Why some small businesses
ignore austere working capital

management routines
Laura Aseru Orobia

Department of Entrepreneurship,
Makerere University Business School, Kampala, Uganda

Kesseven Padachi
School of Accounting, Finance and Economics,

University of Technology, La Tour Koenig, Pointe, Mauritius, and
John C. Munene

Graduate and Research Center,
Makerere University Business School, Kampala, Uganda

Abstract
Purpose – The purpose of this paper is to investigate factors explaining take-up rate of working
capital management routines in small-scale businesses.
Design/methodology/approach – A cross-sectional survey research was employed using a sample
of 450 small-scale businesses in the central business district of Kampala, Uganda. Common working
capital management routines and activity rates were analyzed using descriptive statistics. While
binary logistic regression analysis was conducted to discriminate between businesses that engage in
working capital management frequently and those that do so less frequently.
Findings – The results show that on average, the most frequently performed routines relate to
safeguarding cash and inventory, and credit risk assessment. Payment management routines are least
performed. Second, business size, perceived usefulness and attitude explain high take-up rate of
working capital management routines in small-scale businesses. Business age, level of education and
financial management training are inconsequential in determining the likelihood to undertake working
capital management frequently.
Research limitations/implications – Paucity of studies world over on the input perspective of
working capital management limited comparison of the findings with previous research. Future
studies should be conducted to confirm the results.
Practical implications – The study findings imply that policy makers should develop work-based
training programs that take into account the business size effect.
Originality/value – This study contributes to existing working capital management literature by
explaining activity rate in a developing country perspective.
Keywords Small business, Attitude, Working capital management, Perceived usefulness, Firm factors
Paper type Research paper

1. Introduction
In this paper, we extend the prime working capital management studies to small-scale
businesses in Uganda, a developing country. Specifically, we investigate working
capital management routines undertaken and factors explaining activity rate.
Small-scale businesses are seen as the engines that drive economies across nations,
through their contribution in terms of job creation and poverty reduction (Abor and

Journal of Accounting in Emerging
Economies
Vol. 6 No. 2, 2016
pp. 94-110
©EmeraldGroup Publishing Limited
2042-1168
DOI 10.1108/JAEE-08-2013-0039

The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-1168.htm

The authors are grateful to the respondents who participated in the interviews, the peers as well
as the two anonymous reviewers for their valuable suggestions and comments.

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Quartey, 2010; Agyei-Mensah, 2011; Halabi et al., 2010). However, despite their impact,
such businesses continue to face challenges that prevent them from realizing their full
potential. For instance, Aggarwal et al. (2012) report that Africa accounts for only
30 percent survival rate for business start-ups in the first year compared to 71.3 percent
survival rates in the UK and 69 percent in the USA. The Kenya National Bureau of
Statistics (2007) as cited by Nyabwanga et al. (2012) indicates that small-scale
businesses in Kenya exhibit high-birth rates and high-death rates with 40 percent of the
start-ups failing by year two and at least 60 percent closing their doors by year four.
In Uganda, the Global Entrepreneurship Monitor studies indicate that on average,
27 percent of the entrepreneurs shut down their businesses within the first 12 months
of operation (Briggs, 2009; Namatovu et al., 2010). This trend has been frequently linked
to poor working capital management (Briggs, 2009; Bowen et al., 2009; Ekanem, 2010,
Kehinde, 2011).

According to Atrill (2006) and Gitman (2009), businesses can achieve effective and
efficient working capital management through budgeting activities such as cash
planning, inventory planning and credit planning, as well as credit risk assessment,
keeping financial records and conducting reconciliations. Take-up of such routines
enable businesses to avoid the risk of inability to meet due short-term obligations on
one hand and prevent excessive investment in short-term assets on the other hand
(Howorth and Westhead, 2003). Given, their limited access to capital markets,
small-scale businesses tend to rely on short-term funds, and thus efficient management
of working capital is crucial for the survival and growth of small-scale businesses
(Ekanem, 2010; Padachi, 2006). However, there is insufficient knowledge on take-up of
working capital management routines in small-scale businesses.

The focal point of extant research is the relationship between working capital
management and profitability of firms (e.g. Oladipupo and Okafor, 2013; Tauringana
and Afrira, 2013). These studies focus on financial ratio analysis, and consequently
assume well-established reporting frameworks and measureable outputs. As such, the
approach excludes most small-scale businesses especially in developing countries that
do not meticulously keep financial records. Second, the studies assume causes of the
outcomes in financial reports and therefore, specific actions and causes have mostly
been neglected in studies related to working capital management.

Considering the fact that management in most SMEs revolves around the
owner-manager, it is expected that the factors that may explain working capital
management incidence in such businesses reside in the individual nuances. This is in
line with behavior theorists like Ajzen (1991) and Davis (1986) who allude that the
actions involved in managing working capital are associated with the individual’s
behavior beliefs. Nonetheless, our empirical knowledge on the relationship between
individual characteristics and working capital management is limited, given that much
of the observed explanations are based on financial ratio analyses. This study was
guided by the following research objectives:

(1) to examine the most frequently performed working capital management
routines by small-scale businesses; and

(2) to explain working capital management activity rate in small-scale business.

We expect that when the actions and causes are understood, it is easier to propose
solutions and policies to improve working capital management in small-scale
businesses. This study contributes to extant literature in a number of ways. First, the

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study reports the findings of working capital management routines undertaken and
factors explaining activity rate. Past studies that have attempted to investigate
working capital management routines have only documented the activity rate paying
less attention to the explanatory factors (Agyei-Mensah, 2011; Nguyen, 2001).
Moreover, the routines studied are limited to “review” of working capital management
routines. Exploring broader management activities and understanding the factors that
explain take-up rate is important for practitioners and policy makers to focus on for
interventions. Second, to the best of our knowledge, there is no existing research that
has investigated why some businesses take-up working capital management activities
more frequently than others. This kind of investigation is particularly fascinating
given that when we discriminate businesses based on activity rate, we are able to
provide learning experiences for businesses that are performing below expectation. It is
evident that there is need for more studies on success factors that keep certain
businesses at the top.

The rest of the paper is structured as follows. We begin with an overview of
small-scale businesses in Uganda. The next section covers past studies on working
capital management. This is followed by methods employed in collecting and analyzing
the data. Results and discussion are then presented. In the last section, conclusions and
implications for academics, practitioners and policy makers are presented.

2. Small-scale businesses in Uganda
Small-scale businesses in Uganda are defined basing on parameters such as annual
turnover, number of employees and value of fixed assets (Okello-Obura et al., 2008).
However, the number of employees is the most preferred criterion given that most
small-scale businesses lack adequate financial records to facilitate the computation of
actual annual turnover. In addition, owner-managers are more willing to disclose
employee numbers rather than financial records. In this study, we adopt the small-scale
business definition by the Uganda Ministry of Finance, Planning and Economic
Development (MoFPED) which defines a small-scale business as the kind that employs
between five and f50 staff. Further, policies on the SME sector in Uganda are
formulated basing on the MoFPED definition.

The business model in Uganda is predominantly small-scale business (Ernst and
Young, 2011; UBOS, 2012) and the informal sector. Most of such businesses are found
in metal fabrication, furniture-making, food processing, motorcar garages, wholesale
and retail trade, restaurants and transport (Namatovu et al., 2010), with the biggest
proportion (40 percent) being the trade sector (UBOS, 2012). Such businesses are
responsible for; about 90 percent of total non-farm private sector employment,
constitute approximately 20 percent of the national GDP, contribute over 20 percent of
incomes of the labor force, and have great potential for reducing poverty levels (Ernst
and Young, 2011). The importance of the SME sector to the Ugandan economy is not
unique and is consistent with the trends observed by Abor and Quartey (2010),
Agyei-Mensah (2011) and Hallberg (2000) who argue that small businesses have important
contributions to make at micro and macro levels of economic and social development.

The factors in the small-scale business operating environment that have a bearing
on the management of working capital in Uganda are complex but essentially similar
over time. Orobia et al. (2013) cite that, the task environment is quality deficient and
institutional conditions hardly demand for austere working capital management
practices. For instance, the current state of technological advancement in small-scale
businesses is somewhat rudimentary. There are very few computers and small-scale

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business operators do not consider it a priority or important to acquaint themselves
with the state of the art technology. As such, operations in most small-scale businesses
are not automated. Coincidentally, the nature of small-scale business customers and
their suppliers are not sufficiently sophisticated to demand or expect accounting
documentation such as invoices, statements and the like. The competitors are no better
positioned. Furthermore, the general environment is constituted of a weak economic
and legal environment in which private contracts are rarely documented and
requirements for audited accounts are not enforced; the accounting norms and
expectations that make up the cultural environment are underdeveloped; the role of the
government in providing direction is capacity constrained. Similarly, institutions such
as the accountants associations and the education system that would be useful in
information management are yet to make an impressionable impact. Generally, there is
a very slow structural transformation into a modern economy.

3. Working capital management in SMEs in developing countries
SMEs in developing countries serve as a useful bridge between the informal economy
of family enterprises and the formalized corporate sector (Padachi et al., 2012).
Consequently, most policy makers consider the health of the SME sector to be highly
important to an economy. However, despite the increased attention paid to the SME
sector, there is comparatively little knowledge about working capital management
routines and practices.

Padachi et al. (2012) investigated working capital management practices among
Mauritian small firms. Their study established that on a scale ranging from “never” to
“always,” small firms rarely review bad and doubtful debt levels. The regular activities
include review of customer discount policy, credit risk to customers and financing of
working capital. The results further show that small firms often review stock levels and
re-order levels. More still, importance is placed on cash flow monitoring. Similarly,
Nyabwanga et al. (2012) examined the effect of working capital management on
financial performance of small-scale enterprises in Kisii, Kenya. The study found that
on average, the routines that are ignored include preparation of cash budgets and
setting up guidelines for credit customers. Determination of target cash balances is
rarely done, while review levels of receivables and bad debts is occasionally done.
The results further show that the regular routines relate to preparation of inventory
budgets and reviewing inventory levels. This seems to suggest that importance is
placed on inventory management. However, the study concludes that small-scale
enterprises are not good at managing their working capital since they do not seem to
embrace and implement the routines in their businesses.

Agyei-Mensah (2011) examined working capital management practices of small
firms in Ghana and found that on average cash budgeting was the most frequently
undertaken routine. With regard to accounts receivable’s management, the results
show that small firms never review debtors credit period, debtors credit policy, bad and
doubtful debt levels, and customer risk standing. On inventory management, most
small firms never review stock turnover, stock level, stock re-order level and they never
use the economic order quantity model. The study concluded that working capital
management in small firms is poor. Likewise, Masoud and Mbega (2008) conducted an
exploratory study of SMEs’ working capital management practices in Dar es Salaam,
Tanzania. The results showed that preparation of cash and inventory budgets, and
investing cash surpluses in profitable ventures are never undertaken by most SMEs.
The rare routines included setting up credit policy for customers and reviewing

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inventory levels. The results further showed that most SMEs review their receivable
levels and irrecoverable debts based on monthly period. Nonetheless, the study
concludes that SMEs exhibit poor working capital management.

From the foregoing discussion, it is evident that past studies have focussed on use of
budgets and review aspects of working capital management routines at the expense of
other management activities such as monitoring and control. Working capital
management is beyond reviewing credit policy, working capital level and use of
budgets. We know little about safeguarding assets, conducting reconciliations and
credit risk assessment. Moreover, the results are mixed and inconclusive. Whereas the
extant literature informs us about the state the businesses are in, the approach adopted
leaves a number of questions unanswered. For instance, if majority of the SMEs never
use or review the mentioned routines, what do they do? Why do some SMEs undertake
working capital management routines frequently than others? Munene et al. (2005) and
Sejjaaka (2005), observe that answering the “why” question provides a somewhat
deeper understanding of human behavior or actions. This study intends to fill the gaps
identified by examining a broader range of working capital management routines and
factors explaining activity rate.

4. Factors affecting working capital management incidence
Most small-scale businesses in developing countries like Uganda generally do not exhibit
separation of ownership and management controls, and lack formal systems, structures
and procedures (Bagire and Kyogabirwe, 2004; Briggs, 2009; Kazooba, 2006).
Consequently, the factors that are likely to affect the way such businesses manage
their working capital relate to firm (size, age, life cycle stage) and individual (knowledge,
perceived usefulness, attitude) characteristics (Briggs, 2009; Maseko and Manyani, 2011).

Business size has been advanced to explain the adoption strategies by small-scale
businesses (Padachi, 2012). Particularly, increase in volume of transactions is
associated with increase in activities such as record keeping and reconciliations.
Howorth andWesthead (2003), who investigated the relationship between firm size and
low take-up of working capital management routines in the UK small firms, support
this. Their findings revealed a significant relationship, implying that as firms grow, the
level of complexity of operations also increases, thus explaining the high take-up of
working capital management routines in larger businesses. In a similar case, Padachi
(2012) discovered that the take-up of accounting systems depended on the size of the
business. Earlier studies by Filbeck and Lee (2000) and Perren et al. (1999) also provide
evidence on the impact of business size by demonstrating the transition from informal
system to formal one as the number of transactions increases. The studies corroborate
the relationship between business size and take-up of activities. Based on these
insights, we expect that undertaking the numerous working capital management
routines in small businesses will vary according to the business size.

From the business life cycle perspective, it is widely accepted that businesses go
through infant, growth, expansion, mature and decline stages. Each stage has its own
unique characteristics and the focus of the business activities will reflect the current
point within the life cycle. In the early stage, business activities, transactions and
revenues are expected to be low. This implies that, businesses in the infant stage are
expected to have least working capital management routines (Howorth and Westhead,
2003; Padachi, 2012). However, as the businesses advance in these stages, business
activities and revenues tend to increase and therefore, management practices equally
get advanced.

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According to Davis (1989), people take up certain activities to the extent that such
engagement will enhance their job performance. Likewise, the expectancy theory
(Vroom, 1964) argues that the choice to initiate a particular course of action is
influenced by the expectation that an action will lead to valued outcomes. The theory
suggests that individuals choose actions that will maximize desirable outcomes and
minimize undesirable outcomes by evaluating the expectancy and valence of those
outcomes. Some of the desired outcomes (usefulness) in managing working capital that
have been highlighted in the finance literature include saving costs and increasing
returns (Chowdhury and Amin, 2007; Deloof, 2003). Therefore, we expect that take-up
of activities will vary according to perceived benefits derived out of such engagement.

Further, in view of the central function of owner-managers, management in small
businesses is to a great extent determined by the individual’s attitude. Ajzen (1991)
defines attitude toward a given activity as the degree to which the person evaluates the
activity in a favorable or unfavorable light. The theory of reasoned action (Fishbein
and Ajzen, 1975) posits that, people are rational decision makers, implying that they
consciously think through the reasons for their actions, take into account the possible
implications of such actions and act according to such reasoning. Therefore, it is
expected that when owner-managers evaluate planning, monitoring and control of
working capital positively, they are likely to take up the related activities accordingly.

Overall, although attempts have been made to examine the influence of firm
characteristics on working capital management incidence in small businesses, we know
little about the Ugandan context. In addition, the impact of perceived usefulness and
attitude have not been explored in past working capital management studies.
This study therefore contributes to the finance literature by filling the gaps identified.

5. Methodology
This study was conducted using a questionnaire survey. The sample selected for the
study was taken from the UBOS (2007) list of 10,029 small-scale businesses employing
between 5 and 50 workers in the trade, hotel and restaurants and manufacturing
sectors located in Kampala (the capital city of Uganda). The region was chosen because
it is the commercial heartland where most business activities take place. While, a
multi-sector sample was preferred in order to control for sector specifics that could
influence the extent of working capital management in small-scale businesses.

The sample was selected using systematic sampling method. Of the 450
questionnaires administered, 360 usable questionnaires were obtained, achieving a
response rate of 80 percent. The high-response rate is attributed to the fact that a
researcher-administered questionnaire approach was employed in data collection. This
approach was chosen to enable a face-to-face interaction between the researcher and
the respondents. Moreover, lack of panel data and limited availability and efficiency of
postal and communication services in Uganda could not allow questionnaires to be
mailed, faxed or couriered to respondents without causing selection bias. Procedural
and statistical remedies recommended by Podsakoff et al. (2003) were employed to
control for common methods bias, and the results revealed that the data analyzed is
free from bias.

Tables AI and AII show the sample characteristics by firm and individuals that
responded to the survey. Respondents were either owner-managers or managers.
Whereas the unit of analysis is the business entity, it is worth noting that, the pervasive
influence of founders on their firms, and their dominance in making decisions, enables
the study to assume a high degree of equivalence between the individual and the

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organizational levels of analysis (Dickson andWeaver, 1997). Furthermore, to avoid the
possible data variance created by differences in the views of owner-managers in a
start-up situation vs the situation of those who actually have been operating for some
years, only businesses which were at least 12 months old participated in this study.

Measures working capital management is measured using frequency of undertaking
the various activities in planning, monitoring and controlling working capital (Chau
et al., 2004; Kidwell and Brinberg, 2003; Hilgert et al., 2003; Poutziouris et al., 2006; Perry
and Morris, 2005). The items generated were anchored on a six-point Likert scale
ranging from 1¼ “never” to 6¼ “always” (α coefficient 0.81). Perceived usefulness is
measured by examining owner-managers’ perception on the degree to which they
believed that undertaking working capital management routines would lead to desired
outcomes (Cheong and Park, 2005; Chiu et al., 2005; Davis, 1989; Venkatesh and Morris,
2000). The items generated were anchored on a six-point Likert scale ranging from
1¼ strongly disagree to 6¼ strongly agree (α coefficient 0.68).

Attitude is measured by examining individual’s evaluation of working capital
management routines in a favorable/unfavorable light (Ing-Long and Jian-Liang, 2005;
May, 2005; Lu et al., 2003; Ramayah et al., 2005; Shih and Fang, 2004; Teo and Pok,
2003; Yulihasri, 2004). The items generated were anchored on a six-point Likert scale
ranging from 1¼ strongly disagree to 6¼ strongly agree (α coefficient 0.69).

Level of education is measured by the Ugandan education system ranging from
primary school education to university level. Respondents were asked to indicate their
highest level of education. Financial management training is represented by a
dichotomous variable, which takes the value of 1 if the respondent has ever received
financial management training and 0 if the respondent has never received financial
management training.

Business size is measured by number of employees; respondents were asked to
indicate the number of workers employed. Business age is measured using the number
of years the business has been operational; respondents were asked to state the age of
the business in absolute figures.

5.1 Data analysis
Descriptive statistics analysis was used to describe the demographic characteristics of the
study participants, working capital management routines and activity rate. While, binary
logistic regression analysis was conducted to discriminate between businesses that
engage in working capital management frequently and those that do so less frequently.
The choice of the regression analysis was because of its power to express the outcome
variable as a logit variable through log-linear transformation, which represents a natural
log of the odds of the outcome variable occurring or not. In computing the binary logistic
regression analysis the study variables were coded using the recode function in SPSS:
working capital management (1¼ “more frequently,” 0¼ “less frequently”), business size
(1¼ “very small,” 2¼ “fairly small,” 3¼ “small”), business age (1¼ “infant,” 2¼ “growth,”
3¼ “mature”), level of education (1¼ “primary or less,” 2¼ “secondary,” 3¼ “university”),
perceived usefulness (1¼ “low,” 2¼ “high”), and attitude (1¼ “positive,” 2¼ “negative”).

6. Empirical results
6.1 Descriptive statistical analysis
Table I shows that on average, Ugandan small-scale businesses often undertake the
various routines involved in managing working capital. Keeping daily collections in

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safes (77 percent) and limiting access to the cash safe (71 percent) are the most
frequently undertaken routines by majority of the respondents. This suggests that
importance is placed on safeguarding cash. This is followed by safeguarding
inventory –where 70 percent of the respondents often make use of an adequate storage
facility, while 57 percent limit access to the storage facility. Further, the findings show
that majority of the respondents assess credit risk, and communicate the credit terms
before extending credit to their customers. More still, the results demonstrate that the
least performed routines relate to payables management.

6.2 Logistic binary regression analysis
The results presented in Table II show that the Hosmer-Lemeshow goodness of fit
statistic for the logistic regression model is insignificant ( χ2¼ 6.699; pW0.05),
indicating that the model fitted the data well.

Table II reveals that business size has an influence on working capital
management frequency ( po0.01). This indicates that the larger the business size, the
greater the likelihood that these businesses will employ working capital management
routines more frequently, since the business volume and activities will have
increased. Therefore, it can be stated that business size is positively related to
working capital management frequency. Second, the results show that business age
is not a significantly influential variable ( pW0.05). This implies that the influence of
business age on working capital management frequency is inconsequential in the
context of Uganda.

Third, Table II indicates that the level of education ( pW0.05) and financial
management training ( pW0.05) do not determine the frequency of undertaking working
capital management routines in small-scale businesses. A deeper analysis of the results
(Table AII) reveals that majority of the respondents (23.3 percent) have attained higher

How often do you … 1 2 3 4 5 6 Total %

Inventory management
Use an adequate storage facility 6.1 1.4 1.4 2.8 18.6 69.7 100
Limit access to the storage facility 11.1 1.9 1.1 3.3 25.8 56.7 100

Receivables’ management
Check stock condition 2.2 0.6 0.6 7.8 39.4 49.4 100
Check customers’ ability to pay before extending credit 5.3 0.6 0.6 7.8 39.4 49.4 100
Clearly communicate the credit terms before extending credit 6.1 0.8 2.2 6.9 35 48.9 100
Review debtors level 5.3 1.7 1.7 11.1 45.8 34.4 100

Cash management
Use a safe for keeping money collections as they occur 3.6 0.8 0.3 1.9 16.4 76.9 100
Limit access to the cash safe 3.3 1.1 0.3 2.2 22.2 70.8 100
Check the money balance in the records against the money
in the safe at the end of the day 7.8 1.9 0.8 8.3 37.5 43.6 100

Payables’ management
Write down details of debts whenever they occur 13.9 3.1 3.3 6.7 26.4 46.7 100
Make plans on how to clear debts 14.7 3.3 1.1 11.1 36.4 33.3 100
Pay debts on time 13.6 2.5 2.8 17.5 28.9 34.7 100
Review debt levels 13.3 3.1 1.7 14.2 41.9 25.8 100
Notes: 1 – “never”; 2 – “rarely”; 3 – “somewhat rarely”; 4 – “somewhat often”; 5 – “often”; 6 – “always”

Table I.
Working capital

management
routines and activity

rate (in percent)

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secondary school education (A-Level), followed by 21.1 percent with bachelors degree
(University level). Further, 57.8 percent have received financial management training.
Ordinarily, one would expect education level and financial management training to have
a significant influence. Fourth, perceived usefulness and owner-manager’s attitude were
found to be significantly related to working capital management frequency ( po0.01).
This indicates that the more the owner-manager perceives working capital management
routines as useful, and has positive attitude, the greater the likelihood that he/she will
undertake the routines more frequently, since he/she will have understood the derived
benefits and attached importance to the various routines.

Regarding other indicators of the model, the global explanatory value of the model is
good ( χ2¼ 84.138; po0.000; df¼ 6; 68 percent of observations correctly classified) and
that the chosen set of independent variables makes an adequate discrimination
between those businesses that undertake working capital management routines more
frequently and those that do not do so. Likewise, the R2 of Cox and Snell (21 percent)
and Nagelkerke’s R2 (28 percent) indicate that the logistic regression model explains a
fairly limited percentage of the likelihood of undertaking working capital management
routines more frequently. This is due to the fact that the likelihood of undertaking
working capital management routines depends upon other factors, as well as those
considered in this study.

7. Discussion of results
This study established that on average, the most frequently performed routines relate
to safeguarding cash and inventory, and credit risk assessment, respectively. On face
value, the findings suggest that small-scale businesses actually do manage their
working capital. However, such results may be misleading if the developing country
context is not taken into account. For example, Orobia et al. (2013) found that majority
of small-scale businesses in Uganda manage their working capital in a rather simple
way and not according to the book or best practice. Whereby, they employ sketchy
written and mental records, assess credit risk based on personal relations, have varied
credit terms, make use of improvised safes, assume re-order levels, conduct regular
physical checks and “balance” books among others. These actions can be performed
easily and frequently, it is no wonder the routines were scored highly (Table I).

Variables Coeff. SE Wald ( β) Sig. Ex ( β)

Business size 0.165 0.032 25.971** 0.000 1.180
Business age −0.012 0.047 0.061 0.805 0.989
Level of education −0.011 0.079 0.018 0.892 0.989
Fin Mgt training −0.243 0.258 0.890 0.346 0.784
Perceived usefulness 0.679 0.284 5.722* 0.017 1.971
Attitude 0.563 0.266 4.481* 0.034 1.756
R2 Cox & Snell 0.208
R2 Nagelkerke 0.278

χ2 Hosmer and Lemeshow test
χ statistic 6.699
Sig. 0.569
Global percent of correct prediction 68.1
Note: *po0.05; **po0.001

Table II.
Binary logistic
regression

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This study also provides empirical evidence indicating that such factors as business
age, education level and financial management training are inconsequential in
determining the likelihood of small-scale businesses to undertake working capital
management routines frequently or not. The result on business age is not surprising,
because in Uganda, there are circumstances where business transactions or volumes
remain small even at a mature stage of the life cycle. For instance, most businesses are
necessity based that is to say they are set up to cater for basic needs such as food, clothing,
medical, education and shelter (Namatovu et al., 2010; Rosa et al., 2006; Walter et al., 2005).
As a result, the business capital is often eroded and the size of the business may remain
the same or even grow smaller with time. A plausible explanation for the finding on the
role of education level is the fact that the current education system (primary school to
university) is not action oriented. As a result, the knowledge acquired in schools is
considered to a great extent theoretic and less relevant for small-scale businesses.
This means that a university graduate will find it irrelevant to translate his/her knowledge
on sophisticated techniques in managing working capital to a small-scale business
context. Anecdotal evidence indicates that most financial management training programs
have equally been developed basing on large firm practices at the expense of small-scale
business specifics. In this regard, it is not sufficient to say that the higher the level of
education or financial management training, the greater the likelihood that the individual
will undertake working capital management routines, more so frequently.

On the other hand, such factors as business size, perceived usefulness and attitude
of owner-managers explain why some small-scale businesses undertake working
capital management routines more frequently than others. The impact of business size
can be ascribed to the fact that a very small business is associated with very minimal
record keeping and need to review inventory and debtors’ levels. Such businesses have
a limited customer base and tend to operate on cash basis. Consequently, the issue of
debtor screening and management is likely to be a fallacy. In addition, the issue
of banking daily cash receipts is non-existent. Because of the minimal routines, there is
room to downplay frequent application. However, as the business size grows, the need
for such activities becomes relevant. The study finding is in line with Howorth and
Westhead (2003)’s study, which concluded that larger businesses are positively
associated with high take-up of working capital management routines.

Assessing credit worthiness, detailed record keeping and monitoring of working
capital level is associated with knowledge on credit terms, financial records,
reconciliations and inventory control. This is in line with Hogarth and Hilgert (2002)’s
study which established that people who had more knowledge on cash flow
management, credit management, saving and investment tended to score better in
terms of financial practices. Such households were more likely to follow sound financial
management behaviors. In the same vein, Kidwell and Turrisi (2004) established that
45.6 percent of students with better financial knowledge keep detailed financial records,
compared to only 29 percent of the students with inferior financial knowledge. This
means that, when owner-managers possess basic financial knowledge, this knowledge
improves the way they plan, monitor and control inventory, cash, receivables and
payables. This is true because, they are able to understand not only what things
happen but how and why. Put simply, this understanding enables them to evaluate the
usefulness of managing working capital and attach importance to the various activities
involved therein.

A deeper analysis revealed that 80 percent of the respondents had prior experience
before starting their own businesses. This suggests that in Uganda, owner-managers of

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small-scale businesses derive working capital management knowledge and skills
through past experience as opposed to the formal education system. Once people are
exposed to certain ways of doing things, they gain the basic knowledge and confidence
and can identify the actions that lead to the desired outcomes. This in turn, shapes their
attitude and translates into consequent actions. Nonetheless, it should be noted that
whereas an individual may possess the relevant knowledge on various routines
involved in managing working capital and understands the usefulness, the ultimate
choice of action will depend on what he/she feels is important. Recall that in the absence
of formal systems, structures and procedures, decision-making process and actions
depend on the individual’s attitude. Therefore, the more positive the owner-manager’s
attitude is toward working capital management routines, the greater the likelihood
that he/she will undertake working capital management routines more frequently.
The results provide support to previous behavioral studies, which assert that people’s
actions depend on their attitude (Lu et al., 2003; Ramayah et al., 2005; Rhodes and
Courneya, 2003; Shih and Fang, 2004).

8. Conclusion
From the practical perspective, this study demonstrates that when owner-managers
perceive take up of working capital management routines as usefulness and important,
activity rate is likely to increase. However, this is possible if they possess the basic
knowledge and skills required. The implication therefore is the need for action-based
training and capacity building programs. Poor working capital management affects
growth and survival rates of businesses, and the overall economic development of a
country. Thus, policy makers need to design work-based (action-oriented) training
programs that are relevant for small-scale businesses. Typically, “one size” policy does
not fit all. Second, considering the development International Financial Reporting
Standards (IFRS) for SMEs, the current standard assumes a well-established reporting
framework and systems. In addition, it emphasizes the quantitative aspects and
assumes causes of the outcomes. By their nature and task environment, most
small-scale businesses in the third world setting are informal and do not keep financial
records meticulously, implying that the IFRS may not be applicable to such businesses.
This study provides empirical evidence on the behavior perspective of working capital
management, suggesting that to have such businesses on board, accounting bodies
should consider behavioral perspective in the continuing development of the IFRS for
SMEs. Moreover, the new wave in the accounting and finance literature indicates that
financial reports cannot tell it all, and therefore may not been able to provide
organizations with prescriptions of how to generate and sustain efficient and effective
financial performance.

Several limitations to this study provide guidance for future research. First, paucity
of studies on the supply-side perspective of working capital management deprived the
study of the opportunity to cross-validate the present study findings. Future studies
should be conducted to confirm the results. Second, the study is cross-sectional. Given
that the views held by individuals may change over the years, there is need for a
longitudinal study. Third, although a survey questionnaire was used to collect data
through a personal approach, follow up interviews, which would have informed us of
the reasons why the respondents held certain views were not undertaken. Therefore,
the need for a qualitative approach is evident. Finally, the study focussed on firm
factors, perceived usefulness and attitude, providing an overall prediction of 28 percent
(Nagelkerke R2). This implies that the remaining 72 percent of the variance in working

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capital management may be explained by other factors that were not considered in this
study. Future studies should consider other individual attributes such as previous
experience, psychological capital, self-identity and personal initiative. Alternatively,
future research may wish to replicate in different country contexts to test the
robustness of the model.

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Appendix

Variables Frequency %

Business type
Trade 144 40
Hotels and restaurants 112 31.1
Manufacturing 104 28.9

Business age
Infant (1-5) 139 38.6
Growth (6-10) 109 30.3
Mature (11+) 112 31.1

Business size
Very small (5-10 employees) 121 33.6
Fairly small (11-20 employees) 140 38.9
Small (21-50 employees) 99 27.5

Table AI.
Distribution by firm

characteristics

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Corresponding author
Laura Aseru Orobia can be contacted at: lorobia@mubs.ac.ug

Variables Freq. %

Gender
Female 127 35
Male 233 65

Age of respondents
18-28 years 105 29.2
29-39 years 184 51.1
40-50 years 60 16.7
above 50 years 11 3.1

Highest education level
Primary level or less 27 7.5
O’ Level 62 17.2
A’ Level 84 23.3
Vocational school (certificate) 47 13.1
Diploma 57 15.8
Bachelor’s degree 76 21.1
Master’s degree 7 1.9

Financial management training
Yes 208 57.8
No 152 42.2

Past experience
Yes 291 80.8
No 69 19.2

Table AII.
Distribution by
demographics

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