An Analysis of Working Capital Management Practices in Uganda: A Case Study of Selected Supermarkets in Kampala

Abstract

Optimal management of working capital is an important financial decision and contributes positively to the value creation of business. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called „Long term Funds‟ or „Fixed Capital‟. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc is called „Short-term Funds‟ or „Working Capital‟. The „Working Capital‟ can be categorized, as funds needed for carrying out dayto-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. It is also concerned with maintaining liquidity in the business to ensure smooth running of day to day operations and to meet its financial obligations This study is to examine working capital management practices in the selected supermarkets in Kampala, Uganda. This is because businesses have been noted to rely on banks, the stock market and equity capital which gives less attention to efficient working capital as a viable means of raising capital hence the research objectives were to assess the working capital management practices that supermarkets in Kampala employ to manage the various components of working capital, to examine the factors that influences the choice of working capital management practices by the supermarkets in Kampala and to establish the effectiveness of the working capital management practices employed by supermarkets in Kampala. The study adopted cross sectional descriptive research design. From a purposive sample of 15 supermarkets in Kampala, 15 accountants of the supermarkets were selected. Both qualitative and quantitative data was used. It was found that supermarkets face liquidity challenges, low profitability, worse competitive position, increased fund tied up in working capital and finally lack of ability to unlock capital to finance growth. It was recommended that the supermarket re-examine the factors that determine their working capital so that they come up with best practices of working capital that can mitigate against the challenges. The working capital management policies need to be changed from informal to formal enhance effective working capital management. Supermarkets should also deploy advanced information technology (IT) in their operations to improve on working capital management.