Effect of Cash Management on the Financial Performance of Small and Medium Business Enterprises in Nairobi County, Kenya

Abstract

This study focused on assessing the effects of cash management on financial performance of small and medium enterprises in Nairobi County, Kenya. This study identified liquidity management, receivable collection and cash cycle management (cash conversion cycle) as the independent variables. The dependent variable of the study was Net Profit Margin. There are several research studies done on cash management and financial performance. Nonetheless, a large number of these studies majored on diverse industries like insurance and manufacturing and not SMEs. This study therefore sought to fill this gap. This study used descriptive research design with the population consisting of 43,432 licensed Small and Medium Enterprises in Nairobi County, Kenya. Data was collected from primary sources using Questionnaires and from secondary sources using publications. Stratified Random Sampling method was employed to select a sample size of 208 Small and Medium Enterprises in Nairobi County, Kenya. The study also carried out correlation analysis and multiple regression on the data to find the relationships between cash management components and financial performance of SMEs in Nairobi County, Kenya. The findings of the study show that majority of SMEs (56.7%) were involved in Receivable Collection. However, only 46.2% and 45.7% were involved in liquidity management and cash cycle management respectively. There was a weak positive correlation between receivable collection (r=0.271), cash cycle management (r=0.147), liquidity management (r=0.035) and financial performance of SMEs in Nairobi County. 17.9% of financial performance could be attributed to receivable collection and 9.2% attributed to cash cycle management. However, -1.4% of financial performance could be attributed to liquidity management. The relationship between cash management and financial performance was significant (The F-value of 6.523). However, with a weak R squared value of 0.088, it was concluded that there are other variables affecting financial performance of SMEs in Nairobi County other than cash management.