Internal control systems, working capital management and financial performance of supermarkets

Abstract

The purpose of this paper is to examine the contribution made by the internal control systems and working capital management on financial performance of supermarkets. This study is cross-sectional and correlational, and it uses firm-level data that were collected by means of a questionnaire survey from a sample of 110 supermarkets in Uganda. Results suggest that working capital management is a significant predictor of financial performance. Contrary to previous thinking internal control systems do not significantly predict financial performance. Therefore, once organizations have appropriate working capital management, they are also likely to have adequate internal control systems that enhance financial performance. This study focuses on supermarkets in Uganda, and it is possible that these results are only applicable to the supermarkets. More research is therefore needed to further understand the contribution of the internal control systems and working capital management on financial performance in other sectors. The results are important for internal control and working capital policy development, for example, in terms of prescribing the internal control systems and working capital requirements for the organizations to enhance financial performance. Internal control systems and working capital management have apparently hitherto been the subject of limited consideration by most supermarkets in Uganda. Nevertheless, this study, in possibly the most thorough treatment so far, highlights the areas requiring improvement to enhance financial performance.

Keywords:

• Internal control systems
• working capital management
• financial performance

PUBLIC INTEREST STATEMENT

To date, supermarkets are failing to continue operating in the foreseeable future due to poor financial performance. Financial performance is the degree to which financial objectives of the organization are being or have been achieved. Supermarkets in Uganda are failing to achieve their financial objectives due to ineffective internal controls and poor management of working capital. This study suggests that to ensure increase in financial performance, supermarkets ought to improve their working capital management through holding optimal levels of inventory, debtors, cash and creditors. This will ultimately shorten the working capital cycle and thus increase financial performance of the supermarkets. Additionally, the supermarket owners and managers should design, implement and maintain strong systems of internal controls to minimize theft, and to ensure that the entity’s operations are conducted in accordance with the provisions of the applicable laws and regulations.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Frank Kabuye

Frank Kabuye is a Lecturer in the Department of Accounting, Makerere University Business School. He holds a degree of Master of Science in Accounting and Finance and Bachelor of Business Administration of Makerere University. His research interests are in the areas of auditing, accounting and finance.

Joachim Kato

Joachim Kato is the Principal Accountant in the Department of Accounting and Finance, New Uganda Securiko Limited. He holds a degree of Master of Science in Accounting and Finance and Bachelor of Business Administration of Makerere University.

Irene Akugizibwe

Irene Akugizibwe is a Lecturer in the Department of Accounting, Makerere University Business School. She holds a degree of Master of Science in Accounting and Finance and Bachelor of Business Administration of Makerere University. Her research interests are in the areas of corporate governance.

Nicholas Bugambiro

Nicholas Bugambiro is a Teaching assistant in the Department of Accounting, Makerere University Business School. He is a certified public accountant and holds a degree of Bachelor of Science in Accounting of Makerere University.