Effects of financial management practices on performance of top 100 small and medium

Abstract

The role and importance of small and medium enterprises in an economy has long attracted interest of many nations. In Kenya, Small medium enterprises (SMEs) form a vital part of the economy. Their contribution to the economy include; the generation of income, provision of new job opportunities, introduction of new innovations, competition stimulation and an engine for employment. Despite the fact that SMEs contribute a lot to the economy, they are faced with tremendous challenges that threaten the ability to thrive and remain competitive. This research study examined the effect of financial management practices on performance of top 100 small and medium enterprises in Kenya, with majority being in Nairobi. The aim of the study was to find out the effect of Working Capital Management, Financial Reporting, Budgeting Process and Internal Control Systems on performance of top 100 SMEs in Kenya. The study used a sample of 200 senior managers drawn from top 100 SME in Nairobi. The researcher used descriptive and inferential research design. The data collected was encoded and tabulated. Statistical descriptors were used and information presented in form of figures, tables, pie charts and bar charts. Correlation and regression model was also used in examining the relationship between the variables. SPSS software was used in analyzing the data. From the descriptive findings, the results revealed that respondents clearly demonstrated that even though the considered financial management practices in the study are effective in improving the performance of SMEs, the level of utilization or practice is still low and therefore, there is need for SMEs to reassess the use so as to enhance performance. From the correlation analysis results, the study established that Internal Control Systems had the highest or strongest positive correlation with performance of top 100 SMEs in Kenya, followed by working capital management then Financial Reporting and finally Budgeting Process. Correlation analysis Working Capital and Budgeting Process has significant strong relationship. This clearly indicates that there is need for SMEs to have proper budgeting process if they are to manage their working capital efficiently. Regression analysis produced the study findings which indicated that both working capital management, financial reporting and internal control systems had appropriate p-value of 0.05, 0.04, 0.05 and 0.06 respectively which was lower than the significant level hence indicated that they both had statistical significant relationship with performance of top 100 SMEs in Kenya. It is recommended that both the management and the policy makers should implement effective financial management practices which are aligned with the objectives of the businesses. It is also recommended that SMEs to reassess the effect of financial management practices based on the market performance so as to improve performance. Further study should be undertaken on other financial management practices such as governance which may affect the performance of top 100 SMEs in Kenya.