Working capital management and firm performance in Uganda: a case of DFCU bank

Abstract

Working capital is considered as the life blood of organizations as it underscores the availability of cash and ensuring liquidity of the organization. The organization’s liquidity position influences the operations and overall performance in a number of dimensions. Hence, how working capital is managed in an organization is central to ensuring successful business. Existing literature and empirics on financial management claim that working capital management practices influence financial performance of organizations. However, in Uganda in general and the banking sector specifically, there is limited evidence to support this claim. Yet, appreciating the importance of working capital management practices in enhancing an organization’s financial performance is an imperative. This study assessed the contribution of working capital management practices on financial performance focusing on DFCU Bank. Specifically, it examined the influence of cash management; measured the effect of accounts receivables; determined the influence of accounts payables; and analyzed the contribution of working capital management practices on financial performance of DFCU Bank for the period 2016-2020. The study adopted a mixed methods explanatory design with qualitative and quantitative approaches. 110 self-administered survey questionnaires were distributed across 32 DFCU Bank branches out of which 98 were duly filled and returned. The study involved purposively selected staff in banking operations related to working capital management. The investigation covered a cross section of staff across gender, age, level of education, seniority and length of experience with the bank. The study revealed that cash management practices had a significant (sig. 0.000) but weak positive influence (R2 .074) on financial performance; accounts receivables also has a significant (sig.0.000) but low positive effect (R2 0.316) on financial performance while accounts payables had no significant influence (sig. 0.389) (R2 0.008) on financial performance meanwhile, the overall observation was that working capital management practices had a combined significant (sig. 0.000) and moderate positive contribution (R2 .410) on financial performance. Hence, unit improvement in working capital management practices could lead to a 41 percent improvement in financial performance of the bank. Other factors outside this investigation could explain up to 59 percent of variation in financial performance. The board and management of organizations are implored to design and operate efficient and effective working capital management practices to improve their organizations financial performance. Scholars are challenged to interest themselves in uncovering other factors that contribute to 59 percent variation in financial performance of organizations to promote better financial health of institutions for better business sustainability and economic development.