Financial Risk Management and Financial Performance of Construction Companies in Greater Kampala Metropolitan Area

Abstract

The financial performance of construction companies depends significantly on their ability to manage financial risks. This study examined the effect of financial risk management on the financial performance of construction companies focusing on three dimensions: risk identification, risk assessment and evaluation, and risk management strategy. Guided by Modern Portfolio Theory, the study adopted a crosssectional survey design and collected data from 191 construction companies selected through proportionate sampling. Structured questionnaires were used for data collection and the validity and reliability of the instruments were confirmed through expert review and Cronbach’s Alpha. Data were analyzed using descriptive statistics, correlation analysis, and hierarchical regression. Findings revealed that all three financial risk management components were positively associated with financial performance. Risk identification showed a significant but modest relationship with financial performance (r = .300, p < .01), while risk assessment and evaluation exhibited the strongest association (r = .591, p < .01). Risk management strategy also demonstrated a significant positive relationship (r = .428, p < .01). Hierarchical regression results further indicated that risk assessment and evaluation contributed the largest increase in explained variance (24.9 percent), followed by risk management strategy (7.1 percent), whereas the influence of risk identification diminished after additional predictors were introduced. Overall, the models explained 42.7 percent of the variation in financial performance. The study concludes that financial risk management significantly improves financial performance, particularly when firms invest in thorough assessment and evaluation of risks and implement structured mitigation strategies. It recommends that construction firms adopt comprehensive risk management frameworks, strengthen analytical capacities and integrate proactive financial planning tools to enhance profitability, reduce exposure to uncertainty and improve long-term sustainability