The Effect of Financial Management Practices on the Financial Performance of Top 100 Small and Medium Enterprises in Kenya

Abstract

Financial management practices act as tool for the organizations to remain profitable while ensuring that they do not become bankrupt or insolvent. Particularly, this is important to the SME’s sector where any mismatch in financial management practices is probable to negatively impact the performance to a high extent. However, the influence that the financial management practices have on SME’s financial performance has not been well established, as both positive and negative relationships have been obtained. The study sought to determine the effect of financial management practices on the financial performance of top 100 small and medium enterprises in Kenya. The study employed the descriptive research design in conducting the study. The population for this research comprised of all the top 100 SMEs in Kenya listed in KPMG, with the respondents being the managerial employees or owners. Due to the population being well defined, small and manageable, a census approach was employed in order to cover the entire population of 100 SMEs. The study used primary and secondary data, primary data was collected using questionnaires. The data were tabulated, classified and summarized by descriptive measures such as frequency distribution, percentages, inferential statistics and mean and standard deviations. Tables and graphs were used for presentation of analyzed data. All the SMEs were found to have financial management practices incorporated in their operations. The financial management practices had positive Pearson Correlations implying that all the variables had a positive effect on the SMEs' performance. This means that an increase in these variables will cause an increase in the organization's returns. However, all the variables were less significant except cash budget management practices meaning they must be combined for them to be able to predict the changes in the performance. The effect of the variables combined had a strong relationship with SMEs’ financial performance based on the regression analysis. The study recommends that the managements should carefully evaluate their companies’ structures before adopting the financial management practices. The study thus concludes that adding and integrating financial management practices is concluded to highly improve how the SMEs will perform overall. The study recommends that the managers in the SMEs should highly prioritize financial management practices during the formulation of the organization strategies. The study also recommends that regulatory bodies should formulate appropriate policies and regulations which will facilitate the implementation of financial management practices in the firms.