Analysis of the causes of financial distress in private unlisted firms in Uganda

Abstract

The impact of private firms to economic growth and development of any country cannot be taken for granted propelling economies to devise policies that enhance the sector’s growth. However, the failure rate of private unlisted firms in Uganda is very high instigating the need for an in-depth investigation. Earlier studies conducted concentrated on listed firms. Rafique (2018) concentrated on firms listed on Karachi stock exchange, Idrees and Qayyum (2018) study was conducted on financially distressed firms listed on Pakistan Stock Exchange (PSX), Kihooto, Omagwa, Wachira and Emojong (2016) concentrated on financial distress in commercial and services companies listed at Nairobi Securities Exchange, Kenya. Omondi and Muturi (2013) Study was about factors affecting the financial performance of listed companies at Nairobi Securities Exchange in Kenya. Since many studies have been conducted on listed firms, the researcher was motivated to study private unlisted firms. The researcher believes that this sect of firms has not been given due attention yet comprise the largest portion of business activity. The researcher also believes that given their nature, private unlisted companies are faced with challenges unique to listed companies making them prone to financial distress as much or even more than the listed firms do. Data was collected from 12 private unlisted firms in Kampala district to identify the causes of financial distress and devise measures to save firms caught up in distress. The causes of financial distress in private unlisted firms are both internal and external. The internal factors are corporate governance weaknesses, high debt burden, poor investment decisions, high administration and operational costs and misappropriation of funds and fraud practises. The external causes include intense competition, general economic conditions and political factors. Many firms however have managed to survive long with the pressure of being financially distressed through investment in large asset base, establishing political connections and financial distress prediction. The study recommends strategies like strengthening corporate governance mechanisms, acquisition of funds for investment, engagement of external management expertise, establishing a corrective implementation plan and financial distress prediction as ways that private unlisted firms could utilise to redeem themselves from total collapse.