory ordering purposes Atrill, (2006). Maintaining optimal inventory
levels reduces the cost of possible interruptions or of loss of business due to the scarcity of
products, reduces supply costs and protects against price fluctuations Nyabwaga et al. (2012).

However, the studies only looked at economic order quantity (EOQ) as a means of maintaining
the right stock levels and ignoring all other aspects of inventory management, therefore this
study would like to look at the methods of inventory control that the above studies did not
explore.

According to (I.M. Pandey 2005), the firm should always avoid situations of over or under
investment in inventories. The major dangers of over investments are unnecessary tie-up of the
funds firm and loss or profit, excessive carrying cost, and risk of liquidity. The excessive level of
inventory consumes funds of the firm which cannot be used for any other purpose and it involves
an opportunity cost. The curing cost such as cost of storage, handling, insurance, recording, and
inspection also increase in the propulsion to the volume of inventory. This will impair the firm’s
profitability further. Excessive inventory carried for a long period increase chance of loss of
liquidity, it may not be possible to save inventory in time and full value. Raw materials are
generally difficult to sell as the holding period increase. There are exceptional circumstances
where it may pay to the company to hold stock of raw materials. Similarly, difficulty may be
faced to dispose of finished goods as time lengthens in case of certain goods or raw material
detoriation, it may be due to mishandle and improper storage facilities. These factors are within
the control of management, unnecessary investment in inventory can thus be cut down M.C
Graw-Hill Ryerson (2006).

The studies did not look at the aspect of economic order quantity (EOQ) that can be used to
determine what quantity of stock should be ordered and what time and it was upon this
background that this research was necessary.

Alaka Gupta and N.S Gupta (2000) say that inadequate level of inventory is also dangerous, the
consequence of under investment in inventory were production hold up and failure to meet
delivery commitment. Inadequate raw material and work in progress (WIP) inventory will result
in frequent production interruption, if finished goods inventories are not sufficient to meet
demands of customers regularly. They may shift to competitors which will result to loss hence
poor performance. The aim of inventory management should be to avoid excessive and
inadequate level of inventories and to maintain sufficient inventory for the smooth production
and sales operation.

This study ignored the use of just in time (J-I-T) method of stock control where the appropriate
quantity of stock was purchased to facilitate the production of the quantity ordered by the
customers. This avoids wastage and storage costs and it was upon this background that this study
was relevant.

2.2.3 Debtor Management and Profitability

Efficient receivables management involves a shortened creditor’s collection period, low levels of
bad debts and a sound credit policy which often improves the businesses’ ability to attract new
customers and accordingly increase financial performance Ross et al., (2008). This was further
affirmed by a study by Sushma and Bhupesh (2007), which stated that putting in place a sound
credit policy ensures proper debt collection procedures and is pivotal in improving efficiency in
receivables management hence the performance of firms. The standard measure of receivables
management is the Average Collection Period (ACP) which was the time taken to collect cash
from customers. ACP was calculated as average accounts receivable divided by credit sales
multiplied by 365 days. Receivable management was very important for all business be it small
or large. The extents to which firms manage their receivable go along with the level of their
profit. This means the customers who have not made payments for goods and services for which
the firm has provided affect the profits (Mathuva, 2009).

This study only valued debtors’ management in terms of the average collection period while
ignoring other aspects like the cash conversion cycle which can help to determine the period
taken for a firm to recover its debts hence making the research necessary.

Falope and Ayilora (2009) the objective of debtors’ management was to minimize the time laps
between inventory acquisition and completion of entire cash conversion cycle. Accounts
receivable prevent the average days that firm takes to collect payment from its customers.
Excessive level of current assets and low level of current assets may lead to negative effect on a
firm’s profitability and difficulties in mediating smooth operations.

This study only looked at the conversion cycle and valued firms’ viability in terms of current
assets while ignoring cash and other means of encouraging customers to pay their dues in time
like offering discounts and it was this research gap that the study seeks to fulfill.

Gzegor (2008) in his study a portfolio management approach in accounts receivable management
used portfolio management theory to determine the level of account receivable in firm, he found
out that there was an increase in level of accounts receivable in firms but net working capital and
cost of holding and managing accounts. K Senija (2013) investigated how public companies
listed at the regulated markets in the republic of Serbia manage their accounts receivable during
recession time. A sample of 108 firms was used. The account receivable policies were examined
in the crisis period of 2008-2011. The short term affects the tested and the study shows that
between account receivable and two dependent variables on profitability return on total assets
and operating profit margin, there was positive result but no significant relation. This suggests
that effect of receivable on firm’s profitability was changing in time of the crisis. However the
studies carried out were on listed companies and in developed countries as compared to Movit
Products Ltd that is a small enterprise in Uganda that was still a developing country
The studies conducted did not show how the components of working capital management affect
the overall business efficiency of firms.

To date the studies done on working capital management practices by business entities in
Uganda were scanty and thus called for this study on effect of working capital management on
performance of Movit Products Ltd.

2.3 Intervening variables

2.3.1 Interest rates

Ruicho (2013) a lower interest rate environment is associated with cheaper money or cash, and a
higher interest rate environment is associated with higher borrowing costs and a higher cost of
cash or capital. Thus, from a standpoint of working capital management a higher interest rate
environment would seem to call for more efficient working capital performance unions would
want to offset the higher cost of borrowing or financing by improving internally generated cash
flows (Abuzayed 2007). However, the data available on interest rates shows that an increase in
interest rates is associated with an increase in working capital (Raheman and Nasr 2007). By
analyzing the relationship between interest rates and working capital since 1991 a few
conclusions can be drawn that interest rates and working capital levels show a strong positive
correlation for Movit Products Ltd as of this study.

2.3.2 Inflation

The term inflation refers to raise in general price level of goods and services in the economy that
is to say fall in purchasing power of money (Gill 2010). Working Capital is the money used to
make goods and attract sales therefore during the period of rising prices; a firm needs more funds
to finance working capital. Not understanding the impact of inflation on working capital has
been the cause of many cooperative unions’ failures (Nyabwanga 2012). Cost of financing the
working capital rises because of increase in interest rates therefore cash should never be allowed
to remain idle in the reference to saying of time eats value of money that’s is to say cooperative
unions suffer loss of interest and the purchasing power of wealth kept as cash will decline
(Nyabwanga 2012). Good cash management can provide a major source of profit, while poor
cash management can destroy a company in a short time and when the inflation rate is high, it
will have a direct impact on the requirement of working capital management and on Movit
Products Ltd for this study.

2.3.3 Political stability

Claude Ake (2008) an attempt to define political stability must begin by clarifying the concepts
of politics and political structure where political behavior is any act by any member of a society
that affects the distribution of the power to make decisions for that society. Political stability is a
variable of great importance in a unions’ evolution since, across time, it is identified as causing
the level of economic growth, but it can also be presented as a consequence of poor economic
development (Swagel, P., 1996). The influence of political stability on working capital
management on cooperative union can be based on statistical and econometric approach
(correlation and multivariate regression) therefore, political stability has an important role in a
unions economic growth and that a stable political environment helps in building a coherent and
continuous path for sustainable development (Perotti R 1991) and for this study of Movit
Products Ltd.

2.4 Conclusion

This chapter has provided a review of different authors’ work on working capital management
practices and financial performance on the objectives of the study. The next chapter is about the
methodology of the study which includes the introduction, research design, Area of study,
population, sample size, sample technique, sources of data, data analysis, ethical consideration
and limitations of the study.
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction
This chapter will present the methods and procedures which the researcher will use to plan,
gather and present data. The content will include; the research design, study population,
sampling, sources of data, data collection methods and instruments, data processing, analysis,
presentation and limitations of the study.

3.1 Research Design

The researcher will use a descriptive research design in which both qualitative and quantitative
methods will be employed. The study will use a descriptive survey research design because it
included different categories of respondents which will require different data collection methods,
a descriptive survey research design will also allow easy description and interpretation of
peoples’ opinions, analysis of the current situation related to the analysis of the impact of
working capital management on profitability of Movit Products Limited.

3.2 Area of study

The study was carried out in at Movit Products Limited Kampala district. The area was selected
because of it employs a high population of young men and women in the area. Movit Products
Limited is located in Kampala district Plot 4454 & 4455 Zana - Bunamwaya, Off Entebbe Road..
It is considered as the base for the healthy beauty hair, skin and nail care products aimed at
empowering every person to face life with confidence.

3.3 Study Population.

Study population is a group of individuals, items from which samples are taken for the
measurement or involvement in the study (Kombe & Tromp 2009). The target population will be
the staffs and customers of Movit Products Ltd. These will be drawn from production, stores and
accounts department. Management was also targeted for the study. Therefore, the study
population considered of 100 people (Toya Yamane 1961).
3.4.0 Sample procedures

3.4.1. Sample Size

A sample size refers to the total population of people selected to act as the respondents, and it
will be determined using the formula developed by (Toya Yamane 1961). Which was stated as
[n= N/ (1+Np2)]. The sample selection will be the total population in each department divided
by the total study population multiplied by the sample size

Below is the formula of how to calculate the sample size.

n= N/ (1+Np2).

Where;

n - Sample size, N = Study population, p = Level of significance (0.05)

n= 100/1+100(0.05 *0.05)
n= 100/1+100(0.0025)
n=100/1+0.25
n= 100/1.25
n= 80

Therefore 80 was the sample size.

Category of Study population Sample size Sampling techniques
respondents
Management 7 3 Purposive sampling
Production 70 60 Simple random sampling
Stores 20 15 Simple random sampling
Accounts 3 2 Purposive sampling
Total 100 80
Source: Toya Yamane (1961).

3.4.2. Sampling techniques

A sampling technique is the name or other identification of the specific process by which the
entities of the sample have been selected (Toya Yamane 1961). In this study, stratified, purposive
and simple random sampling techniques will be used to select the samples for the study.
Stratified random sampling; this will involve dividing the population into homogeneous sub
groups and taking a random sample in each sub group (Toya Yamane 1961). . In this study, the
population was stratified into business owners (management) and staff of Movit Products Ltd.
This will help in having representative respondents depending on the positions they hold in the
company.
Purposive sampling; This is where the researcher selects respondents whom he/she believed are
key informants and have direct information about the topic of study. In this study, Movit
Products Ltd owners will be purposively selected because they had key information about the
working capital management and profitability of their company.
Simple random sampling technique; this will be used to select the staff in the production
department, stores department and accounts department of Movit Products Ltd that will be part
of the study. Simple random sampling will be used and it provides a chance to employees to give
their views about the working capital management and profitability of the company they work in.
Choice and use of these techniques will be provided in the study with comprehensive and
representative information.
3.5 Sources of data
The researcher will use both primary and secondary sources of data. Sekram & Bleiz (2013)
defined primary sources as any source of first-hand information relating to the purpose of the
study. Primary sources of data will be collected using questionnaires. Secondary data is defined
by Hawkard (2011) as any already existing data that can be accessed by the researcher in the
field or other public libraries relating to the study. This will be obtained from different
documents like newspapers new vision article on BCU in February (2009), cover letters and
invoices relating to working capital management and profitability.

3.6 Data collection methods and Tools

3.6.1 Methods
The study will be used of questionnaire survey and documentary review. Use of questioning is very
vital for busy and high response rate (Mbabazi, 2011), and document review is the consistent and
scientific inquiry that involves a review of different documents about the study variables (Trochim,
2014). The choice of these two (2) methods helped in obtaining a high response from both primary
and secondary data sources.
3.6.2 Tools

3.6.2.1 Questionnaires

The researcher will use a set of questions arranged systematically and logically so as to achieve
the specific research objectives. These questions will be typed and printed in a definite order.
The questions will be both open ended and close ended and this will depend on the respondents’
education status. The questionnaires will be taken and handed over to the respondents in the
management, production, stores and accounting department because they will assume to have the
substantial knowledge of the organization and were able to understand its financial position.

3.6.2.2 Interview Guide

This will involve presentation of oral verbal stimuli and reply in terms of oral responses. The
researcher will ask questions to respondents who will be expected to give answers immediately
and it will be personal. The researcher will use this tool to get responses from the workers in the
stores and the production department mainly because most of them are not able to interpret the
questionnaires because they are illiterates and this is to ensure that the respondents give clear and
accurate information.

3.7 Quality control methods

3.7.1 Validity
According to Kendra.C (2012), validity is the way in which a test measures what it claims to
measure. The researcher therefore will develop research tools that will be appropriate to the
study and validated by the supervisor. Law & Kelton (1991) suggested that if a questionnaire
model is” valid”, then the decisions made with the questionnaire model should be similar to
those that would be made by physically experimenting with the system. A questionnaire model is
said to be credible when its results are accepted by respondents as being valid, and used as an aid
in collecting data.

The validity of the questionnaire is determined using the Content Validity Index. Williams
(2004) stated that building valid and credible questionnaire is an important aspect of a
researcher’s representation of the actual system being studied.
Content Validity Index (CVI) was computed using the following formula:
CVI = No of items rated valid

All items in the questionnaires

3.7.2 Reliability.
A test is considered reliable if we get the same result repeatedly (Kendra. C.2012). Reliability,
according to Miles &Huberman (1994), has to do with the extent to which the items in an
instrument generate consistent responses over several trials with different audiences in the same
setting or circumstances” The data collection tools will be pre-tested by the researcher in order to
identify and minimize errors. The method that will be used to test for reliability is the internal
consistency method. The internal consistency method provides a unique estimate of reliability
for the given test administration. The most popular internal consistency reliability estimate was
given by Cronbach’s alpha.

It was expressed as alpha = Np/ [1+p (N-1)]. Where N equals the number of items and p equals
the mean inter item correlation. And for this study our N was calculated as below
n= 100/1+100(0.05 *0.05)
n= 100/1+100(0.0025)
n=100/1+0.25
n= 100/1.25
n= 80
3.8 Measurement of variables

The researcher will use frequencies, percentages, standard deviation, frequency, arithmetic mean
to measure financial performance. Questions will be prepared basing on the five scales by Likert
(2009) where the respondents are requested to respond according to their levels of agreement to
the statements provided in the questionnaires ranging from strong disagreement to strong
agreement. These will be abbreviated to letters where A represents Agree, D represents Disagree,
S.A for strongly Agree, S.D for strongly Disagree and N.S for Not Sure

3.9. Data collection, processing, analysis and presentation

3.9.1 Data Processing

Data will be collected and checked for completeness, categorized, coded and entered into a
computer where it will be summarized into frequency tables.
3.9.2 Data Analysis
The researcher will analyze data using descriptive and inferential statistics. Descriptive statistics will
involve the use of frequencies, percentages, standard deviation and mean while inferential statistics
will involve the use of correlations. Quantitative data analysis is useful in measuring numerical
findings and their impact on the study variables (Kombo & Trump 2009). Quantitative data will be
processed through the use of statistical package for the social sciences (SPSS) and this will be
presented in figures, tables, graphs, chart and descriptive statements to help generate conclusions
and recommendations about the study.

3.9.3 Data Presentation

Quantitative data will be presented in form of descriptive statistics using tables. Qualitative data
will be sorted and grouped accordingly. The researcher thereafter will evaluate and analyze the
adequacy of information in answering the research questions through coding of data, identifying
categories and parameters that emerged in the responses to the variables of the study. Findings
will be presented in form of frequency tables, graphs, and pie charts. The analyzed data will be
reported using the descriptive method.

3.10. Ethical Issues

The following ethical considerations will be adhered to during collection of data;

Confidentiality during data collection. Efforts will be taken to protect the identity of the
participants in the study at all levels. No respondent’s name will be presented in the collection of
data.

Respondent’s autonomy will be respected. Autonomy means the freedom to decide what to do.
Respondents will be made aware that they are free to withdraw from the study at any time,
without giving a reason. They will also be given freedom to request data they would have given
and would be removed from the study if they wish. This will make participants to feel a sense of
freedom which leads to the success of data collection.

The study will ensure that selected respondents are directly associated with working capital
management and profiitability which helped to keep the researcher on truck.
3.11 Limitations to the study

 Bureaucratic delays in obtaining introduction and acceptance of letters from the

university and stakeholders at Movit Products Ltd.
 Financial shortage by the researcher in collection of data, processing and compilation.
 Uncooperative respondents, some respondents most cases have no interest in the research
hence being mean with giving feedback.
3.12 Conclusion

This chapter will provide a review on the research methodology these will include research
design, Area of study, population, sample size, sample technique, sources of data, data analysis,
ethical consideration and limitations of the study.
2.4 CONCLUSION
According to the literature, working capital management involving proper inventory
management, accounts receivables management and accounts payables management leads to
proper organizational profitability. A number of studies have been done on the relationship
between working capital management on organizational profitability as given in the literature.
However most of these studies have been general and no study has specifically considered the
manufacturing sector especially in Uganda and particularly in Uganda Baati Limited. This
therefore leaves a gap for more research.