The Effect Of Working Capital Management Levels On Financial Perfomance Of Small And Medium Enterprises In Homabay Town

Abstract

Working capital management is very important to businesses operating in Kenya and other emerging markets as most of them are SMEs and have inadequate access to long term capital markets and rely heavily on owner financing, trade credits and inventories to finance their working capital. An optimal balance of the working capital components is thus paramount to ensure profitability and endurance of SMEs considering the critical role they play in reduction of poverty and creation of employment. The aim of this study was to establish the effect of Working capital management levels on financial performance of SMEs in Homabay Town. The study adopted descriptive research design. The target population comprised 334 SMEs operating in Homabay town of which a sample of 100 SMEs was used. Both secondary and primary data was gathered for the period 2016 to 2018. Quantitative data was processed using OLS regression models and correlation analysis. Inferential statistics was used to establish the link between change of dependent variable (ROA) as a result of change in each of the independent variables (ACP, ITP, & APP) with Size used as control for the variables. The study found that ACP, ITP and APP had an insignificant negative effect on financial performance of SMEs in Homabay town. The model without the control variable was also found to be insignificant with the independent variables predicting 0.006% of the ROA. When the three variables were regressed against the ROA with the control variable size introduced, the models’ goodness fit improved 0.065 implying that all the predictor variables used in the model were able to explain about 6.5% of the variation in ROA meaning that SMEs in Homabay county performed better when their scale of operations as measured by assets held was smaller. The study recommends that SMEs should focus more on optimal xi management of the total assets invested and not grow their asset base beyond their ability to manage as this will be detrimental to their performance.