The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1176-6093.htm

Working capital
How do small business owners management
manage working capital in an
emerging economy?
127
A qualitative inquiry
Laura A. Orobia and Warren Byabashaija
Department of Entrepreneurship, Makerere University Business School,
Kampala, Uganda
John C. Munene
Graduate Research Centre, Makerere University Business School,
Kampala, Uganda
Samuel K. Sejjaaka
Department of Accounting, Makerere University Business School,
Kampala, Uganda, and
Dan Musinguzi
Stenden University Qatar, Doha, Qatar

Abstract
Purpose – The purpose of this study was to examine the actions owner-managers of small
businesses undertake in managing working capital.
Design/methodology/approach – The study adopted an exploratory research design. The point of
saturation was achieved after ten owner-managers were interviewed. Data were analyzed using content
analysis technique with the aid of NVivo software. Verbatim texts were used to explain the emergent themes.
Findings – The findings indicate that in the absence of systems, structures and procedures, small
business owner-managers intuitively plan, monitor and control their working capital. The activities
undertaken include; reliance on memory and oral agreements, informal planning, assuming inventory
limits, unconventional record keeping, cash flow based information management and giving credit to
close associates.
Research limitations/implications – A more detailed investigation of the steps in the action
sequence ma y advance our understanding of the process. Future studies need to test the effect of
personal characteristics on working capital management process.
Practical implications – Owner-managers of small businesses do not require the same degree of
sophistication employed in planning, monitoring and controlling working capital. They require soft
skills. Therefore, academicians, practitioners and policy makers need to emphasize knowledge
management and cash accounting.
Originality/value – This study examines the process perspective of working capital management,
an aspect that has not been adequately highlighted in previous studies.
Keywords Working capital management, Small businesses, Qualitative research, Owner-managers
Qualitative Research in Accounting &
Paper type Research paper Management
Vol. 10 No. 2, 2013
pp. 127-143
q Emerald Group Publishing Limited
The authors are grateful to the respondents who participated in the interviews, the peers as well 1176-6093
as the two anonymous reviewers for their valuable suggestions and comments. DOI 10.1108/QRAM-02-2012-0008
QRAM 1. Introduction
10,2 Small businesses greatly contribute to the economic development of a country (Abor
and Quartey, 2010; Halabi et al., 2010). Their contribution is gauged in terms of job
creation, income generation and poverty reduction (Agyei-Mensah, 2011). However,
despite their significance, small businesses continue to experience poor working
capital management as indicated by cash problems, poor planning, high stock out costs
128 and low debt collection rates (Deakins et al., 2002; Ekanem, 2010; Kazooba, 2006), as is
the case for small businesses in emerging economies such as Uganda. In the current
economic climate of tighter liquidity, rising cost of capital and raw materials, sky
rocketing energy costs and ever-increasing competitiveness, there is need for
businesses to manage working capital effectively and efficiently (Ekanem, 2010).
Working capital is what keeps a business alive and functioning. Businesses need to
efficiently manage their working capital in order to avoid the “risk of inability to meet
due short term obligations on one hand and preclude excessive investment in short
term assets on the other hand” (Eljelly, 2004, p. 48). This study examines the actions
initiated by owner-managers of small businesses in managing working capital.
The working capital management literature is replete with studies based on the use
of financial reports to investigate organizations’ efficiency (Howorth and Westhead,
2003; Lazaridis and Tryfonidis, 2006; Raheman and Nasr, 2007; Samiloglu and
Demirgunes, 2008; Teruel and Solano, 2007). These studies assume well-established
reporting frameworks, characterized by well-structured tasks and measurable outputs.
The studies fail to take into account the behavior and decision processes that determine
how working capital is managed. Small businesses generally do not have separation of
ownership and management controls, and lack formal systems, structures and
procedures (Bagire and Kyogabirwe, 2004; Briggs, 2009; Kazooba, 2006). Consequently,
management of these small businesses revolves around the owner-manager, their
business skills and social context (Beaver, 2003; D’Amboise and Muldowney, 1988). How
then do small business owners manage working capital? What are the actions involved
in managing working capital in the absence of well-established systems and structures?
Previous studies have tended to focus on the use of financial reports disregarding
behavior, which drives management processes and, as a result, our empirical knowledge
of working capital management is still limited. This study attempts to develop an
in-depth understanding on how owner-managers of small businesses manage working
capital. As observed by Munene et al. (2005) and Sejjaaka (2005), answering the “how is
it done?” Question provides a somewhat deeper understanding of human behavior or
actions. When the rationale for action is understood, it is easier to propose solutions and
policies to improve working capital management.
The rest of the paper is structured as follows. The next three sections present brief
reviews of small businesses in Uganda, working capital management, and the theoretical
framework used in this paper. This is followed by an explanation of the methodology
used in data collection and analysis, and a discussion of the findings of the study. The
last section presents the conclusions of the study and implications for research and
practice.

2. Small businesses in Uganda: definition, role and environment

There is no universally accepted definition of small businesses. The definition varies
across countries and industries. However, the most common measures used include
number of employees, annual turnover, industry, ownership and value of fixed assets Working capital
(Agyei-Mensah, 2011). Table I presents some of the definitions generated from a review management
of the literature.
This study adopts the official Uganda Government definition provided by the Uganda
Ministry of Finance, Planning and Economic Development (MFPED), given that it is the
basis on which policies in the SME sector in the country are made. The predominant
business typology in Uganda is small businesses (Ernst & Young, 2011; MFPED, 2006). 129
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 labour force, and have great potential for reducing poverty
levels (Ernst & Young, 2011). The results of the Global Entrepreneurship Monitor
(GEM-Uganda) study indicate that most of these businesses are found in metal
fabrication, furniture making, food processing, motorcar garages, trade, restaurants and
transport (Namatovu et al., 2010). 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 development.
The factors in the small business operating environment that have a bearing on the
management of working capital in Uganda are complex but essentially similar over time.
The task environment is quality deficient and institutional conditions hardly demand
for austere working capital management practices (Briggs, 2009; Munene, 1991).
Relevant factors in the task environment include technology advancement and the
nature and quality of the competition, suppliers and customers.
The technological environment embraces knowledge, tools, techniques and actions
that are used to extract meaning from available information. According to Briggs (2009)
and the United Nations Conference on Trade and Development (2002), the current state
of technological advancement in small businesses is somewhat rudimentary. There are
very few computers, and small business operators do not consider it a priority to acquaint
themselves with this technology. Coincidentally, the nature of small 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 weak economic
and legal frameworks. It is characterized by transactional failure, feed-back time lag

Agency No. of employees

The European Commission (EC, 2003) 10-49 employees

The United Nations Industrial Development 99 or less workers for developed countries;
Organization (UNIDO) 5-19 workers for developing countries
East African Community Countries Kenya (10-50 employees), Rwanda (3-30
(Ernst & Young, 2011) employees), Uganda (5-50 employees) and
Tanzania (5-49 employees)
Uganda, Ministry of Finance, Planning and Maximum 50 people
Economic Development (MFPED) Table I.
Uganda Small Scale Industries Association, an Not more than 50 people Definition of small
indigenous non-government organization that businesses by relevant
promotes small scale industries in Uganda local agencies
QRAM understood in terms of the time it takes to learn the outcome of one’s actions and
10,2 personalissimo, or the situation where being connected in a personal way is the real
guarantee that any transaction concluded will be honoured as expected (Briggs, 2009;
Munene, 1991). In this environment, private contracts are rarely documented and
requirements for audited accounts are not enforced. There is limited access to financial
intermediaries, hence limited external pressure for proper financial reports. The
130 accounting norms and expectations that make up the cultural environment are
underdeveloped and the role of government in providing direction is capacity
constrained. Similarly, institutions such as the Institute of Certified Public Accountants
of Uganda and trade associations that would be useful in information management are
yet to make an impressionable impact.

3. Overview of working capital management

The finance literature is replete with studies on working capital management (Filbeck
and Krueger, 2005; Lazaridis and Tryfonidis, 2006; Padachi, 2006; Raheman and Nasr,
2007; Teruel and Solano, 2007). Such studies seem to have a consensus on conceptualizing
working capital management as the planning and control of inventory, receivables,
payables and cash, in order to eliminate the risk of illiquidity and maximize profitability.
Anand and Gupta (2001, p. 3) affirm that:
[. . .] higher liquidity in a firm gives the comfort of meeting short-term liabilities but at the
cost of profitability and on the other hand, too little of it may increase the profitability but at a
greater risk of not meeting the short-run obligations.
van Horne (1995) states that managing working capital involves making decisions on
the investment of available cash, maintaining a certain level of inventories, managing
account receivables and account payables.
As mentioned earlier, previous empirical studies have tended to focus on the use of
financial reports. For instance, Raheman and Nasr (2007) investigated the impact of
average collection period, inventory turnover in days, average payment period and cash
conversion cycle on the net operating profitability of firms. They established significant
relationships between the variables. Their findings are consistent with Padachi (2006)
who tested key variables such as inventory days, accounts receivable days, cash
cycle and profitability to evaluate working capital management in Mauritian small
firms. Other similar studies include Eljelly (2004), Filbeck and Krueger (2005), Howorth
and Westhead (2003), Lazaridis and Tryfonidis (2006) and Teruel and Solano (2007).
Whereas the aforementioned studies provide acceptable explanations on working capital
management, they assume well-established reporting frameworks characterized by
well-structured tasks and measurable outputs, which for many small businesses is not
the case. Consequently, these studies are limited in scope. By their nature and size,
management in small businesses revolves around the owner-manager (Beaver, 2003;
Frese, 2000; Frese et al., 2002). Consequently, operations depend on the individual’s
perceptions and attitudes. Few prior studies emphasize the role of the individual in
small businesses. For instance, Krauss et al. (2005) examined the psychological model
of success among South African small business owners, and found that the role of
the individual is fundamental for business success. This was confirmed by Frese et al.
(2002). Therefore, given the central function of the owner-manager of small businesses,
it is expected that the personal characteristics of the owner-manager may provide
a clearer understanding of working capital management in these businesses rather than Working capital
structures and systems, which may be non-existent. management
Second, by focusing on the output perspective, less attention has been paid to the
process perspective. Prior studies are constrained to answering “what state a business is
in” and are unable to explain “why or how a business reached its current state”. The few
studies that have attempted to examine working capital management practices without
necessarily using working capital ratios are also limited to providing insights on the 131
outcomes (Agyei-Mensah, 2011; Nguyen, 2001; Poutziouris et al., 2005). This limits our
empirical knowledge on the activities and processes involved in managing working
capital. For instance, Agyei-Mensah (2011) examined working capital management
practices in Nigerian small businesses and reported that: 33 percent of the respondents
claimed that they used cash budgeting very often; 36 percent never reviewed their
debtors’ credit period; 78 percent never reviewed bad and doubtful debts; and 35 percent
never reviewed customer risk standing. With reference to stock management, 70 percent
never reviewed stock levels and 80 percent never used the economic order quantity
model. The question that arises is, so what do they do and how?
Nguyen (2001) investigated financial management practices in small Vietnamese
businesses. The findings showed that: the majority of respondents (80 percent) often
or always prepared cash budgets; 83 percent determined cash balance based on the
owner/manager’s experience; 77 percent sometimes had cash shortages; 54 percent
rarely had a cash surplus; 75 percent did not invest any cash surplus; 52 percent sold on
credit; 40 percent often set up a credit policy; 81 percent reviewed their debtors levels
monthly; 46 percent always prepared inventory budgets; 51 percent reviewed inventory
levels monthly; 94 percent determined inventory levels based on the owner-manager’s
experience, while 89 percent did not know the economic order quantity model.
Grablowsky and Rowell (1980) and Poutziouris et al. (2005) report similar findings.
According to Munene et al. (2005), by studying the product, we merely describe it, but by
investigating “how it came to be”, we can explain it. We need to answer the “how”
question about working capital management in small businesses by unearthing the
actions individuals initiate in managing working capital.

4. Action theory
Action theory Frese and Zapf (1994), which centers on focus, sequence and action
structure, was developed to model an understanding of the action process, whereby
focus is represented by the task itself. Sequence looks at the broad range of activities,
dividing them into goal setting, mapping the environment, planning, monitoring and
feedback. Action structure is about cognitive regulation of behavior, implying that
initiation of actions is dependent on self-regulation mechanisms. If well done, the key
outcomes of working capital management in small businesses are reduced stock out
costs, reduced cash problems and increased debt collection rates. Achieving this
involves planning, monitoring and control activities and a series of deliberative steps.
For instance, in managing inventory, owner-managers must first identify the key
activities and the critical outcomes associated with the activities such as setting
inventory limits in order to reduce stock out costs. They then collect information from
the environment on suppliers, prices and stock availability, plan how to achieve the set
goal, monitor the process of executing the plans and finally process feedback from
suppliers and customers. The same sequence applies to managing receivables,
QRAM payables and cash. Over time, these sequences become reflexive. Given that
10,2 management of small businesses revolves around the owner-manager, self-regulatory
mechanisms such as attitudes and perceptions play a big role in managing working
capital. Therefore, the process perspective of working capital management is a direct
reflection of an understanding of action theory.
The theory has been successfully applied to analyze the process perspective in prior
132 studies. For instance, Munene et al. (2005) employed action theory to analyze
poverty-carrying actions referred to as poverty carriers that actors initiate. They found
evidence that the poverty state of individuals’ was a function of the acts they initiated.
Frese and Sonnentag (2000) focused on process characteristics of the task accomplishment.
They found that task accomplishment was a function of the acts initiated. In this study,
the outcomes of working capital management in small businesses are traceable to the
actions that the owner-managers initiate. Therefore, this study sought to examine how
small business owners manage working capital using an action framework.

5. Methodology
The study adopted a qualitative research method to examine the working capital
management process from the context of the respondents. This approach is widely
accepted and applied in the small business context (Grant and Perren, 2002; Halabi et al.,
2010; Perren and Ram, 2004). The businesses of interest were those situated in the
Central Business District of Kampala, Uganda. This region was chosen because
it is the commercial heartland where most business activities take place. In addition,
small businesses are predominant and easily accessible (Kazooba, 2006; MFPED,
2006). Purposive sampling was used to select study participants. The interviewer
invited participants at a business exhibition organized by the Uganda Manufacturers
Association (October, 2011) to participate in interviews. The criteria for selecting
interviewees were that the respondent had to be either an owner or a manager of a small
business, and the business had to be more than six months old and employ five to
49 workers. The required number of participants was reached when the point of
saturation was achieved, whereby analysis of additional interviews led only to aspects
that had already been mentioned in previous conversations and did not result in new
findings (Creswell, 2006).
Data were collected using semi-structured interviews. As Qu and Dumay (2011, p. 9)
observe, “a semi-structured interview involves questioning guided by identified
themes in a consistent and systematic manner interposed with probes to elicit more
elaborate responses”. Miles and Huberman (1994) assert that this approach enables
the generation of descriptions grounded in reality. In addition, the sensitivity of the
discussion topic (money matters) made interviews a better choice. The interview guide
was developed after a comprehensive review of the literature with respect management
aspects (i.e. planning, monitoring and control) of inventory, accounts receivable, cash
and accounts payable. With the permission of the respondents, all interviews were
audio recorded, transcribed verbatim and memos were written to summarize the
information obtained. The interviews lasted between 45 min and one hour.
The interview data were analyzed using content analysis techniques. Basing on
guidelines by Miles and Huberman (1994), Pope et al. (2000), Creswell (2006) and Bazeley
(2007), the following steps were taken to analyze the data. Transcribed data were entered
into QSR NVivo 8. Units of analysis were the paragraphs in each transcript that dealt
with the separate working capital components. The initial coding was deductive. Using Working capital
prior research, a scheme representing aspects of working capital management was management
developed. Operational definitions were determined to facilitate the coding process. The
predetermined categories were then coded into tree nodes. A second round of coding was
undertaken in which all transcripts were carefully reviewed, categorizing text sentences
into emergent themes. The emergent themes formed the subcategory codes within each
of the major categories. This approach helped to manage the data and eliminate 133
irrelevant data. Using selective coding, the components of each subcategory were
specified. This involved grouping quotations from the transcripts that represented each
subcategory. This enabled us to use the participants’ own words as much as possible
so as to maximize representation of participants own views as opposed to those of the
researchers.
After the comprehensive coding process, cross case analysis was carried out. For
each of the codes, the different working capital management behaviors were compared.
Careful analysis of the coded record helped to ensure that the domains derived
accurately reflected participants’ perspectives, and not the researchers’ own bias. This
is particularly important in naturalistic research, in which the researcher must be
sincere in addressing the subjects’ views of the world, which are afterall the subject of
analysis. The data were further explored to identify relationships within the data using
the search option. This enabled an in-depth understanding of what each code statement
and relationship meant and the exploration of complex ideas or hypotheses.

6. Findings
6.1 Sample characteristics
Ten small business owners-managers were interviewed after which the point of
saturation was achieved. The details of these businesses are presented in Table II.
The results show that most of the businesses are aged over one year except for the
charcoal briquette maker who had been in business for seven months. In Uganda, most
businesses employ both full-time and part-time workers (casual workers). The results in
Table II indicate the number of full-time employees. Eight of the participating
businesses employed five and more full-time workers. Table III shows the demographic
characteristics of the interviewees.
Eight out of ten interviewees were in the 29-39 years age bracket. The age distribution
is an indication of youth dominance in the small business sector. The findings are
consistent with GEM-Uganda (Namatovu et al., 2010) and the Uganda Bureau of
Statistics (2007). The results also show that the majority of the interviewees (70 percent)
obtained secondary school education, an indication of a reasonable level of literacy and
comprehension of the data collection instrument. In addition, seven out of ten had prior
business experience before starting their own businesses.

6.2 Inventory management

This construct describes how the interviewees (owner-managers of small businesses)
conduct inventory planning, set inventory limits, undertake record keeping and
safeguard inventory. The results show that typical inventory management in small
businesses starts with generating a list of inventory requirements (a shopping list).
This list doubled as an inventory/purchase budget and a purchase requisition note.
The interviewees then matched it against the cash available. Credit was only sought in
QRAM
No. of
10,2 Interviewee Business age employees Business type Nature of business activity

1 2 years 6 6 Service/trade Motor garage – maintenance, motor

months repairs and selling car accessories
2 1year 3 3 Trade Ladies boutique – selling ladies clothes
134 months in the shop and door-to-door sales
3 7 months 7 Manufacturing Charcoal briquettes – making and
selling charcoal briquettes made of
waste collected from garbage deposits
4 1 year 5 3 Agriculture Dairy farm – selling dairy milk
months
5 3 years 3 9 Manufacturing Roasting and packaging groundnuts
months and groundnut paste (peanut butter)
6 1year 9 7 Restaurant Restaurant and take-away
months
7 3 years 6 Agriculture Poultry farm – poultry rearing and
selling eggs and chicken
8 2 years 10 5 Manufacturing Furniture maker – making and selling
months chairs, tables, wardrobes, sofa sets and
any other customized furniture
9 3 years 12 Service Training center – providing services
such as short courses and consultancy
10 1 year 6 3 Manufacturing Handcrafts – making and selling an
Table II. months assortment of handcrafts (e.g. necklaces,
Participating businesses ear rings, etc.)

Interviewee Position Gender Age group Highest education level Previous experience

1 Manager Male 29-39 years Senior 2 1 year

2 Owner Female 29-39 years O’Level Nil
3 Owner Female 29-39 years Senior 1 2 months
4 Owner Female 29-39 years Bachelors degree Nil
5 Owner Male 29- 39 years O’Level 2 years
6 Owner Female 29-39 years P7 3 years
7 Owner Male 29-39 years O’Level 1 year
8 Owner Male 40-0 years P7 1.5 years
9 Manager Male 29-39 years Masters degree 2 years
10 Owner Female 18-28 years A’Level Nil
Notes: P7 refers to primary year 7 (the final level of primary education); seniors 1 and 2 refer to forms
1 and 2 (lower secondary education); O’Level refers to those who completed their education at senior
Table III. year 4 (lower secondary education); A’Level refers to those who completed their education at senior
Interviewee background year 6 (higher secondary education)

case of insufficient cash. This demonstrates basic inventory planning. The following
responses illustrate the inventory management process:
First of all, I spend on things that I must get. I do not just get up and get what to buy. I have to
make a list of what is needed (Interviewee No. 4).
 Yeah, I do plan. Okay, what I do. I have been in this business for more than I year. Yeah. Working capital
So I know the quantity to sell per week. Because you know I stock every week. So I plan,
I make a list of what I will need to sell in the next week and I go and buy. If you do that it is management
easy, you can also estimate how much sales you expect in that week (Interviewee No. 2).
I plan what I am going to prepare like today and I go and buy what to prepare for today,
sometimes it is not enough but you go with that. And you see, you also cannot be sure
whether you will sell all that you prepare (Interviewee No. 6). 135
Six of the owner-managers indicated recording inventory in “a way that they can
understand”, while the other four felt there was no need to keep records so long as they
could remember (recall) what came in and what went out. This shows that the small
business owners keep inventory records in an elementary manner. The following direct
quotations confirm this:
Yeah, sure I do, but of course in a way that I can understand. For instance, I can just note how
many blouses, short skirts, like that. It is not easy but I try [. . .] keep canceling them out after
sale (Interviewee No. 2).
Of course not detailed, so long as I can understand. You see what is important is how to
calculate whether you are making profits. If you are not making profits, then the business
may collapse. So you have to keep checking your position (Interviewee No. 10).
You mean writing? I don’t write but I can remember what I bought, how much and what
I have sold, then I balance to see if I made profits (Interviewee No. 6).
In monitoring inventory levels, the owner-managers would first set an assumed
inventory limit below which inventory was not allowed to drop. The inventory level
was then monitored by comparing the physical count against the set limit on a daily
basis, as evidenced by the following responses:
What you do, before you close the shop, check what is there, in the morning when you report,
check what is there. Then during the day, if you buy anything that has not been used, you
take note (Interviewee No. 1).

I don’t wait for the charcoal to get finished or the waste to get finished. When I see they are
remaining little [reaching the assumed stock limit], I go around in the village, to collect, collect
more garbage and dry so that I am ready for production (Interviewee No. 3).

Haah [exclaims while smiling]! You see, with the current situation, you are not sure
whether you will get stock or not. So the best thing I do is, when I see my stock is reducing,
I order for more. If my suppliers have stock, it takes about 2-3 days and I have the
stock. So I always check my stock to determine whether I should order for more
(Interviewee No. 5).

6.3 Accounts receivable management

This construct describes how the interviewees conduct credit screening, keep debtors
records and follow up due debts. The following excerpts illustrate the process that
was followed:
For those I offer service on credit or sell on credit, first of all credit is limited to those I know
personally that they will not give me hard time when I want my money, so we agree when the.
person should pay me back. I also give my customers who have been with me for a long time
[. . .] So we have to agree and understand each other [. . .] Of course just an understanding.
QRAM When the time comes and the person has not yet paid me, I call the person to find out what is
happening, [. . .] [my dear] you also have to understand that person’s position because you
10,2 may not want to lose him as a customer [. . .] for us, we do not have books for recording, [. . .]
[but] with time you learn how to do things and be able to remember who owes you and how
much. Since we give only those we know, you can remember (Interviewee No. 1).
Before I give credit, I know the customers. And we enter into an agreement when to pay.
136 When the time comes, I go to them and ask for my money. If you sit and wait some of them will
not pay. They want to be followed [. . .] No, we just agree. I don’t write, because not very many
people take on credit. I sell in the market and they pay cash. People don’t want to pay debts,
so I cannot risk. But, there are like three or four people I give credit [. . .] Yes I do, otherwise,
how would you remember? What I do, I have my [small] book for customers, I keep updating it.
And I check who has not yet paid [. . .] Just in the way I understand, but at least it has the date,
name, quantity and amount. So after paying, I write the balance (Interviewee No. 7).
Most of my customers pay cash. I only sell on credit to the few I know, and we agree on the
payment terms [. . .] Even when I trust they will pay, I will have to record who has taken what.
The agreement can just be in words, so long as you can trust them. When the agreed time
comes, I wait to see the person, if two days pass, I give the person a call. I know it will
somehow be a problem because even the ones you trust can let you down. I will try and follow
them up. If I fail, I forget about that person and reduce the credit deals (Interviewee No. 10).
The results show that only two of the owner-managers interviewed issued sales
invoices instead of using verbal agreements, as evidenced by the following responses:
I give credit to only the big customers. They are more organized and will not fail to pay. They
may delay to pay but they cannot fail to pay. So what I do, I give them an invoice with all the
information and terms of payment. When the agreed time is approaching, I give them a call to
remind them. When the day passes, I give them time after which I go physically and I am able
to collect all my debts. It is not easy when it comes to collecting your money I don’t know
why, and yet it is so easy for them to get my goods on credit (Interviewee No. 5).
Most of clients are corporate clients, they are sponsored by their organizations, ministries, so of
course we trust these agencies, they are government agencies, they are credible agencies, they send
their staff to come for the trainings, we issue invoices and they pay after the training [. . .] The only
problem, as you are aware, the Government as you know it, be it in Uganda or anywhere in the
world, they do not always want to pay on time. So sometimes, someone can study in July and you
receive the payment in December. But what we do, we do follow the normal credit management
procedures, we do have a formal credit policy, whereby we do not immediately go to the courts of
law straight away taking the harsh route (Interviewee No. 9).
The above excerpts show that most owner-managers granted credit on the basis of their
relationship with the customer. Generally, credit was granted to only those customers
personally known, implying that debtors in these businesses are intuitively selected. With
the exception of two owner-managers, credit screening was followed by a mutual oral
agreement on the terms and conditions of payment as opposed to issuing a sales invoice.
Further, as with inventory management, the study shows that three owner-managers
rarely kept written debtors records – perhaps because they felt there was no need to
keep records so long as they could remember the debtors, amounts and collection due
dates. This may also be attributed to the small numbers of credit customers who were
personally known or the opportunity cost associated with maintaining records.
However, six of the owner-managers had elementary records prepared for own
consumption, while one had a computerized system for record keeping. Regarding chasing
up for payments, the results show that the interviewees made phone calls on the date Working capital
payment was due. This was usually followed by physical visits. management
6.4 Cash and payables management
This construct describes how the interviewees undertook activities such as cash
planning, record keeping, reconciliations, safeguarding and saving cash. The results
indicate that cash management in small businesses starts with informal cash planning. 137
This involved estimating expected cash receipts and expenditure per day or week. It is
interesting to note that while some owner-managers drew rough sketches, others relied
on memory. Nine of the owner-managers recorded their transactions in a simple manner.
All they did was record cash receipts, cash purchases (shopping lists), rent, water and
electricity, leaving out other operating expenses like wages, lunch and transport
inwards. With regards to conducting cash reconciliations, they did this by balancing
their “records” daily and/or computing “profits/losses” made. This is an interesting
finding given that few business owners kept sketchy written records, while most of them
relied on memory. The following quotations illustrate the processes that were followed:
Most of the sales are in the market and restaurants around. So my workers move around
selling [. . .] So when they sell, they collect the money. When they come back, I count the
money and compare to the litres sold. I have a small box, they are called what? A safe – for
keeping my cash [. . .] I bank every Monday and Friday mornings [. . .] No, I do not prepare
budgets because that is theory. What I do, when I receive cash, I sit down and see how to
spend it. But I make sure I do not spend everything. I keep some for running [. . .] I sell milk,
what kind of budget will I prepare? [. . .] So long as I can determine how much milk I can get
per day, I can estimate how much sales I can make [. . .] I have my farm book. If I buy
medicines, I write down the date and amount. Sometimes, I keep the receipts sometimes
I don’t. So long as I have recorded in my book, I don’t need the receipts. In the same book,
when the boys bring the sales [cash], I count and record how much I have made for the day.
So I compare (Interviewee No. 4).
After selling, I put the money in my wallet. Then before going home in the evening, I count
the money and the broilers that are remaining [. . .] My boys help me to sell also [. . .] In the
evening we balance the cash [. . .] I spend on things that I must get. I do not just get up and get
what to buy. I have to make a list of what is needed [. . .] Then also, what I get from my sales,
I make sure I put some on my bank account and some I use for my needs [. . .] Budget? How do
you start writing a budget for this kind of business? Budgets are for big organized
businesses. You see sometimes, the things taught in school may not be applied on ground.
I think if someone can say that I have 100 broilers, and I compute expected sales, I don’t need
other details. I just have to now make sure I get the expected sales. I then compare with how
much I spent to buy the broilers and compute my profits [. . .] I record what I have bought
mostly (Interviewee No. 7).
Further analysis showed that only one owner-manager gave discounts as a way of
speeding up cash collection. The rest did not mention giving discounts. In terms of
safeguarding cash collections, the interviewees utilized improvised “safes”. This
ranged from a small box, drawer, small bag, money purse to a wallet. When asked
whether they saved excess money, one of the interviewees had this to say:
At least I know I have some little money on my account out of the (small) business that I have
started, and this will encourage me to work more and produce more so that I can get more
money, and expand my production (Interviewee No. 4).
QRAM The study shows that only three owner-managers saved some amount of money in a
10,2 bank account periodically. Another two imputed saving to mean safekeeping. Perhaps
they understood the risks associated with keeping cash at home or at the business
premises, so they chose to bank their collections until the time it was needed. One of
them had this to say:
The money I save in the bank is mostly the capital for buying more stock and paying my
138 workers, rent, water, electricity and other expenses. At the end of the day, I rarely have
anything for myself. You see, it is difficult because it is also the business that feeds my
family, pays school fees, medical and so on (Interviewee No. 5).
The remaining five owner-managers either saw no value in saving or felt they had
nothing to save. The following are some of the responses that illustrate this:
Save? Is there anything to save? Here, I spend as it comes, there is nothing to save [so bitter,
perhaps the question was sensitive] (Interviewee No. 8).
When I get cash for the day, it is what I will use to start the next day. Remember that from
this cash I have to clear expenses like food and pay the “leja-leja” [casual workers] boys. What
I am left with is what I start with the next day to buy some stock or clear expenses
(Interviewee No. 1).
What I get out of the business today is what I will start with tomorrow. So, if I collect little
cash it means I will buy less, nothing to save (Interviewee No. 6).
Overall, the study provides evidence that the owner-managers interviewed intuitively
engaged in working capital management using idiosyncratic methods such as:
.
informal planning (using a shopping list, cash budgets);
.
employing assumed/imaginary stock limits;
.
offering credit to only those personally known to them;
.
entering oral agreements regarding debt payments;
.
emphasizing cash flow based information; and
.
keeping financial information in their memory.

The various processes used by owner-managers to manage their working capital are
summarized in Figure 1.

7. Discussion
Businesses need to plan and control inventory, receivables, payables and cash in order to
eliminate the risk of illiquidity and maximize profitability. This study established that small
businesses prepare purchase plans and cash flow forecasts. This provides evidence of the
use of planning tools in managing working capital. The finding is consistent with Nguyen’s
(2001) study which revealed that majority of small firms (80 percent) prepare inventory and
cash plans. Notably, the planning appears to be very basic. By their nature and size, such
businesses do not require the conventional budgeting techniques and process. They are
mainly concerned with cash flows and therefore tend to attach importance to cash flow
plans. With regards to setting the minimum inventory limits, the results indicate that
this was determined using assumed/imaginary stock limits. Such businesses usually
have small stock levels, easy access to suppliers and tend to have personal relationship
 Working capital
management

139

Figure 1.
A schematic presentation
of how working capital
is managed in small
businesses

with them. As such, the use of sophisticated inventory management techniques such
as the economic order quantity models is non-existent. This finding is similar with
Agyei-Mensah’s (2011) study, which found that 80 percent of the respondents never used the
economic order quantity model. The same study found that inventory level determination
was based on the owner-manager’s experience. It is possible that the businesses that
experience stock out costs lack basic knowledge and skills.
Credit policies are essential in managing debtors (Atrill, 2006). This study found
evidence that owner-managers of small businesses assess credit risk based on their
personal relationship with the customer. The current task environment is characterized by
personalissimo or the situation where being connected in a personal way is the real
guarantee that any transaction concluded will be honored as expected (Munene, 1991).
In this environment, contracts are rarely documented. In addition, the customers are not
sufficiently sophisticated to demand or expect accounting documentation such as invoices,
statements and the like. The finding is consistent with Eyaa and Ntayi (2010). Notably, these
businesses have unwritten credit policy spelling out the credit terms and conditions. This
is similar to Poutziouris et al.’s (2005) study that found evidence that 22 percent of the
respondents had verbal credit policy. However, the limitation of such an approach is delay
or failure to honor debts when they fall due. Poutziouris et al. (2005, p. 7) reported that:
[. . .] debtors who are experiencing financial difficulties will look to do business with, or try to
delay payment to, companies known to have poor or relaxed credit granting and collection
procedures.
This suggests that some debtors tend to abuse the trust extended to them by not
complying with the verbal agreements, and therefore trust may be insufficient in
managing debtors.
QRAM This study also established that most owner-managers keep records in their
10,2 memory. This corroborates the findings of Berry et al. (2002) that managers of small
businesses work with accounting ideas in their mind rather than accounting data in the
books. It points to the reliance on memory abilities. A plausible explanation may be
attributed to the fact that the low volume of transactions does not justify additional costs
associated with record keeping; there are no strict regulations or incentives for producing
140 financial reports; and small businesses also have limited access to credit from formal
financial institutions, and therefore, the issue of external pressure to maintain records is
limited. In such an environment, the owner-managers usually consider it less important to
keep conventional records. It also suggests that the kinds of records that are kept are for
the benefit of the owner-manager as opposed to other users of financial information.
Furthermore, it was established that whether written or in the owner-manager’s mind,
emphasis was placed on recording cash sales and some operating cash expenses such as
stock, rent and utilities. This provides evidence supporting that small businesses employ
a cash accounting approach. The finding is consistent with Padachi’s (2012) study,
which indicated that 60 percent of the respondents did cash planning and 80 percent
paid attention to chasing up for payments. The authors concluded that small firms
placed importance on monitoring cash flow. Similar findings were established by Collis
and Jarvis (2002) and Maseko and Manyani (2011).
Overall, the owner-managers of small businesses control all functional areas of the
business. This suggests that working capital management practices in these businesses
are driven by the attitude and motivation of the individual and contextual factors. Thus,
the study findings mean that having well-structured tasks and systems may not be
applicable to small businesses. Therefore, if the outcomes of working capital management
are to improve, the attitude and motivation of the owner/managers need to be enhanced
through knowledge management.

8. Conclusion
This study examined the actions that owner-managers of small businesses undertake
in managing working capital. It can be concluded that they intuitively plan, record,
monitor and control their working capital. This implies that the general working capital
management principles apply to small businesses. However, the difference between
small and larger entity practices lies in the processes undertaken. Owner-managers
of small businesses do not require the same degree of sophistication employed in
planning, monitoring and control. They require soft skills. However, they also need to be
pro-active and familiarize themselves with better work methods that can improve
management of working capital. This suggests that academics and practitioners need to
emphasize the element of knowledge management. This study also indicates that the
owner-managers do not need to keep the conventional records, but rather focus on cash
flow based information management. This means that the assumption that every
business person should keep records of a conventional nature is fallacious. It is
recommended that policy makers should develop policies that take into account the
specific needs of small businesses. It is erroneous to bundle these businesses with larger
ones, given the differences in the task environment.
This study demonstrates the usefulness of an action oriented perspective of
working capital management. Acknowledging that working capital management
requires action, a more detailed investigation of the steps in the action sequence may
advance our understanding of the process. Furthermore, in the view of the fact that Working capital
management of small businesses revolves around the individual, it is reasonable to management
conclude that factors such as experience, perceptions and attitudes may influence
working capital management. Therefore, the need to develop a model that includes
the individual in the working capital management equation is evident. Future studies
should examine the personal characteristics that may explain small business
owner-managers’ actions. This study focused on a small sample of ten participants and 141
therefore generalization of the findings is restricted.

References
Abor, J. and Quartey, P. (2010), “Issues in SME development in Ghana and South Africa”,
International Research Journal of Finance and Economics, Vol. 39, pp. 218-228.
Agyei-Mensah, B. (2011), “Financial management practices of small firms in Ghana: an empirical
study”, African Journal of Business Management, Vol. 5 No. 10, pp. 3781-3793.
Anand, M. and Gupta, C.P. (2001), “Working capital performance of corporate India: an empirical
survey for the year 2000-2001”, Management and Accounting Research, Vol. 4 No. 4,
pp. 35-65.
Atrill, P. (2006), Financial Management for Decision Makers, 4th ed., Financial
Times/Prentice-Hall, Harlow.
Bagire, V. and Kyogabirwe, J. (2004), “Interfaces of OR/MS in small business management”,
Proceedings of the Second International Operational Research Society for Eastern Africa
(ORSEA) Conference, Dar-salaam, Tanzania, 17-19 November.
Bazeley, P. (2007), Qualitative Data Analysis with NVivo, Sage, London.
Beaver, G. (2003), “Management and the small firm”, Strategic Change, Vol. 12 No. 2, pp. 63-68.
Berry, T., Sweeting, B., Goto, J. and Taylor, M. (2002), “Financial management practice amongst
SMEs”, WP 02/16, Manchester Metropolitan University, Manchester.
Briggs, B.R. (2009), “Issues affecting Ugandan indigenous entrepreneurship trade”, African
Journal of Business Management, Vol. 3 No. 10, pp. 786-797.
Collis, J. and Jarvis, R. (2002), “Financial information and the management of small private
companies”, Journal of Small Business and Enterprise Development, Vol. 9 No. 2,
pp. 100-110.
Creswell, J.W. (2006), Research Design: Qualitative and Quantitative Approaches, Sage, London.
D’Amboise, G. and Muldowney, M. (1988), “Management theory for small business: attempts and
requirements”, The Academy of Management Review, Vol. 13 No. 2, pp. 226-240.
Deakins, D., Morrison, A. and Galloway, L. (2002), “Evolution, financial management and
learning in the small firm”, Journal of Small Business and Enterprise Development, Vol. 9
No. 1, pp. 7-16.
EC (2003), The New SME Definition: User Guide and Model Declaration, Enterprise and Industry
Publications, European Union, European Commission, Brussels.
Ekanem, I. (2010), “Liquidity management in small firms: a learning perspective”, Journal of
Small Business and Enterprise Development, Vol. 17 No. 1, pp. 123-138.
Eljelly, A.M.A. (2004), “Liquidity – profitability trade off: an empirical investigating in an
emerging market”, International Journal of Commerce & Management, Vol. 14 No. 2,
pp. 48-61.
Ernst & Young (2011), 2010 Baseline Survey of Small and Medium Enterprises in Uganda,
Draft Final Report 2011, Print, Uganda Investment Authority, Kampala.
QRAM Eyaa, S. and Ntayi, J. (2010), “Procurement practices and supply chain performance of SMEs
in Kampala”, Asian Journal of Business Management, Vol. 2 No. 4, pp. 82-88.
10,2
Filbeck, G. and Krueger, T.M. (2005), “An analysis of working capital management results across
industries”, Mid American Journal of Business, Vol. 20 No. 2, pp. 11-18.
Frese, M. (Ed.) (2000), Success and Failure of Microbusiness Owners in Africa: A New Psychological
Approach, Greenwood, Westport, CT.
142 Frese, M. and Sonnentag, S. (2000), “High performance: an action theory approach”,
working paper, University of Giessen, Giessen.
Frese, M. and Zapf, D. (1994), “Action as the core of work psychology: a German approach”,
in Triandis, H.C., Dunnette, M.D. and Hough, L.M. (Eds), Handbook of Industrial and
Organizational Psychology, 2nd ed., Vol. 4, Consulting Psychologists Press, Palo Alto, CA,
pp. 271-340.
Frese, M., Brantjes, A. and Hoorn, R. (2002), “Psychological success factors of small scale
businesses in Namibia: the roles of strategy process, entrepreneurial orientation and the
environment”, Journal of Developmental Entrepreneurship, Vol. 7 No. 3, pp. 259-282.
Grablowsky, B.J. and Rowell, D.R. (1980), Small Business Financial Management: Theory and
Practice, Old Dominion University, Norfork.
Grant, P. and Perren, L. (2002), “Small business and entrepreneurial research: meta theories,
paradigms and prejudices”, International Small Business Journal, Vol. 20 No. 2, pp. 185-211.
Halabi, A.K., Barret, R. and Dyt, R. (2010), “Understanding financial information used to assess
small firm performance: an Australian qualitative study”, Qualitative Research in
Accounting & Management, Vol. 7 No. 2, pp. 163-179.
Hallberg, K. (2000), “A market-oriented strategy for small and medium enterprises”,
IFC Discussion Paper No. 40, The World Bank, Washington, DC.
Howorth, C. and Westhead, P. (2003), “The focus of working capital management in UK small
firms”, Management Accounting Research, Vol. 14 No. 2, pp. 94-111.
Kazooba, C.T. (2006), “Causes of business failure in Uganda: a case study of Mbarara and
Bushenyi towns”, African Studies Quarterly, Vol. 8 No. 4, pp. 27-35.
Krauss, S.I., Frese, M., Friedrich, C. and Unger, J.M. (2005), “Entrepreneurial orientation:
a psychological model of success among South African small business owners”, European
Journal of Work and Organizational Psychology, Vol. 14 No. 3, pp. 315-344.
Lazaridis, I. and Tryfonidis, D. (2006), “Relationship between working capital management and
profitability of listed companies in the Athens stock exchange”, Journal of Financial
Management and Analysis, Vol. 19 No. 1, pp. 26-35.
Maseko, N. and Manyani, O. (2011), “Accounting practices of SMEs in Zimbabwe:
an investigative study of record keeping for performance measurement (a case study of
Bindura)”, Journal of Accounting and Taxation, Vol. 3 No. 8, pp. 171-181.
MFPED (2006), Development Cooperation Uganda: 2005/06 Report, Uganda Ministry of Finance,
Planning and Economic Development, Kampala.
Miles, M.B. and Huberman, A.M. (1994), Qualitative Data Analysis, Sage, Beverly Hills, CA.
Munene, J.C. (1991), “Organisational environments in Africa: a factor analysis of critical
incidents”, Human Relations, Vol. 44, pp. 439-458.
Munene, J.C., Schwartz, S.H. and Kibanja, G.M. (2005), Escaping from Behavioral Poverty in
Uganda: The Role of Culture and Social Capital, Fountain Publishers, Kampala.
Namatovu, R., Waswa, B., Kyejjusa, S. and Dawa, S. (2010), Global Entrepreneurship Monitor:
GEM Uganda 2010 Executive Report, GEM Uganda, Kampala.
Nguyen, K.M. (2001), “Financial management and profitability of small and medium Working capital
enterprises”, DBA thesis, Southern Cross University, Lismore.
Padachi, K. (2006), “Trends in working capital management and its impact on firms’
management
performance: an analysis of Mauritian small manufacturing firms”, International Review
of Business Research Papers, Vol. 2 No. 2, pp. 45-58.
Padachi, K. (2012), “Factors affecting the adoption of formal accounting systems by SMEs”,
Business and Economics Journal, Vol. 67, pp. 1-21. 143
Perren, L. and Ram, M. (2004), “Case-study method in small business and entrepreneurial
research”, International Small Business Journal, Vol. 22 No. 1, pp. 83-101.
Pope, C., Ziebland, S. and Mays, N. (2000), “Qualitative research in health care: analyzing
qualitative data”, British Medical Journal, Vol. 320 No. 7227, pp. 114-116.
Poutziouris, P., Michelas, N. and Soufani, K. (2005), “Financial management of trade credits in
small- medium sized enterprises”, working paper, Concordia University, Montreal.
Qu, S.Q. and Dumay, J. (2011), “The qualitative interview”, Qualitative Research in Accounting
& Management, Vol. 8 No. 3, pp. 238-264.
Raheman, A. and Nasr, M. (2007), “Working capital management and profitability – case of
Pakistani firms”, International Review of Business Research Papers, Vol. 3 No. 1,
pp. 279-300.
Samiloglu, F. and Demirgunes, K. (2008), “The effect of working capital management of firm
profitability: evidence from Turkey”, The International Journal of Applied Economics and
Finance, Vol. 2 No. 1, pp. 44-50.
Sejjaaka, S.K. (2005), “Corporate mandatory disclosure practices”, PhD thesis, Makerere
University, Kampala.
Teruel, P.J.G. and Solano, P.M. (2007), “Effects of working capital management on SME
profitability”, International Journal of Managerial Finance, Vol. 3 No. 2, pp. 164-186.
Uganda Bureau of Statistics (2007), Business Register, Uganda Bureau of Statistics, Kampala.
United Nations Conference on Trade and Development (2002), Proceedings of the Symposium on
Modalities for Financing SMEs in Uganda, United Nations, New York, NY.
van Horne, J.C. (1995), Fundamental of Financial Management, Prentice-Hall, Englewood Cliffs, NJ.

Further reading
Frese, M. (2007), “Psychological actions and entrepreneurship success: an action theory
approach”, in Baum, J., Frese, M. and Baron, R. (Eds), The Psychology of Entrepreneurship,
Lawrence Erlbaum Associates, London, pp. 151-188.
Gitman, L.J. (2009), Principles of Managerial Finance, 12th ed., Pearson Prentice-Hall, Boston, MA.
Muhwezi, M. (2010), “Horizontal purchasing collaboration in developing countries: behavioral
issues in public units in Uganda”, PhD thesis, University of Twente, Enschede.

About the author

Laura A. Orobia is a PhD candidate at Makerere University, and this paper is part of her PhD
project work. Laura A. Orobia can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected]

Or visit our web site for further details: www.emeraldinsight.com/reprints