Value of decision control mechanisms in avoiding free cash flow drawbacks in the first place

Abstract: This thesis examines the utilization of internal controls as means of facilitating effective use of free cash flow (FCF) by managers, with the aim of preventing potential issues that may distort their relationship with shareholders. The objective was to understand the means of mitigating FCF issues by identifying internal controls within the companies to guarantee the effective utilization of cash available while aligning decision making with companies’ strategy and performance. In the theoretical framework, there are three dimensions. The starting point is that the FCF causes a potential agency problem between managers and owners of organizations (Jensen & Meckling, 1976; Jensen, 1986). Second, there is an interrelation between strategic control, management control, and internal control in the decision-making process (Pfister, 2009). Lastly, pre-decision controls and LOC serves as decision control mechanisms in regard to the effective use of FCF (Simons, 1995; Alkaraan and Northcott, 2007) We follow a multiple case study approach where we gather empirical data by conducting semi structured interviews complemented by surveys with five manufacturing companies in Uganda. The empirical data is structured as follows: 1) To what extent do companies effectively utilize their FCF, 2) how internal decision control help the companies to avoid investing in non-performing projects when excess FCF is present, and 3) how managers can enhance identified internal decision controls to prevent unwanted investment. Our results of this study emphasize that stringent controls are essential to improve the effectiveness of cash utilization and eliminate agency problems. The use of pre-decision control enables managers to identify valuable investment projects. Moreover, the combination of diagnostic and boundary levers of control when carrying out exploitative activities guides companies in ensuring effective and efficient use of FCF.