Debt Financing, Cash Flow Management and Financial Performance of SMES in Mogadishu, Somalia. A Case of Registered SMES in Bakara Market Mogadishu, Somalia.
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Date
2025-11-04
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Makerere University Business School
Abstract
The study investigated the relationship between debt financing, cash flow management, and the financial performance of Small and Medium Enterprises (SMEs) in Mogadishu, Somalia, with a focus on registered SMEs in Bakara Market. The research was guided by the Baumol model and the free cash flow concept, focusing on three key objectives: to examine the effects of debt financing on the financial performance of SMEs, to assess the influence of cashflow management on financial performance, and to determine the extent to which debt financing and cashflow management explain the variance in financial performance among SMEs in Mogadishu. A quantitative cross-sectional survey design was adopted, using Morgan and Krejcie(1970) sample size determination table to select 140 respondents. Data were collected through questionnaires and analyzed using correlation and regression techniques to evaluate the associations between the variables and their combined predictive power. The findings revealed a strong positive relationship between the independent variables and SME financial performance, as indicated by an R value of 0.655. The model’s R² of 0.429 suggests that 42.9% of the variation in financial performance can be explained by the combined effect of debt financing and cashflow management, with an adjusted R² of 0.417 confirming a good model fit. Debt financing emerged as the most influential predictor (B = 0.812, β = 0.583, t = 7.519, p < 0.001), indicating that access to and effective utilization of external finance particularly trade credit and long-term loans significantly enhance SME growth and profitability. Cashflow management also had a significant but weaker effect (B = 0.245, β = 0.220, t = 2.663, p = 0.009), suggesting that effective management of operating, investing, and financing activities supports liquidity and operational efficiency. The study concluded that other factors beyond debt financing and cash flow management might play a more substantial role in influencing the financial performance of SMEs in Mogadishu. It recommended adopting a more comprehensive financial management approach to better support SME growth and financial sustainability in this context. The study concludes that both debt financing and cashflow management are critical drivers of SME financial performance, with debt financing exerting the stronger influence. It recommends that SME owners strengthen financial management practices, improve debt utilization efficiency, and adopt robust cashflow planning systems to enhance financial sustainability. Policymakers and financial institutions should create favorable credit policies and provide financial literacy programs to help SMEs optimize the benefits of debt financing while maintaining sound cashflow control.
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This is a master's thesis.
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Sowda, M. A. (2025) Debt Financing, Cash Flow Management and Financial Performance of SMES in Mogadishu, Somalia. A Case of Registered SMES in Bakara Market Mogadishu, Somalia. (Unpublished master’s dissertation). Makerere University Business School, Kampala, Uganda.