Effects of Internal Control Practices on Financial Performance of Small and Medium Enterprises in Nairobi County

Abstract

SMEs play a vital role in an economy of any nation more especially the developing ones. However, SMEs are still finding it hard to survive and compete with other well established firms despite their contribution to an economy as a whole. As such, an effective internal control in SMEs has the potential of reducing employees’ fraud leading to success of SMEs in achieving its objective and goals, which is creation of more profits. This study examined effects of internal control practices on performance in financial perspective of SMEs within the county of Nairobi. A descriptive research design was adopted in the study. Population of this study comprised of all SMEs in Nairobi County. Using simple random sampling technique a sample of 100 SMEs was randomly selected. Both primary data and secondary data were utilized in the study, which was collected using self-administered questionnaires and secondary data on performance in financial perspective of SMEs was collected from SMEs financial reports. The results established that the control environment and risk assessment had a negative relationship with financial performance of small and medium enterprises. The results also revealed a positive relationship between control activities and information and communication and monitoring and financial performance financial performance of SMEs in Nairobi County. The study concluded that there is an inverse relationship between financial performance of SMEs in Nairobi County and the control environment and risk assessment. The study also concluded that there is a direct relationship between control activities, information and communication, monitoring and the financial performance of SMEs in Nairobi County. The study recommended that SMEs should ensure there they have a good environment control, effective assessment of risk and control activities and proper monitoring strategies.