Determinants of financial performance of micro, small and medium sized enterprises in Uganda: a case study of Nakawa Division, Kampala District

Abstract

The purpose of this study was to determine the factors affecting the financial performance of Small and Medium Enterprises (SMEs) in Uganda. The research objectives for this study were: to assess the effect of governance on the financial performance of SMEs, to examine the effect of human resource capacity on the financial performance of SMEs and to examine the influence of access to finance on the financial performance of SMEs in Nakawa Division. A descriptive research design was adopted for this study. The target population of the study was the 4,560 SMEs in Nairobi County. Data available from the Ministry of Trade showed that there were 2500 SMEs in manufacturing, 1500 SMEs in trading and 560 SMEs in services. A stratified sampling technique was used to determine a sample size of 100 from the total population. For this study, data was collected using structured questionnaires based on the research questions. Descriptive statistics included frequency distribution and percentages and mean, while inferential statistical analysis used included correlations and regression. The first research objective of the study was to examine the influence of corporate governance on financial performance of SMEs. The findings of the study revealed that majority (81.6%) of the respondents agreed that corporate governance affects financial performance. Similarly, the findings of the study revealed that there was a positive relationship between corporate governance and financial performance (r= 0.491) p <0.05. The second research objective of the study was to ascertain the impact of human resources on the financial performance of small and medium-sized enterprises (SMEs). The study findings indicated that the majority (89.5%) of respondents agreed that the HR department ensures that employees are conversant with new trends in technology adopted in the market. The study findings also indicated a strong positive relationship between human resources and financial performance, with a correlation coefficient of r (0.414) and a p-value of less than 0.05. This suggests that the relationship is statistically significant. The third research objective of the study was to ascertain whether access to financing affects the financial performance of SMEs. The findings indicated that the majority (81.6%) of respondents agreed that access to financing was important for the growth of SMEs (r = 0.612; p < 0.05). The relationship was therefore found to be statistically significant. In conclusion, the results demonstrated that corporate governance, human resources and access to finance were statistically significant in explaining financial performance. This suggests that SMEs generally possessed effective factors that enhanced their financial performance. The findings led to the conclusion that corporate governance is a key determinant of financial performance. The results also indicated that the SMEs had embraced and implemented the structures of corporate governance, which proved beneficial for them. The study demonstrated the significance and influence of human resource capacity on financial performance. Small and medium-sized enterprises (SMEs) ensured that their employees were adequately trained to enhance the firms' overall performance. The study concluded that access to finance was a significant factor influencing financial performance. The ability to access bank loans with relative ease proved to be a significant factor in the financial improvement of SMEs. This, in turn, led to a reduction in the cost of finance, which included higher interest rates, application fees, loan insurance premiums, and legal fees. Consequently, SMEs were able to expand their operations with greater ease and at a reduced cost. The study recommended that the Ugandan government provide incentives to small and medium-sized enterprises (SMEs) to encourage the implementation of corporate governance practices. It was also recommended that the board and managers be made aware of the importance of corporate governance.