Developing a sustainable financing model for SMEs during the organizational life cycle in Uganda

Abstract

World over, it is generally acceptable that Small and Medium Enterprises (SMEs) are the engines of growth for a number of economies contributing more than half of the economies employment opportunities while at the same time being sources of innovation. With generally that acceptable level of importance to different economies, it is important that these firms continuously prosper for the countries to reap the accompanying benefits. In order for these firms to prosper, there is need for conscious effort being placed on creating an environment that supports their growth and prosperity. It is from this understanding that this study set out to develop a sustainable financing model for Small and Medium Enterprises along the organizational life cycle. The study originated from the observation that a number of researchers have undertaken studies regarding the appropriate mix of debt and equity in the capital structure of organizations with a view that organizations are looked at as standard entities without putting into consideration the stage of growth that an organization might be at. The study was based on the premise that organizations move through different stages of growth referred to as the organizational life cycle and at each stage, a different mix of debt and equity may be appropriate. The study referred to existing literature on sources of finance using the known different categorisations to ensure a proper understanding of the financing decision. Existing literature on Small and Medium Enterprises across different economies (developed and developing) was also reviewed to emphasize and add importance to the study undertaken. Additionally, review of existing literature on organizational life cycle was done. The review of literature on organizational life cycle was used to facilitate the categorisation of firms that were under the study. The study used mixed methods for purposes of gathering data as well as in the analysis of the data collected. Data was collected from a total of 72 firms that formed the unit of analysis. The data was collected using a number of methods including Survey questionnaire initially for data to facilitate classification of the firms along the organizational life cycle stages. This was followed by interviews with the top management representatives of firms in the study as well as documentary checklists for information regarding the financial information. The analysis of data was undertaken concurrently for quantitative and qualitative information following the mixed method approach discussed in the methodology chapter. The key findings of the study are presented following the different stages of the organizational life cycle. At the start up stage, firms tend to heavily rely on internal sources of finance with few firms at this level maintaining long term debt in their capital structure. The major source of long term finance is equity provided by the shareholders of the firm. At this stage, firms mainly source for short term finance largely from trade credit and to some extent using friends and family for bridging finance. At the growth stage of the organizational life cycle, firms have the highest level of pressure on the financing. A number of firms at this stage have high financial demands due to the growing business which requires investment in financing. Firms at the growth stage of the organizational life cycle just like the firms at the earlier stage mainly rely on internal sources of finance with shareholders remaining the most dominant source of such funds. Additionally, firms at this stage also rely heavily on friends and family as a source of finance. However unlike in the first stage, more firms at the growth stage have long term debts in their capital structure. The third stage in the organizational life cycle is the maturity stage. According to study finding, firms at this stage have the largest variety of sources of finance. Firms’ reliance on shareholders’ funds is highly reduced at this stage with a wide spectrum of long term sources of finance being accessed. At the last stage of the organizational life cycle, firms tend to reduce on the sources of long term funds in their capital structure and concentrate on a few sources which are regarded as least costly. In line with the primary objective of the study, a model in terms of a regression formula for determining the appropriate mix of debt and equity in the capital structure is presented accompanied with a graphical representation of the popularity of different sources of finance among SMEs in Uganda during the organizational life cycle, along a continuum. In conclusion a number of recommendations addressed to the different actors in the financing or supporting of Small Medium Enterprises are made from the study. The actors to whom recommendations are addressed include financial institutions, the managers/owners of the SMEs and Government agencies.