Assessing the Effect of Financial Management Practices on Financial Performance and the Moderating Role of Farm and Farmers’ Socioeconomic Characteristics on Dairy Enterprises

Abstract

Financial management practices can positively affect the finance performance, but this relationship is also influenced by the farm and farmer characteristics, which moderates the effect size. Thus, this research investigates the effect financial management practices on financial performance and the moderating role of farm and farmers’ socioeconomic characteristics of dairy enterprises. Based on existing researches, four financial management practices were considered and financial performance we considered profitability, liquidity, and solvency. The variables considered for moderation are; respondents’ age, education, and enterprise age. A hierarchical multiple regression with primary data was used to test for the moderating effect. The results revealed that financial management practices and firm and farmer characteristics significantly interact better with financial performance among dairy farm enterprise. Thus, the effect of financial management practices on financial performance depends on the firm and farmers’ characteristics such as age and education of the farmers, as well as the number of years the dairy enterprise exist. Implying that if dairy enterprises manage their capital structures, working capital, budget, and financial records this will ultimately increase profitability, liquidity, and solvency while incorporating more farm and farmers’ characteristics.

1. Introduction

In the contemporary world, financial management practices are desirous for all business enterprises. Finance is an integral part of modern economic life and occupies an important place in all economic activities. In this regard, financial management is a goal, as well as a measure of a good performing enterprise. The degree of success or failure over a period of time can be tested on the basis of profitability in an enterprise [1]. In other words, an enterprise may be deemed as sick should it fail to be profitable, implying that not having liquidity its survival is at stake [2]. Appropriate management of working capital, record-keeping, capital structure, and budgeting and budgeting controls for everyday firm operations matters.

In emerging economies, farmers face several challenges among which is financial stress. According to [3] 78.22%, dairy farmer in Nagpur face financial constraints, and this has a negative influence on the financial performance of their farm due to milk payment delay from the cooperative. The financial management framework postulates that firm and socioeconomic characteristics affect the financial decisions made by the farm investors [4, 5]. More so, extant literature shows that demographic factors in the context of personal and socioeconomic factors moderate the relationship between financial management practices and financial performance [6, 7, 8]. Furthermore other scholarly work show that financial management is positively related to financial performance and firm characteristics such as firm size, leverage, firm age, income, and firm age [7, 9].

Ironically, Uganda’s economy is projected to grow by 2.9% in the 2019/2020 fiscal year, with GDP standing at US$35 billion (at 2016/2017 prices) [10]. The dairy industry contributes significantly to Uganda’s GDP value as one of the largest foreign exchange earners, with exports valued at more than US$120.74 million as of 2019 [11]. Furthermore, dairy production has the potential to significantly reduce hunger, malnutrition, rural poverty, improve rural livelihoods, promote food security and nutrition, create employment opportunities, promote gender equality, and contribute to Uganda’s overall economic development [12, 13]. According to the most recent statistics, Uganda’s annual milk production is 2.04 million tons [10], obtained from an estimated 4.14 million milked cows. Each cow was estimated to produce 492.8 liters of milk per lactation [11]. Out of the total milk produced, 80.2% is marketed for an estimated US$835.9 million (2019), while the remaining 19.8% is consumed on farms and in households. 34% of marketed milk is processed into a variety of products such as powdered milk, cheese, butter, UHT, yogurt, and ice cream, whereas the remaining 66% is sold raw [14, 15].

In terms of dairy product export and import, Uganda exported 0.16 million tons worth over US$120.74 million in 2019, while importing 412 tons worth US$1.69 million [11]. The high proportion of dairy exports to imports indicates a low reliance on and expenditure on imported dairy products, indicating the industry’s growth. The increased value of Uganda’s dairy exports can be attributed to improved compliance of Uganda’s dairy products with regional and international market standards, as well as an annual increase in dairy processing capacities market standards and the annual increase in dairy processing capacities [15].

Despite these developments, studies assessing the effect of financial management on financial performance and the moderating role of farm and farmers’ socioeconomic characteristics of dairy enterprises in the Rwenzori region are still scanty. Therefore, the current study seeks to build on the work of earlier researchers elsewhere to explore the influence of financial management on financial performance and the moderating role of farm and farmers’ socioeconomic characteristics of dairy enterprises, given the economic viability of the dairy industry.

As for the rest of the book chapter, the outline is as follows: In Section 2, we present the literature of previous research. In Section 3, we present methodology, we used to conduct the study. In Section 4, highlights the empirical results and discusses the link of the study findings with extant literature. In Section 5, we go over the conclusions and the study implications.

2. Literature review

A variety of definitions have been offered to characterize financial management, for instance [16] describes financial management as the acquisition and use of financial resources and protection of equity capital from various sources of risk. Beside, financial management in the agriculture is defined as the economic study of the acquisition and use of capital in agriculture [17]. The overall task of the financial management is to improve financial performance by ensuring that the capital structure, budgeting and budgetary control, working capital management, and financial record keeping; all these components are important for all enterprises to be powerful financially [17, 18, 19].

Other scholars suggest that financial management consists of the four processes of budget-making, budget implementation, accounting, and audit, which contribute to financial performance and divide into processes for target-setting and processes for measuring performance [20]. On the other hand, financial management literature suggests that optimal application and commitment toward financial management practices, such as internal systems, (financial record keeping) result in an increased company’s performance [21]. The financially well-managed companies are operationally efficient. This stands as a positive sign for investors and farmers’ farm performance. In this context, the primary desire by the dairy farmers is to earn more profits and enhance the income of the farmers which is attributed to socioeconomic and farm characteristics [22].

More so, financial performance is a way to satisfy farm owners and can be represented by profitability, growth, and market value. Ref. [23] supported this argument by emphasizing that profitability is an important issue to various stakeholders who have a direct or indirect interest in the entity. In spite of these critical roles that profit plays in the going concern of manufacturing firms, the profitability position of most manufacturing enterprises operating in relation to firm age, firm size, firm growth, loss ratio, liquidity, and leverage of the firm have not drawn much consideration of researchers in the area of finance performance [24]. Nevertheless, financial performance measurement, on the other hand, mostly focuses on the types of financial ratios attained from the financial statements of an enterprise. These measures comprise of profitability ratios, liquidity ratios, activity ratios, and debt ratios [25].

In this regard, the assertion that financial management and financial performance with moderating effect on farm and farmers’ socioeconomic characteristics is gaining considerable attention. In pioneering research, [26] published their work on the multinational corporations and domestic corporation financial performance and characteristics. In the process, their results indicated that firm size does not a significant relate the financial performance in any of the cases. Precisely a greater aggressive working capital strategy that has low investment in working capital is related with a higher return and risk, whereas a conservative strategy, which deals with high investment in working capital, has lower return and risk [26, 27].

More so, between 2004 and 2011, a study on working capital management (a measure of financial management) and its effect on profitability was conducted in Ghana by [28]. They used the working capital cycle (WCC) and the gross operating profit (GOP) to calculate profitability. Their research found a negative but significant relationship between working capital and profitability. Furthermore, their research discovered a negative relationship between individual elements of the cash conversion cycle, including inventory turnover period, and profitability. Lastly, their research found a significant negative relationship between leverage and profitability, whereas liquidity measures such as interest cover and the current ratio produced significant positive relationships with profitability.

Investigated the effect of working capital management on profitability in 69 South African listed manufacturing firms from 2007 to 2016 using panel data. According to his research, average collection period and average payment period have a negative but significant effect on profitability, implying that firms that manage their accounts receivable efficiently and pay their creditors on time outperform those that do not. In addition, [29] a positive statistically significant relationship between the number of days in inventory and profitability was found, implying that firms that stock-up and maintain their inventory levels experience fewer stock-outs and have fewer difficulties obtaining financing when needed. This improves operational efficiency and ensures long-term profitability. Because evidence to support this premise was lacking, it was impossible to determine whether a shorter or longer cash conversion cycle improves firm profitability. However, it was discovered that manufacturing firms, on average, carry a significant amount of debt in their capital structures.

It is widely assumed that financial record keeping has a significant impact on the enterprise’s financial performance. According to Abdul-Rahamon and Adejare [30], financial record keeping provides significant information about an enterprise’s financial strength and current performance, and thus managers find those records useful in making decisions. Financial record keeping and financial transparency are inextricably linked according to Refs. [31, 32, 33]. On the other hand, emphasizes that keeping good records makes any business partner or investor more aware of what is going on in their businesses and saves them from loss of money. Similarly [34], discovered a link between record keeping and financial performance of Nairobi County Savings and Credit Cooperatives (SACCOs). According to Chelimo and Sopia [35], approximately 60% of small businesses fail within the first 3 years due to management inefficiencies caused by poor record keeping. This is consistent with the findings of Ademola et al. [36] who found that poor records can lead to financial inefficiency in small and medium-sized businesses, resulting in poor organizational performance.

As investigated by Mwebesa et al. [37], another construct of financial management is capital structure, this is a highly sensitive indicator in financial management research because it influences financial performance. Thus, variable items such as short-term debt, long-term debt, total debt, debt-equity ratio, and firm size and financial performance as measured by return on equity/profitability (ROE) and return on assets (ROA). It was hypothesized that these factors have no significant relationship with firm profitability. The main finding indicated that total debt has a significant negative impact on ROE and ROA, whereas sales size has a significant negative impact only on ROE of American firms [37].

A ten (10) year study on the budgetary control and financial performance of government ministries in Boston, Massachusetts was conducted by Nickson and Mears [38]. The researcher used secondary data (panel data) to conduct a ten-year analysis; the regression model was used to analyze the data, and they discovered that there was a positive relationship between budgetary control and financial performance. Equally, [39] conducted a study to determine the relationship between budget and performance in remittance companies in Mogadishu, Somalia. The target population consisted of seven (7) Somali remittance companies. The researcher chose a sample of 103 people using the judgmental sampling technique of non-probability sampling. The methods used by the researcher included descriptive statistics, standard deviation, and correlation analysis. The study concluded that a moderate relationship existed between budgeting and the performance of remittance companies [39].

Numerous studies on financial management practices and financial performance in Africa has been conducted in West and Southern Africa, with only a few studies being conducted in East Africa [37]. Unfortunately, they also measure a single proxy of financial management and financial performance, excluding the socioeconomic characteristics of the firm owner and the enterprise and other financial management practices. It is against this background that the researchers were motivated to investigate the effect of financial management practices on financial performance with a moderating role of farm and farmers’ socioeconomic characteristics of dairy enterprises in Uganda.

3. Methodology

3.1 Sample size determination

In the study, the effect of financial management practices on financial performance with the moderating role of socioeconomic characteristics is analyzed using primary data collected from 162 dairy farmers in the Rwenzori region. In this context, the sample size was determined by a simplified formula as provided by Yamane [40]. In calculating the sample size, a 95% confidence level and level of precision of 5% were assumed. The level of precision is also termed a sampling error. This is the range in which the true value of the population is assumed to be [40]. Based on the formula by Yamane, the sample size for the study included 162 dairy farmers because the target population was 275. However, 156 responses were coded for analysis with a response rate of 96.2% meaning that six questionnaires were discarded.

$$n=\frac{N}{1+N{\left(e\right)}^2}$$E1

Where n = sample size.

N = population.

e² = level of precision

$$n=\frac{275}{1+275{\left(0.05\right)}^2}$$E2

n = 275/1 + 275(0.0025).

n = 275/1 + 0.6875.

n = 275/1.6875.

n = 162.

3.2 Study design and sampling techniques

This study used a cross-sectional study design to obtain quantitative data. To collect qualitative data, the researchers employed survey questionnaire in every study district. The dairy farm enterprises in the Rwenzori region were from the districts of Kabarole, Kamwenge, and Kyegegwa. The three districts were prioritized because they are important sources of dairy farming and they also participated in the training needs assessment, where financial management was one of the needs required [41]. Also, farmers from these districts are embracing the commercialization of the dairy farming business [41]. Within these districts, particular cooperative groups were selected namely:- Mpanga Dairy Cooperative in Kamwenge, Toro Dairy Cooperative, and KYOFNET in Kabarole and Mirembe Dairy Cooperative in Kyegegwa Districts. Furthermore, the study used both probability and non-probability sampling techniques. In particular, stratified and simple random sampling were used in the context of probability sampling, whereas purposive sampling techniques were preferred for non-probability sampling techniques to collect data from key informants [42].

3.3 Measurement of variable

The financial management practices were the study’s independent variable, measured by four indicators, which are working capital management [26, 27, 28, 29], capital structure [37], financial record keeping [30, 31, 33], and budget and budgetary control [38, 39], Financial performance was the dependent variable, which was determined by an increase in income, increased profits, and debt collection. The Likert scale with five options was used to assess these variables: 5. Agree, 4. Agree, 3. Neutral, 2. Disagree, and 1. Agree [43]. A mean of 3.5 or higher indicated that the majority of respondents agreed, while a mean of less than 3.5 indicated that the majority of respondents disagreed [44]. The validity and reliability of the instruments were ensured by pre-testing them on a separate sample to determine the reliability of the coefficients. The information from the sample was tested for accuracy and compared to conventional financial management and financial performance instruments. The study also tested for moderation effect using age of the respondents, education level, and years in dairy business/experience.

3.4 Data analysis and hierarchical multiple regression model

Primary data was edited and entered into SPSS^© version 25 Software. There were three levels of analysis: descriptive statistics with frequency tables and figures for descriptive analyses and correlation analysis with cross tabulations for relationships between the dependent and independent variables. Finally, we conducted a hierarchical multiple regression to show if our variables of interest explain a statistically significant amount of variance in the dependent variable after accounting for farmer and farm characteristics moderating effect.

3.4.1 Hierarchical multiple regression model

The study examined the moderating effect of firm and farmers’ characteristics on the relationship between financial management practices and financial performance of dairy farm enterprises. In pursuance of the above objective, the study set a research question that was to be answered. The study carried out a hierarchical multiple regression analysis, intending to establish the predictive power of each explanatory variable. The researcher preferred the hierarchical regression method because of its strength in pointing out the contribution of each predictor at different stages in the regression model [45]. Consequently, the following hierarchical regression model was specified:

We assume our multiple regression model is

$$Y_i={\beta }_0+{\beta }_1{X}_{1i}+{\beta }_2{X}_{2i}+{\beta }_3{\text{X}}_{3\text{i}}+{\beta }_{\text{i}.}$$E3

Where Y is the dependent variable (financial performance), ${\beta }_0$ is the constant (intercept), and ${\beta }_1$ to ${\beta }_3$ are coefficients estimated along x1 to x3, whereas x1 is financial management practices, x2 is the firm and farmer characteristics, and x3 is the interaction term. The regression results are provided in the Table 1 below.

	Model 1 Beta	Model 2 Beta	Model 3 Beta
Constant	0.25	1.45	4.43
Financial management practices	0.35^**	0.13^**	0.27
Firm & farmers characteristics		0.60^**	1.09^**
FinMgtP ^* FP&FXtics			0.89^**
R	0.35	0.51	0.6
R Square	0.12	0.26	0.37
Adjusted R square	0.11	0.25	0.35
R Square change	—	0.14	0.1
Sig. (ANOVA)	0.001	0.001	0.001

Table 1.

Hierarchical multiple regression results for a moderation effect.

Note: **p < .01, N = 394, Dependent variable: Financial performance.

FinMgtP * FP&FXtics = Interaction term.

Source: Primary data.

4. Empirical results

Table 2 describes the statistics of the sample respondents based on the farmer and farm characteristics. Most of the respondents were male (78%) and female (22%). In terms of age, 40% were over 60, implying that the majority of dairy farmers are retired and have returned to dairy farming. The sample’s education level is dominated by certificate holders (29%) and the number of years in business is dominated by those who have been in business for more than 16 years (48%).

Gender	Frequency	Percentage
Male	121	77.6
Female	35	22.4
Total	156	100
Age
Below 30	18	11.5
40–49	37	23.7
50–59	39	25.0
60 and above	62	39.7
Total	156	100
Education
Primary	22	14.1
Secondary	35	22.4
Certificate	45	28.8
Diploma	29	18.6
Bachelors	19	12.2
Masters	6	3.8
Total	156	100
Years in business
Below 5 Years	19	12.2
5–10 Years	30	19.2
11–15 Years	32	20.5
16–20 Years	75	48.1
Total	156	100

Table 2.

Frequency and percentage of farmer and farm characteristics.

Source: Primary data; n = 156.

The Table 3 below demonstrates the reliability and validity of each construct. The capital structure with reliability of 0.8 measured by five items, and working capital management has reliability of 0.7; there are six items, and the Cronbach alpha of budget and budgetary control is 0.8, measured with six items. In addition, financial record-keeping reliability is 0.7, (items 9). Lastly, financial performance scored a reliability of 0.7 (items 5).

Variables	Code	Measurement scale item No.	Cronbach’s α
Capital structure	CS	5	0.8
Working capital management	WCM	6	0.7
Budget and budgeting control	BBC	6	0.8
Financial record keeping	FRK	9	0.7
Financial performance	FP	5	0.7

Table 3.

Reliability of measurement items.

Source: Primary data.

Table 4 reports the correlations among the variables. As expected, financial management practices (FMP) are significantly and positively correlated with financial performance (FP).

Variables	FMP	FRK	CS	BBC	WCM	FP
FMP	1
FRK	0.81^**	1
CS	0.82^**	0.60^**	1
BBC	0.86^**	0.62^**	0.63^**	1
WCM	0.69^**	0.66^**	0.62^**	0.55^**	1
FP	0.35^**	0.27^**	0.28^**	0.20^**	0.20^**	1

Table 4.

Correlation matric analysis.

^**P < 0.01 level (1-tailed), n = 156.

Overall, most of the correlation coefficients among the key variables are relatively low, indicating that concerns about multicollinearity are not serious as suggested by Refs. [46, 47, 48]. In addition, the correlation analysis results in the table above revealed a positive and significant relationship between financial management practices and financial performance of dairy farm enterprises in the Rwenzori region (r = 35, p < 0.01). This means that an improvement in financial management practices in terms of improved record-keeping, budgeting, working capital management, and optimal capital is positively associated with an improvement in financial performance.

Furthermore, the results indicated that capital structure (CS) has the highest correlation coefficient (r = 28, P < 0.01) followed by financial record keeping (FRK) (r = 0.27, p < 0.01), budgeting (BBC) and working capital management (WCM) (r = 0.20, p < 0.01), respectively. This implies that farmers should prioritize an optimum capital structure (a balance of debt and equity) to minimize the cost of capital. They should also keep proper record for decision-making as they control their budgets and working capital to improve their financial performance. The findings of FRK and FP are in accordance with the [21, 31, 32, 33, 34] who also discovered that financial record keeping boosts financial performance of several enterprises. On the other hand, results of WCM and FM contradict with the studies of [28, 29] whose research revealed a negative relationship between the two variables.

The main objective of this book chapter was to gain a better understanding of the moderating role of dairy farmers, and farm enterprise characteristics on the relationship between financial management practices and financial performance are presented in Table 1 below. The empirical results suggest that in Model 1, financial management practices accounted for 12% of the variance in financial performance (R² = 0.12, p < 0.01) and caused a positive statistically significant standardized coefficient of (β = 0.35, p < 0.01), where a unit change in financial management practices increases financial performance by 0.35 units. Similarly, the study conducted by Zalaghi et al. [2] showed that firm size affects the relation between working capital management and financial performance measured as return of assets. On the contrary, [49] concluded that financial management measured as working capital management has a negative and significant relationship with profitability and that payables accounts and profitability have a negative relationship.

In Model 2, the introduction of the firm and farmers’ characteristics in the equation yielded an additional 14% (R² – change = 0.14, P < 0.01) to the explanatory power of the model. This implies that firm and farmers’ characteristics accounted for the additional 14% of the variance of financial performance and caused a statistically significant coefficient (β = 0.60, P < 0.01), thus improving the predictive power of the model from 12% to 2 6% (R ² = 0.26, P < 0.01). This further implies that a unit change in the firm and farmers’ characteristics would increase the financial performance of the dairy farmer enterprises by 0.60 units. Beside the inclusion of the interactive term (firm and farmer characteristics), Model 3 increased the predictive power of the main effects of financial management practices and firm and farm characteristics by 10% (R² –change = 0.1, P < 0.01) from 26 to 37% (R² = 0.37, P < 0.01). Likewise, studies by Refs. [7, 9, 18, 21] concluded that financial management and financial performance. Since the interactive term (financial management practices firm and farmer characteristics) significantly added an extra 10%, it means that the interactive term boosts the explanatory power of the main effects, thereby causing better results than what the main effects would have registered. This means that firm and farmers’ characteristics moderate the relationship between financial management practices and financial performance of the dairy farm enterprises in the Rwenzori region.

5. Conclusions

The aim for this manuscript was to explore the moderating role farm and farm characteristics on the influence of financial management practices and financial performance for the dairy farmers in the Rwenzori Region. The results further signify that financial management practices and firm and farmer characteristics significantly interact or fuse to cause better financial performance among dairy farm enterprises. Thus, the effect of financial management practices on financial performance depends on the firm and farmers’ characteristics such as age and education of the farmers, as well as the number of years the dairy enterprise has been in existence. Additionally, the nonsignificant effect of financial management practices in Model 3 after including the interaction term means a full moderation of firm and farmer characteristics. This means that financial management practices cannot work sufficiently in isolation to influence the financial performance of dairy farm enterprises in the Rwenzori region. Finally, on the basis of the analyses above the results can be further strengthened if the dairy enterprises manage their financial practices in more efficient ways. Management of capital structures, working capital, budget, and financial records will ultimately increase profitability, liquidity, and solvency while incorporating more farm and farmers’ characteristics.

Acknowledgments

Special thanks to the Mountains of the Moon University in particular Faculty of Business and Management Sciences and Makerere University – college of Business and Management Sciences for giving us all the necessary support as we worked on this book chapter. Lastly, we thank our families for all the moral, financial, and spiritual support accorded to the team.