The Effect of Financial Literacy on the Financial Performance of Sme's in Embu County

Abstract

The study's general objective was to examine the effect of financial literacy on the performance of Small and Medium Enterprises in Embu County. Descriptive research design was adopted to establish the effect of financial literacy. The county has approximately 600 SMEs which was sampled to 170 enterprises in Embu County using a stratified random technique. The study utilized both primary and secondary data which was analyzed using both descriptive and inferential analysis methods. The multiple regression models to determine the association between financial literacy and financial performance (Return on equity). Findings from the regression analysis showed that 76.4% of the variation in return on equity was due to a model fitted with financial literacy, inflation rate and annual GDP rate as predictors. Further the Anova results revealed that the model fit with financial literacy, inflation rate and annual GDP rate was statistically significant to predict return on equity. The results also showed that financial literacy and Annual GDP are positive predictors for return on equity as shown by the beta values 0.107 and 0.355 respectively. The findings from the study also showed that inflation rate had a negative impact on return on equity as shown by the beta value -0.569. The study established that financial literacy had a positive effect on financial performance. Thus the study recommends that the owners of the SME’s in Embu county continually participate in financial literacy programs to ensure that they are up to date with the necessary skills required to run the business. The study also determined that Annual GDP rate had a positive impact on financial performance and inflation rate had a negative impact on financial performance. Thus the study recommends that the government through the Central Bank set up policies to stimulate the economy. This is to enable the economy to growth hence leading to growth of the Annual GDP and further cushioning the economy from bad inflation rates.