The relationship between cash flow and profitability of small and medium enterprises in Nairobi County

Abstract

Cash flow and profitability of firms are organizational objectives of interest having a relationship to each other. A healthy cash flow position result in liquidity of a company which helps it sustain its operation resulting in generation of higher profits and prudent re-investment of the profits results in the growth of the firm. Consistent positive cash flow position will facilitate higher profit levels and hence excess cash for investment. These objectives are determined by the strategic direction of the company, the nature of its business, the period of its existence and the int1uence of the environment around the company for example competition, govemment policies, customers, and staff among others. The objective of this research was to establish the relationship between profitability and cash flow of small and medium enterprises in Nairobi County. A descriptive study was applied in this study using primary data obtained from individual small and medium enterprise firms which were drawn to form a sample for the purpose of this study. Data was organized into a panel and analyzed using a fixed effect regression model to obtain coefficient of the variables. Findings of the study indicated that there was significant relationship between profitability and cash flow of small and medium enterprises in Nairobi County. The findings indicated presence of other significant variables influencing profitability of SMEs and which did not 1'01111 the subject of this study. The study recommended policy of looking at profitability in a holistic manner and working towards identifying these primary variables that inf1uences profitability of small and medium size enterprises. It is evident that cash flow has significant relationship with profitability for this segment of firms sampled.