A Study on the Determinants of Financial Distress in Small and Medium Enterprises: a Case Study of Nairobi County

Abstract

Financial distress in small and medium enterprises (SMEs) is a common phenomenon in the world today and thus attracting the interest of scholars, government and policymakers. The SMEs are the leading drive to the national economic development. They are the means through which the government eradicates poverty through enhancing entrepreneurship and by creating employment. This research project seeks to find the causes of financial distress on SMEs to enable them to avoid financial distress, curb its effects and to ensure continuous and sustainable growth. The study was conducted through a case study design which is an in-depth investigation of a phenomenon (Mugenda, 2003). Data collection entailed the adoption of a questionnaire in the form of a five-point Likert Scale in a sample of 100 SMEs. Out of the issued questionnaires, a total of 79 were returned. Data analysis was done through the SPSS and presented in the manner of a regression analysis. Data validity and reliability was established by ensuring lack of Multicollinearity and looking into skewness and kurtosis. The study findings indicate that there is a significant relationship between financial distress and inadequate capital, poor succession planning and governance, poor government policies and lending rates. There is, however, an insignificant relationship between financial distress and large debt, managerial skills, and competition. If inadequate capital increases by 1 unit, financial distress increases by 0.28. If poor succession and planning increases by 1 unit, financial distress increases by 0.185. If large debts increase by 1 unit financial distress increases by 0.033. If inadequate managerial skills and accounting systems increase by 1 unit financial distress decreases by 0.100. If poor government policies increase by 1 unit financial distress increases by 0.131. If Competition increase by 1 unit financial distress decreases by 0.074, and if lending rates increase by 1 unit financial distress increases by 0.138. The study makes the recommendation that SMEs keep good financial records to ensure reliable study in the area. Further, the government needs to adopt policies that ensure SMEs do not fall into financial distress.