The Effect Of Working Capital Management Practices On The Financial Performance Of Small And Medium Enterprises In Kenya

Abstract

Working capital management plays a significant role in better performance of business entities. This paper analyses whether SMEs in Kenya carry out working capital management and the effect of Working Capital Management (WCM) on the financial performance of SME’s in Kenya. The study employed a quantitative research design which was useful in establishing the relationship of working capital management and financial performance. In addition, the study employed a cross sectional survey to establish whether SMEs in Kenya carry out WCM practices. A sample of 100 SMEs for a period of two years, 2009 and 2010 was used. However, a total of 89 responses were received. The study relied on both primary data, collected through a questionnaire, and secondary data collected from annual reports and financial statements of SMEs in Kenya. The WCM components used for the purpose of this study were, Accounts Payable Period (APP), Inventory Conversion Period (ICP) and Average Collection Period (ACP). Return on Assets (ROA) was used as the proxy for financial performance. The study employed a regression analysis and the Pearsons’ correlation analysis was used to test the significance of relationship between WCM and financial performance of SMEs in Kenya. The results of the study indicate that 62.9% of the SME’s in Kenya do not have a written policy on WCM. However, they are informally adopting some of the WCM practices. The results further indicated there is a significant positive relationship between WCM components (APP, ACP and ICP) and financial performance of SMEs in Kenya, at 0.05 significance level. A positive correlation coefficient of 0.833 was established between ROA and the ACP indicating a significant positive relationship between ACP and ROA. A positive correlation coefficient of 0.869 was also established between ROA and ICP indicating a significant positive relationship between ROA and ACP. Finally a positive correlation coefficient was established between ROA and APP indicating a significant positive relationship between ROA and APP.