ABSTRACT

Abstract

The study investigated the relationship between the external business environment and the financial performance of Small and Medium Enterprises (SMEs) in the Arua Municipality. The main objective was to analyze the relationship between the external business environment and financial performance in general. The external business environment being a multidimensional construct, the study only considered, economic, legal/regulatory, technological, industrial dimensions. The specific objectives analyzed the relationship between the considered dimensions and financial performance. A sample of 103 respondents was selected from a study population of 140 SMEs in the Arua Municipality using a purposive sampling technique. Purely quantitative data was collected by the use of a closed-ended self-administered questionnaire. A cross-sectional and correlational survey was adopted. Pearson’s correlations analysis was used to explore the relationship between the variables, and Multiple Regression Analysis (MRA) was applied in examining the variance in Financial Performance. The results revealed a statistically positive relationship ranging from moderate to strong based on Cohen (1988) among the various dimensions and dependent variable. Surprisingly, the results are in line with previous findings though from different socio-economic settings. MRA revealed a 61.5% variation in financial performance. The findings imply that economic, regulatory, technological, and industrial environment of SMEs is key business environments influence financial performance. Therefore, it’s here recommended that the management of SMEs should understand the external SME environment for appropriate decision making. It is further recommended that; Ministry of Industry and Trade needs to regulate the environment to make it favorable for SMEs to enable them to thrive to boost the country's economy. This could be done by formulating favorable fiscal and monetary policies such as exchange rates, interest rates, favourarble legal reforms that can facilitate SME financial performance. SMEs should embrace and adopt appropriate technologies to easy their operations. Conclusively, understanding the external business environment is essential for SMEs' financial performance. One key limitation of the study is that it was a cross-sectional survey with a limited geographical scope.