The Effect of Financial Management Practices on the Financial Performance of Small and Medium Enterprises in Kenya

Abstract

Many of the Small and Medium-scaled Enterprises (SMEs) in Kenya are still plagued with management problems. Financial management has been one of the most critical aspects that have threatened the survival of SMEs. The objective of this study was to investigate the effect of financial management practices on the financial performance of small and medium enterprises in Kenya. The study adopted descriptive research design; it was chosen because it enabled the researcher to generalise the findings to a larger population. The target population for this study targeted all the registered SMEs within Nairobi area. 520 respondents was the target population. From the above population of 520 possible respondents, a sample of 10% was used. Fifty two respondents were selected representing a population of 520 possible respondents using Stratified random sampling by taking 10% of the target population in each stratum. The organised data was interpreted on account of concurrence and standard deviation to objectives using assistance of computer packages especially SPSS version to communicate research findings. Tables and other graphical presentations as appropriate were used to present the data collected for ease of understanding and analysis. A regression analysis was also conducted to measure the importance of each variable. The study found that inventory, accounts receivable, accounts payable were some of the working capitals that the company uses to manage the business. One of the significant uses of the working capital in the company was inventory which keeps the company running. Majority of the respondents were in agreement that business employed formal inventory control systems, SMEs should have common investments. It was concluded that, inventory management practices in capital management affect the growth of small businesses in that they realize importance of cash management in the process of planning and controlling cash flows. The cash management consisted of three basic components: cash forecasting practices, cash surplus investment practices and cash-control practices. The study also recommends that they should realize the importance of cash management in the process of planning and controlling cash flows. Further, financial structure decisions which include cheaper cost of debt compared to equity; the cost of equity as debt increases; and the benefit of the tax deductibility of debt should be realized.