Effects of financial management practices on the performance of property

development companies in Kenya.

By

Name: Eliud Wanyoike Muturi

Reg No. : HDB324 – C004 – 2736/2017
Unit: Empirical Finance
Unit Code: HDFI 3119

A Concept Paper

Presented To

Lecturer: Dr. Tabitha Nasieku

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 TABLE OF CONTENT
INTRODUCTION........................................................................................................ 1
1.1 Background of the Study........................................................................................ 1
1.1.1 Financial management Practices......................................................................... 2
1.1.2 Financial Performance ........................................................................................ 3
1.1.3 Effect of Financial Management practices on Performance ............................... 4
1.1.4 Shipping Industry in Kenya ................................................................................ 5
1.2 Research Problem ................................................................................................... 6
1.2.1 Objectives of the Study....................................................................................... 8
1.2.2 Value of the Study .............................................................................................. 8
CHAPTER TWO ........................................................................................................ 10
LITERATURE REVIEW ........................................................................................... 10
2.1 Introduction........................................................................................................... 10
2.2 Theoretical Review................................................................................................ 10
2.2.1 Residual Equity Theory .................................................................................... 10
2.2.2 The Contingency Theory .................................................................................. 11
2.3 Financial Management Practices........................................................................... 12
2.3.1 Fixed Asset Management (FAM) ..................................................................... 12
2.3.2 Accounting Information Systems (AIS) ........................................................... 13
2.3.3 Financial Reporting Analysis (FRA) ................................................................ 13
vi
2.3.4 Capital Structure Management (CSM) ............................................................. 14
2.3.5 Working Capital Management.......................................................................... 14
2.4 Financial Performance Measures.......................................................................... 14
2.4.1 Return on Investments ...................................................................................... 14
2.4.2 Return on Assets............................................................................................... 15
2.4.3 Return on Capital Employed............................................................................. 15
2.4.4 Cost Benefit Analysis ....................................................................................... 16
2.4.5 Economic Value Added .................................................................................... 16
2.5 Empirical Review.................................................................................................. 17
2.6 Summary of Literature Review ............................................................................ 18
CHAPTER THREE..................................................................................................... 19
RESEARCH METHODOLOGY ............................................................................... 19
3.1 Introduction........................................................................................................... 19
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3.2 Research Design ................................................................................................... 19
3.3 Study Population................................................................................................... 19
3.4 Data Collection...................................................................................................... 19
3.5 Data Analysis and Presentation............................................................................. 20
3.6 Data Validity and Reliability ............................................................................... 21

1.0 Introduction

Financial Management is a discipline dealing with the financial decisions corporations

make, and the tools and analysis used to make the decisions. The discipline as a whole
may be divided between long-term and short-term decisions and techniques. Both
share the same goal of enhancing a firm’s value by ensuring that return on capital
exceeds cost of capital, without taking excessive financial risks (Pandey, 2010).

According to Stoner, performance refers to the ability to operate efficiently, profitably

to survive, grow and react to the environmental opportunities and threats. In
agreement with this, Sollenberg and Anderson assert that, Performance is measured
by how efficient the enterprise is using its resources in achieving its objective. It is the
measure of attainment achieved by an individual team, organization or process (EFQ
M 1999).

According to (Moore and Reichert, 1989), financial management practices are defined
as the practices performed by the accounting officer, the chief financial officer and
other managers in the areas of budgeting, supply chain management, asset
management and control. The most common financial management practices used are
Accounting Information Systems (AIS), Financial Reporting and Analysis (FRA),
Working Capital Management (WCM), Fixed Asset Management (FAM) and Capital
Structure Management (CSM). All these practices are crucial for an efficient financial
management in organizations.

According to Kwame (2007), careless financial management practices are the main
cause of failure for business enterprises. Regardless of whether it is an owner-
manager or hired-manager, if the financial decisions are wrong, profitability of the

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company will be adversely affected and consequently, the entire business
organization.

Financial management is the planning, directing, monitoring, organizing, and

controlling of the monetary resources of an organization (Gitman,2007). Financial
management system refers to the systems of efficient and effective management of
resources in such a manner as to accomplish the objectives of the organization (Chung
& Chuang, 2010).

Finance management basically entails; ensuring regular and adequate supply of funds
to the concern, ensure adequate returns to the shareholders which will depend upon
the earning capacity, market price of the share, expectations of the shareholders,
ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost. To ensure safety on investment, that
is, funds should be invested in safe ventures so that adequate rate of return can be
achieved and to plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt and equity capital.
The finance function needs to be aligned to the business strategy, and provide
financial analysis and insight to support corporate decision making, while also
meeting legal and regulatory requirements given.

The ultimate goal of financial management is to maximize the financial wealth of the
business owners. This general goal can be viewed in terms of more specific
objectives: profitability and liquidity. Profitability management is concerned with
maintaining or increasing a business’ earnings through attention to cost control,
inventory management and capital expenditure. Liquidity management that the
business obligations (bills, taxes etc.) are paid. McMahon also viewed growth as
another objective of financial management in relation to liquidity, growth and
profitability.

Peca (2009), defines real estate development as the improvement of raw land through
the development process in which physical ingredients such as land and buildings are
effectively combined with finances and marketing resources in order to create an
environment in which people live, work and plan. Real estate developer carries out
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improvements either by starting from the ground up or by renovating an existing
property. Peca (2009) describes development process as a creative process occurring
in the context of complex relationships between the participants and the economic,
political, financial, and social institutions of the environment in which they operate.
The constraints to invest in real estate industries have continued to be experienced in
many global states. In China, for instance, the developers face higher requirements for
land reserves and development loans with restrictions to raise money. Identified
constraints slowing the growth of this industry in China are: lack of transparency in
the market, lack of accurate transaction data, lack of historical or current market
statistics on demand and supply, lack of centralized data and reliable performance
benchmark, property acquisition with inadequate compensation, complexity with
transaction process and several factors affecting the liquidity of real estate market
(Richard; 2007)

In Kenya, developers and buyers in real estate investment are struggling to meet
financing costs occasioned by the high interest rates triggered by aggressive
tightening of monetary policy to counter the weakening of the shilling and high
inflation. Developers are abandoning projects, postponing phases, or reducing the
number of homes under construction, construction workers are being laid off.

Objectives of the Study

General Objective
The general objective of this study was to determine the effects of financial
management practices on the performance of property development firms in Kenya.
Specific Objective
The following will be the specific objectives:
i. To identify the financial management practices adopted by property
development firms in Kenya.
ii. To determine the relationship between financial management practices and
performance of property development firms in Kenya.
iii. To determine the influence of investment practice on financial performance of
property development firms in Kenya.
iv. To assess the influence of capital structure practice on financial performance
of property development firms in Kenya.
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 v. To evaluate the influence of liquidity practice on financial performance of
property development firms in Kenya.

2.0 Theoretical Literature

2.1 Introduction

Theoretical review is a structure that supports a philosophy of a research undertaking.

It defines the model and philosophy which expounds on why the research gap under
investigation is existence. Theories and models are formulated to explain, predict, and
understand a given phenomenon that challenge and extend existing knowledge, within
the bounds of the critical limiting suppositions (Torraco, 2007). The choice of a
theory should depend on its suitability, ease of application, and explanatory power.

2.1.1 Stewardship Theory

Stewardship theory has its roots from psychology and sociology and is defined by
Davis, Schoorman and Donaldson (1997) as “a steward protects and maximizes
shareholders’ wealth through firm performance, because by so doing, the steward’s
utility functions are maximized”. In this perspective, stewards are company
executives and managers working for the shareholders, protects and make profits for
the shareholders.
Unlike agency theory, stewardship theory stresses not on the perspective of
individualism (Donaldson & Davis, 1991), but rather on the role of top management
being as stewards, integrating their goals as part of the organization. The essential
assumption underlying the prescriptions of Stewardship Theory is that the behaviors
of the manager are aligned with the interests of the principals. Stewardship Theory
places greater value on goal convergence among the parties involved in corporate
governance than on the agent’s self-interest (Van Slyke, 2006). The economic benefit
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for the principal in a principal-steward relationship results from lower transaction
costs associated with the lower need for economic incentives and monitoring.

The stewardship perspective suggests that stewards are satisfied and motivated when
organizational success is attained. Agyris (1973) argues agency theory looks at an
employee or people as an economic being, which suppresses an individual’s own
aspirations. However, stewardship theory recognizes the importance of structures that
empower the steward and offers maximum autonomy built on trust (Donaldson &
Davis, 1991). It stresses on the position of employees or executives to act more
autonomously so that the shareholders’ returns are maximized. Indeed, this can
minimize the costs aimed at monitoring and controlling behaviours (Davis,
Schoorman& Donaldson, 1997).

On the other end, Daly et al. (2003) argued that in order to protect their reputations as
decision makers in organizations, executives and directors are inclined to operate the
firm to maximize financial performance as well as shareholders’ profits. In this sense,
it is believed that the firm’s performance can directly impact perceptions of their
individual performance. Indeed, Fama (1980) contend that executives and directors
are also managing their careers in order to be seen as effective stewards of their
organization, whilst, Shleifer and Vishny (1997) insists that managers return finance
to investors to establish a good reputation so that that can re-enter the market for
future finance. Stewardship model can have linking or resemblance in countries like
Japan, where the Japanese worker assumes the role of stewards and takes ownership
of their jobs and work at them diligently.

2.1.2 The Real Options Theory

Myers (1984) proposed the Real Option Theory. Since then, these notions have
remained of great interest among financial experts and analysts. Chance and Peterson
(2002) noted that real options deal with choices about the real investments like capital
budgeting projects. Real options offer a more efficient way for managers to allocate
capital and maximize shareholder value by leveraging uncertainty and limiting
downside risk. Furthermore, it asserts that the presence of real options can make an
investment worth more than its conventional discounted cash flow value.

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Arnold and Shockley (2003) attributed increased interest in real options to forces of
supply and demand. The supply side reflected a growing body of literature pertaining
to the real options approach. The demand side for real options reflected
management’s need to position the firm to benefit from uncertainty and to
communicate the firm’s strategic flexibility. Increasingly, managers in industries
characterized by large capital investments and considerable uncertainty and flexibility
e.g. mining, oil and gas aerospace, pharmaceuticals as well as biotechnology, were
contemplating the use of real options. Real options hold a considerable promise
because they recognize that managers can obtain valuable information after
commencement of the project.

2.1.3 Modern Portfolio Theory

Markowitz (1952) introduced the Modern Portfolio Theory (MPT) that explores how
risk averse investors can construct optimal portfolios taking into consideration the
trade- off between market risk and expected returns. The theory quantifies the benefits
of diversification, and shows that out of a universe of risky assets, an efficient frontier
of optimal portfolios can be constructed. Each portfolio on the efficient frontier offers
the maximum possible expected return for a given level of risk and Investors hold one
of the optimal portfolios on the efficient frontier as they adjust their total market risk
by leveraging or de leveraging that portfolio with positions in the risk-free asset such
as government bonds.
MPT provides a broad context for understanding the interactions of systematic risk
and reward which has profoundly shaped how institutional portfolios are managed,
and motivated the use of passive investment management strategies. Markowitz
model is a single- period approach, which assumes that an investor has a given initial
endowment to invest. The investment will be held for a specific length of time
referred to as the investor’s holding period. At the end of that period, the investor will
liquidate his holdings and will either re-invest it or use it for his own consumption
needs (or a combination of both) that’s a fixed mix or a buy-and-hold strategy. Thus
return (end of period accumulated wealth less starting period wealth) starting period
wealth (Markowitz, 1952).The modern portfolio theory demonstrates that
organizations manage their businesses on a portfolio basis (Markowitz, 1952).

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2.1.4 Agency Theory
Agency theory was proposed by Jensen and Meckling (1976). The theory states that
an agency relation exists when a person (the principal) hire another person (the agent)
to performance certain tasks or services on behalf of the principal. According to this
theory, conflict arises between the principal and the agent. This stems from
conflicting interests between the two parties. The agent strives to maximize reward
for their effort, or if the reward is given, minimize the effort. On the other hand, the
principal wants to reduce the costs of hiring agent, or to maximize the output of the
principal. It is noted that the discrepancy of interests between the two parties leads to
agency problems (conflicts). These agency conflicts are often severe and common in
public institutions (Jensen &Meckling, 1976).

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 2.1 Empirical Literature

The theoretical review links the researcher to existing knowledge (Kiogora, 2007).
This section is intended to furnish the reader with existing scholarly works conducted
and the theories to determine the effects of financial management practices adopted
by the property development firms in Kenya.

Year/ Topic Objectives Findings & Methodology

Author Conclusion
1. Ahmed, The effect of To establish the - It was noted Financial management
Babar financial relationship that financial practices that featured
&Kashif, management between management were working capital
2010 practices on organizational practices management, capital
organizational performance and positively structure decisions,
performance financial influenced dividend policy among
management organizational others.
practices among performance
listed companies among the
in Pakistan. surveyed
companies.
2. Chege The Effect of To evaluate the - The study Descriptive research
Esther Financial effect of cash revealed that design was used.
Muthoni, Management management on most of the Microsoft excel
2016 Practices on the performance respondent package was used as a
the of SACCOs in acknowledged tool to analyze the
Performance the that majority of data and the statistical
of Saccos in Hospitality the SACCOs package for social
Hospitality industry. have adopted science (SPSS) to
Industry cash perform correlation
management analysis with the
practices. objective of
- The SACCOs identifying the degree
have cash of relationship
management between respondents'
policy on the opinion on the three
level of cash to research objectives
hold for and the descriptive
transactionary characteristics of the
and respondents.
precautionary
purposes, they
have
implemented
cash planning
and budgeting
techniques

10
 namely cash
budgets, cash
forecasts, and
preparation of
cash position.
- The findings
also confirmed
that the
SACCOs have
cashflow
management
techniques
where majority
recovered the
loan repayments
within the
month of
disbursement
and after one
month.
- The study also
revealed that
only a few
SACCOs
invested excess
cash on
marketable
securities.
3. Nguyen The To investigate - The research Questionnaires were
(2001) relationship and describe study provided designed and directly
between features of a model of SME delivered to SMEs to
financial financial profitability, in collect data related to
management management which financial management
practices and practices and profitability was practices.
profitability financial found to be The secondary data
of small and characteristics of related to method was used to
medium SMEs in Vietnam financial examine the financial
enterprises in management characteristics of
Australia practices and SMEs, where variables
financial such as liquidity
characteristics. ratios, financial
- With the leverage ratios,
exception of activity ratios, and
debt ratios, all profitability ratios are
other variables derived from financial
including statements.
current ratio,
total asset
turnover,
working capital

11
 management
and short-term
planning
practices, fixed
asset
management
and long-term
planning
practices, and
financial and
accounting
information
systems were
found to be
significantly
related to SME
profitability.
-
4. Gachoki Relationship Tested the - The study did Used regression model
(2005) between pecking order not find any Using Shym-sunder
internal funds theory to relationship and Myers model.
deficits and establish the between
the amount of Relationship financing deficit
new debt between internal and new debt
issued using funds deficits and issued. The
regression the amount of outcome of the
model new debt issued. study was not in
line with the
POT
predictions.
5. Ahmed, The effect of To establish the - It was noted Financial management
Babar financial relationship that financial practices that featured
&Kashif, management between management were working capital
2010 practices on organizational practices management, capital
organizational performance and positively structure decisions,
performance financial influenced dividend policy among
management organizational others.
practices among performance
listed companies among the
in Pakistan. surveyed
companies.
6. Butt, Hunjra The This study - The results The statistical package
and Rehman relationship measures the showed a social sciences
(2010) between relationship positive and program (SPSS) was
financial between significant used to check the
performance organizational relationship reliability of data and
and financial performance and between run the regression. It
management financial financial was an adapted
practices in management management questionnaire based on
Pakistani practices like practices and the financial practices

12
 corporate capital structure financial followed by the local
sector. decision, performance in companies, from the
dividend policy, Pakistani study of [34].
investment corporate
appraisal sector. The
techniques, finding from the
working capital study was only
management and limited to the
financial effect of
performance financial
assessment in performance on
Pakistani financial
corporate sector. management
practices.
7. Ssuuna The effects of The study was - The study found The data was analyzed
(2008) internal only limited to that using both statistical
control the effect of management of and narrative methods.
systems on internal control the institution Correlation was used
financial systems on was committed as away of assessing
performance financial to the control the relationship
in an performance. systems, between internal
institution of actively controls and financial
higher participates in performance.
learning in monitoring and Narrative analysis was
Uganda supervision of used to explain the
the activities of qualitative results of
the University, the survey.
all the activities
of the
Institution’s
activities were
initiated by the
top level
management
and that the
internal audit
department was
not efficient, it
was
understaffed.
- The study also
found out that
there was lack
of information
sharing and
inadequate
security
measures to
safeguard the
assets of the

13
 University.
- The study
established a
significant
relationship
between
internal control
system and
financial
performance.
8. Mohammad The They studied the - They found that They applied two
, Neab and relationship impact of the there is a different techniques
Noriza between dimensions of negative for analyzing the data
(2010) Working working capital relationship that are multiple
Capital component i.e. between regression and
Management C.C.C., current working capital correlations.
(WCM) and ratio (C.R.), variables and
performance current asset to the firm’s
of firms total asset ratio performance.
(C.A.T.A.R),
current liabilities
to total asset
ratio(C.L.T.A.R.),
and debt to asset
ratio (D.T.A.R.)
in effect to the
firm’s
performance
whereby firm’s
value dimension
was taken as
Tobin Q (T.Q.)
and profitability
i.e. return on
asset (R.O.A.)
and return on
invested capital
(R.O.I.C).

9. Umar et al. The influence The influence of - Observed a They used ROA,
(2012) of working working capital significant Earnings Per Share
capital management positive (EPS) and net profit
management (WCM) association margin as proxies to
(WCM) on performance between the measure the
on of small medium performance of performance and
performance enterprises a firm and short-term debt
of small (SMEs) capital obligations to total
medium structure. asset (STDTA), long-
enterprises - The authors term debt obligations

14
 (SMEs) in claimed, on the to total asset
Pakistan basis of (LTDTA), and total
exponential debt obligations to
generalised total asset (TDTA) as
least squares the capital structure
approach, that variables.
their findings
support the
trade-off theory.
10.Salim and Influence of The Influence of - Inverse Employed EPS, ROA,
Yadav leverage on leverage on the influence of ROE and Tobin’s Q as
(2012) Sri Lankan firms’ leverage on the measures of
firms’ profitability profitability of performance. They
profitability firms. used panel data of 237
- Concluded that Malaysian companies
total debt has a for 1995–2011 and
weak positive observed a significant
relationship negative influence of
with a firm‟s TDTA, LTDTA and
financial STDTA on EPS,
performance ROA, ROE and
measured by Tobin’s Q.
earnings per
share
11.PAUL OMALA Effects of To determine the - There exists a The data was analyzed
AMONDE corporate tax effect of positive using Ms. Excel, the
(2011) rate on the corporate tax on relationship statistical package for
capital capital structure between the the social sciences
structure of of firms quoted at corporate tax (SPSS, Ver. 17).Statistical
companies the NSE and debt Tests: T tests and F tests
quoted on the leverage ratios. It and Factor analysis
NSE. shows clearly techniques were also
that firms at the employed.
NSE take into
account the
impact of
corporate tax
before choosing
between debt
and equity. A
direct
relationship
exists between
tax and debt
leverage ratios in
all segment of
NSE but more
specifically, the
findings of the
study indicate
that there is a

15
 strong
relationship
between
corporate tax
and debt-equity
leverage within
the Agricultural
Sector.

2.5 Empirical Review

Klammer (1973) in his study of the relationship between sophisticated capital budgeting
methods and financial performance in US, found out that, despite the growing adoption of
sophisticated capital budgeting methods, there was no consistent significant association
between financial performance and capital budgeting techniques. Moore and

Reichert (1989) in their multivariate study of firm performance and use of modern analytical
tools and financial techniques study in 500 firms in US, they showed that firms adopting
sophisticated capital budgeting techniques had better than average firm financial
performance.

Nguyen (2001), sought to assess the relationship between financial management practices and
profitability of small and medium enterprises in Australia. He focused his attention at various
financial management practices and financial characteristics and demonstrates the
simultaneous impact of financial management practices and financial characteristics on SME
profitability. He further examined fixed (non-current) asset management practices of a
sample of 99 trading and 51 manufacturing SMEs. He found out the nearly

80 percent of SMEs always or often evaluate capital projects before making decisions of
investment and review the efficiency of utilizing fixed assets after acquisitions. Some 87
percent of SMEs stated that they used payback period techniques in capital budgeting; only
27 percent used the more sophisticated discounted cash flow techniques, the Net present
value (NPV), internal rate of return (IRR) and modified internal rate of return

(MIRR). These findings revealed that SMEs highly regarded fixed asset management
although their knowledge of management techniques was not outstanding.

In Kenya, Mundu (1997) sought to review selected financial management practices adopted
by small enterprises in Kenya. The study found out that 66% of the respondents did not
undertake cash budgeting, 70% of the business owners kept surplus cash with themselves and

16
over 56% of the business owners were handling cash personally as the security to their
money. Furthermore, more than 70% of the respondents sold on credit to those customers
believed to be known by the business owner. Overdue accounts were followed up through
reminders either by personal visits or telephone calls or both; 70% of the businesses charged
prices on the basis of full cost plus margin which may be a mentally calculated price or
selling at what the competitors are charging and only 16% of them kept cost control reports.
Over 80% of the businesses had prepared a business plan with the most common reason
being to get financing. These results led to the conclusion that the survival of SMEs heavily
depended on the good practice of formal financial management. Similar studies explained
above on the topic have reported a negative relationship of the capital budgeting techniques
and financial performance. The studies have indicated that, despite a growing adoption of
sophisticated capital budgeting methods, there is no consistent significant association
between performance and capital budgeting techniques.

2.6 Summary of Literature Review

In the literature, it has been argued that the use of financial management practices may be
related to improved financial performance. Some of the studies indicated that sophisticated
capital budgeting techniques mostly NPV and IRR had a positive relationship with ROA
while the traditional methods showed an insignificant relationship. However, similar reported
a negative relationship between the capital budgeting techniques and financial performance.
This indicates that the mere adoption of various analytical tools is not sufficient to bring
about superior performance and that, other factors such as marketing, product development,
executive recruitment and training, labour relations etc., may have a greater impact on
profitability.

Local studies on the other hand have mainly dealt with the application of the capital
budgeting techniques in listed companies and also in the banking sector. Their findings
indicate that discounted cash flow methods are not extensively being used to appraise
investment decisions. The report in the banking sector particularly found the overwhelming
application of the traditional capital budgeting techniques. Thus given these conflicting
findings this study seeks to establish the effect of the financial management practices on
financial performance of all the shipping companies in Kenya.

17
 CHAPTER THREE

3.1 Introduction
This section emphasizes on the approaches employed to give structure to the research process
in collecting and analyzing data to address the research objectives. It covers the research
design, target population, sampling techniques, and research instruments and data analysis
methodologies. According to Dawson (2010), research methodology is the philosophy or
general principles which guide the research. Kombo and Tromp (2009) as well as Zikmund et
al. (2010) advance that research methodology deals with the portrayal of the methods applied
in carrying out the research studies.

3.2 Target Population

According to Salkind (2010), population is the complete group of a general set of elements
relevant to the research.

Table 3.1: Target Population

Company

1. Tilisi Development Limited.

2. Suraya Property Group Ltd.

3. Bada Homes

4. Kisima Real Estate Ltd

5. Urithi SACCO

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 6.

3.3 Sample and Sampling Technique

Kombo and Tromp (2009) and Kothari (2004) describe a sample as a collection of units
chosen from the universe to represent it. A study that collects too much data is also wasteful.
Therefore, before collecting data, it is essential to determine the sample size requirements of
a study (Gerstman, 2009).

3.4 Data Collection Methods

Based on the data collection method, Kooper (2010) classified research into two types:
observation and surveys. However, Salkind (2010) expands this classification into four basic
types: surveys, experiments, and observation and secondary data studies. Survey is a research
technique in which information is gathered from a sample of people by use of a questionnaire
(Salkind, 2010). Experiment holds the greatest potential for establishing cause-and-effect
relationships. The use of experimentation allows investigation of changes in one variable
while manipulating other variables under controlled conditions (Hedges, 2010). Observation
allows the researcher to monitor and record information about subjects without questioning
them (Emory, 2010). Secondary data are data gathered and recorded by someone else prior to
the current needs of the researcher (Salkind, 2010).

3.5 Data Collection Procedures

Dawson (2009) notes that secondary data is one collected from other studies and sources by
other researchers that have made of a subject. Kothari (2004) describes primary data as those
which are collected for the first time, and thus happen to be original. Morrison (2010) define
primary data as those items that are original to the problem under study. Ember and Emory
(2011) describe primary data as data collected by the investigator in various field sites
explicitly for a comparative study.

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3.6 Primary Data
In this study, primary data was collected through the administration of questionnaires to
senior management employees in each sugar company. Four research assistants were engaged
to mainly make follow-up of the administered questionnaires and how they were being filled
out. The entry point to the sugar firms was mainly through either the directors of human
resources or directors of finance departments.

3.7 Secondary Data

Secondary data was obtained from the Kenya Sugar Board Annual reports, Finance
departments of the sugar companies and the Sugar survey manuals/financial reports using the
secondary data collection sheet (Appendix II). The secondary data was also analyzed by time
series to ascertain the profitability trend in the Sugar manufacturing Industry. The total net
profits were then cumulated over the three years under study which formed a trend to create
basis of justification on the deteriorating financial performance among sugar manufacturing
companies.

3.8 Data Analysis and Presentation

Ordinarily, the amount of data collected in a study is rather extensive and research questions
and hypotheses cannot be answered by a simple perusal of numeric information and therefore
data need to be processed and analyzed in an orderly and coherent fashion (Polit & Beck,
2011). Quantitative information is usually analyzed through statistical procedures. Statistical
analyses cover a broad range of techniques, from simple procedures that we all use regularly
like computing an average to complex and sophisticated methods. Cooper (2010) notes that
although some methods are computationally formidable, the underlying logic of statistical
tests is relatively easy to grasp, and computers have eliminated the need to get bogged down
with detailed mathematical operations.

3.9 Empirical Model

Multiple regression analysis allows the researcher to conclude whether a relationship exists
between several independent variables and a dependent variable (Murphy III, 2010). The
research problem in this study was to determine whether a relationship existed between
financial management practices and financial performance of sugar manufacturing
companies.

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Working Capital Management

According to (Garrison, 1999), Working Capital Management (WCM) refers to decisions

relating to working capital and short term financing. These involve managing the relationship
between a firm’s short-term assets and short-term liabilities. The goal of WCM is to ensure
that the firm is able to continue its operations and that it has sufficient cash flow to satisfy
both maturing short-term debt and upcoming operational expenses.

The context of working capital management includes cash management, receivables and
payables management, and inventory management.

Cost Benefit Analysis

CBA is an economic decision-making approach used particularly in government and business

organizations. It is used in the assessment of whether a proposed project, programme or
policy is worth doing or to choose between several alternative ones. It involves comparing
the total expected costs of each option against the total expected benefits to see whether the
benefits outweigh the costs and by how much. In CBA, benefits and costs are expressed in
money terms and are adjusted for the time value of money so that all flows of benefits and
flows of project costs over time (which tend to occur at different points in time) are expressed
on a common basis in terms of their present value.

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Types of Financial Management Systems
There are three main types of financial management systems. These are:
 Financial accounting
Financial accounting is a part of financial information systems that provide income
statements, balance sheets, and statement of cash flows to creditors, investors, and
KRA. These reports could be monthly, quarterly or annually outputs that create the
ability for decision makers to determine financial trends relating to the business.

It is concerned with the preparation of reports which provide information to users

outside the firm. The main objective of these-reports is to inform shareholders,
creditors and other investors how assets are controlled by a firm. A budget of the
organization includes and coordinates the plans of every department in financial
terms.

Accurate and up-to-date information puts one in a position to make intelligent and
informed decisions for building of future success. Identifying a small number of key
performance indicators that have a major impact on the business helps in focusing on
the issues that really matter. A similar focus on a small number of targets helps
employees in different areas of the business to understand what their priorities should
be. Monthly performance monitoring is essential for long-term success.
More detailed analysis can provide a deeper insights into where the opportunities for
improvement lie. For example, you can look not just at overall levels of profitability,
but also at how different products and customers contribute to this. Analyzing
competitors’ prices and your own sales data and margins can help you identify where
changing your pricing might boost overall profitability.
Financial information can provide vital early warnings of impending problems. For
example, tracking customers’ payment patterns (using your own sales records or data
from credit rating agencies) can help you identify customers who may be under

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financial stress and risk becoming bad debts. Benchmarking your business against
competitors and other businesses – for example, comparing key financial ratios and
other indicators in published accounts – can help you understand where you are
different and where you have opportunities to make improvements.
Developing your financial capabilities can contribute to improved performance across
the business. For example, improving sales people’s financial awareness can help
them understand what flexibility there is on pricing and payment terms. Analysis of
sales margins and salary benchmarking against the competition can help you decide
appropriate pay levels and bonus schemes for employees.

According to Hastings Mtine FCCA, Managing Partner MPH Chartered Accountants,

Member of ACCA Global Forum for SMEs, good financial control offers far more
than just keeping track of purchases and sales. Rather than approaching financial
control as a chore to be left to the bookkeeper, your aim should be to see how the
right capabilities can improve your business.

Objectives of Financial Accounting

i. Systematic recording of transactions: basic objective of accounting is to
systematically record the financial aspects of business transactions (i.e. book-
keeping). These recorded transactions are later on classified and summarized
logically for the preparation of financial statements and for their analysis and
interpretation.
ii. Ascertainment of result of above recorded transactions: accountant prepares
profit and loss account to know the result of business operations for a
particular period of time. If expenses exceed revenue then it is said that the
business is running under loss. The profit and loss account helps the
management and different stakeholders in taking rational decisions. For
example, if business is not proved to be remunerative or profitable, the cause
of such a state of affairs can be investigated by the management for taking
remedial steps.
iii. Ascertainment of the financial position of business: businessman is not only
interested in knowing the result of the business in terms of profits or loss for a
particular period but is also anxious to know that what he owes (liability) to
the outsiders and what he owns (assets) on a certain date. To know this,
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 accountant prepares a financial position statement of assets and liabilities of
the business at a particular point of time and helps in ascertaining the financial
health of the business.
iv. Providing information to the users for rational decision-making: accounting as
a ‘language of business’ communicates the financial result of an enterprise to
various stakeholders by means of financial statements. Accounting aims to
meet the financial information needs of the decision-makers and helps them in
rational decision-making.
v. To know the solvency position: by preparing the balance sheet, management
not only reveals what is owned and owed by the enterprise, but also it gives
the information regarding concern’s ability to meet its liabilities in the short
run (liquidity position) and also in the long-run (solvency position) as and
when they fall due.

Managerial accounting
Managerial accounting is a system that provides information internally to individuals
and businesses. These are generally not released to the public and are only for internal
use only. Decision makers can simply request data they wish to see and ask for a
specific format, if necessary.

According to J. Batty, ‘management accounting’ is the term used to describe the

accounting methods, systems and technique which coupled with special knowledge
and ability, assist management in its task of maximizing profits or minimizing losses.
Management accounting is related to the establishment of cost centers, preparation of
budgets, and preparation of cost control accounts and fixing of responsibility for
different functions.

It refers to accounting for the management. It provides necessary information to assist

the management in the creation of policy and in the day to day operations. It enables
the management to discharge all its functions, namely, planning, organizing, staffing,
direction and control efficiently with the help of accounting information. Functions of
management accounting include all activities connected with collecting, processing,
interpreting and presenting information to the management.

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As a business person one need a clear understanding of your own business strengths
and weaknesses. Your plan needs to cover the full range of business functions: sales
and marketing, purchasing, production, human resources, administration and finance.
What people, skills, premises, equipment and financing do you have and what do you
need? What are the particular problems that are holding you back? A good plan will
be based on hard data and research, not just a ‘feeling’ that something is a good idea.
Wherever possible you should be talking to customers and testing out ideas before
committing yourself. Your completed plan should pull together all this information,
creating a vision for the business, setting clear objectives and providing an action
plan. You also need to be able to turn those plans into numbers, with forecasts of the
implications for cash flow and profitability.

Techniques in Managerial Accounting

In order to achieve its goals, managerial accounting relies on a variety of different
techniques, including:

i. Margin analysis
Margin analysis is primarily concerned with the incremental benefits of increased
production. Margin analysis is one of the most fundamental and essential techniques
in managerial accounting. It includes the calculation of the breakeven point that
determines the optimal sales mix for the company’s products.

ii. Constraint analysis

The analysis of the production lines of a business to identify the principal bottlenecks,
the inefficiencies created by these bottlenecks, and their impact on the company’s
ability to generate revenues and profits.

iii. Capital budgeting

The analysis of information required to make the necessary decisions related to capital
expenditures. In capital budgeting analysis, managerial accountants calculate the net
present value (NPV) and the internal rate of return (IRR) to help managers to decide
on new capital budgeting decisions.

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 iv. Inventory valuation and product costing
Inventory valuation involves the identification and analysis of the actual costs
associated with the company’s products and inventory. The process generally implies
the calculation and allocation of overhead charges, as well as the assessment of the
direct costs related to the cost of goods sold (COGS).

v. Trend analysis and forecasting

Trend analysis and forecasting are primarily concerned with the identification of the
patterns and trends of product costs, as well as recognition of unusual variances from
the forecasted values and the reasons for such variances.

Corporate finance
Corporate finance is a part of financial management systems that resides outside of
the normal accounting information systems. These include budgeting, financial
analysis, forecasting, and performance metrics, among others. The activities in this
system take accounting information to create necessary reports. The main purpose of
corporate finance, is to provide a road map or plans for a company’s future activities.

Corporate finance is the division of a company that deals with financial and
investment decisions. Corporate finance is primarily concerned with maximizing
shareholder value through long-term and short-term financial planning and the
implementation of various strategies. Corporate finance activities range from capital
investment decisions to investment banking.

Corporate finance departments are charged with governing and overseeing their firms'
financial activities and capital investment decisions. Such decisions include whether
to pursue a proposed investment, whether to pay for the investment with equity, debt,
or a hybrid of both; and whether shareholders should receive dividends. Additionally,
the finance department manages current assets, current liabilities, and inventory
control.

Capital Investments
Corporate finance tasks include making capital investments and deploying a
company's long-term capital. The capital investment decision process is primarily
26
concerned with capital budgeting. Through capital budgeting, a company identifies
capital expenditures, estimates future cash flows from proposed capital projects,
compares planned investments with potential proceeds, and decides which projects to
include in its capital budget.

Making capital investments is perhaps the most important corporate finance task and
can have serious business implications. Poor capital budgeting (e.g. excessive
investing or under-funded investments) can compromise a company's financial
position, either because of increased financing costs or having an inadequate
operating capacity.

Capital Financing
Corporate finance is also responsible for sourcing capital in the form of debt or
equity. A company may borrow from commercial banks and other financial
intermediaries or may issue debt securities in the capital markets through investment
banks (IB). A company may also choose to sell stocks to equity investors, especially
when raising long-term funds for business expansions. Capital financing is a
balancing act in terms of deciding on the relative amounts or weights between debt
and equity. Having too much debt may increase default risk, and relying heavily on
equity can dilute earnings and value for early investors. In the end, capital financing
must provide the capital needed to implement capital investments.

Short-Term Liquidity
Corporate finance is also tasked with short-term financial management, where the
goal is to ensure that there is enough liquidity to carry out continuing operations.
Short-term financial management concerns exclusively current assets and current
liabilities or working capital and operating cash flows. A company must be able to
meet all its current liability obligations when due. This involves having enough
current assets that can be cash-ready, such as short-term investments, to avoid
disrupting a company's operations. Short-term financial management may also
involve getting additional credit lines or issuing commercial papers as liquidity back-
ups.

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According to Gabriel Low, Head of Accounting and HR Shared Services APAC,
GEA Group AG, Member of ACCA Global Forum for SMEs, cash flow management
lets you anticipate your future cash position. You can take steps to arrange any
additional financing you will need before it becomes a crisis.

The corporate finance domain is like a liaison between the firm and the capital
markets. The purpose of the financial manager and other professionals in the
corporate finance domain is twofold. Firstly, they need to ensure that the firm has
adequate finances and that they are using the right sources of funds that have the
minimum costs. Secondly, they have to ensure that the firm is putting the funds so
raised to good use and generating maximum return for its owners. These two
decisions are the basis of corporate finance and have been listed in greater detail
below:

i. Financing Decision
As stated above the firm now has access to capital markets to fulfill its financing
needs. However, the firm faces multiple choices when it comes to financing. The firm
can firstly choose whether it wants to raise equity capital or debt capital. Even within
the equity and debt capital the firm faces multiple choices. They can opt for a bank
loan, corporate loans, public fixed deposits, debentures and amongst a wide variety of
options to raise funds. With financial innovation and securitization, the range of
instruments that the firm can use to raise capital has become very large. The job of a
financial manager therefore is to ensure that the firm is well capitalized i.e. they have
the right amount of capital and that the firm has the right capital structure i.e. they
have the right mix of debt and equity and other financial instruments.

ii. Investment Decision

Once the firm has gained access to capital, the financial manager faces the next big
decision. This decision is to deploy the funds in a manner that it yields the maximum
returns for its shareholders. For this decision, the firm must be aware of its cost of
capital. Once they know their cost of capital, they can deploy their funds in a way that
the returns that accrue are more than the cost of capital which the company has to pay.
Finding such investments and deploying the funds successfully is the investing

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decision. It is also known as capital budgeting and is an integral part of corporate
finance.

Capital budgeting has a theoretical assumption that the firm has access to unlimited
financing as long as they have feasible projects. A variation of this decision is capital
rationing. Here the assumption is that the firm has limited funds and must choose
amongst competing projects even though all of them may be financially viable. The
firm thus has to select only those projects that will provide the best return in the long
term.

Financing and investing decisions are like two sides of the same coin. The firm must
raise finances only when it has suitable avenues to deploy them. The domain of
corporate finance has various tools and techniques which allow managers to evaluate
financing and investing decisions. It is thus essential for the financial well being of a
firm.

Reference:

Abor, J. (2005). the Effect of Capital Structure on Profitability: An Empirical

Analysis of Listed Firms in Ghana, Journal of Risk Finance, 6(5), 438-445.

Mutya T, Josephine A (2018) Financial Management a Wheel to Financial

Performance of Local Governments in Uganda: A Case Study of Tororo Municipal
Council. J Bus Fin Aff 7: 330. DOI: 10.4172/2167-0234.1000330
Journal of Business & Financial Affairs Received Date: Jun 01, 2018 / Accepted
Date: Jun 28, 2018 / Published Date: Jun 30, 2018

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Kaumbuthu, A.J. (2011).The relationship between capital structure and financial
performance: a study of firms listed under industrial and allied sector at the NSE.

Nguyen, KM 2001, 'Financial management and profitability of small and medium

enterprises', DBA thesis, Southern Cross University, Lismore, NSW.
Peca S.P, (2009).Real Estate Development and Investment Comprehensive Approach,
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International Journal of Scientific and Research Publications, Volume 6, Issue 2,
February 2016
Ahmed, I. H., Babar, Z.B., &Kashif, R. (2010).Financial management practices
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A REVIEW OF REAL ESTATE SECTOR IN KENYA: 2016 AND FORECAST
FOR 2017 by Reginald Okumu(Director in charge of Commercial Service at Ark
Consultants Limited)

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