Effect of Working Capital Management Practices on Financial Performance of Retail Firms in Garowe, Puntland State of Somalia

Abstract

This study adapts a cross sectional survey method to establish the effect of working capital management practices on the performance of retail firms in Puntland State of Somalia with specific reference to retail firms located in Garowe, the Headquarters of the Puntland State of Somalia. It covers a five-year period 2012-2015. It relies on four theories namely agency theory, and corporate governance theory to help explain how the financial management practices affect financial performance. A descriptive research design is used in the study. The target population of the study are 61 medium to large scale retail firms located in Garowe as at June 2017. Accordingly, purposive sampling based on the firms that prepare financial accounts is used to study a sample of 53 retail firms determined based on Slovin’s formula. Both descriptive and inferential statistics are used in the evaluation. Descriptive findings show that retail firms in Puntland State of Somalia generally have a poor financial performance as indicated by a low mean return on assets. The performance however varies widely across the firms as indicated by a very high coefficient of variation. Inferential statistics indicate that the null hypothesis that working capital management practices have no effect on financial performance is rejected as it is found to have a positive effect on financial performance. The study covered only retail firms in Puntland State hence it is recommended that a similar study be carried out not only for other types of firms like financial institutions, but also adapts a wider geographical scope to cover the whole of Somalia.