Effect Of Credit Management Practices On The Performance Of Small And Medium Enterprises In The Transport And Logistics Industry In Nairobi, Kenya.

Abstract

The failure rate of SMEs globally is estimated by experts to be between 70 and 80 percent. It is substantially higher for countries in sub-Saharan Africa. Most Kenyan transport and logistics companies have been unable to maintain that balance due to the competitive nature of the industry and hence some of the companies have been forced to close shop or downsize. Thus, their survival rate has tended to worsen and credit management may be one of the courses of such low survival rates of these firms. The objectives of this study were to examine the credit management practices of SMEs in the transport and logistics sector and to establish the effect of credit management practices on the performance of SMEs in Nairobi County, Kenya. This study adopted a descriptive design. The population of the study was 1,133 transport and logistics companies within Nairobi. Simple random sampling technique was used to select a sample of 287 firms for the study. Primary data was collected via a questionnaire designed based on the objectives of the study. The sampled target respondents were managers/owners of the transport and logistics companies. Face to face interviews were conducted. Descriptive analysis was used to summarize some of the initial results especially the demographics as well as to analyze objective one. OLS regression analysis was used to analyze objective two. The study revealed that the most common credit management practice was checking customer credit worthiness before granting trade credit followed by offering discounts for early payment and use of customer’s audited accounts to extend trade credit. As to the relationship between credit management practices on performance, the results were mixed. No single practice had a uniform and stable effect on all the four parameters of performance used in the study. For instance, checking credit worthiness of customer before extending credit had a negative effect on sales volume and sales growth while it had a positive effect on financial results and ROI. The use of CRB to check for credit worthiness before extending credit had positive effects on sales growth and volume but negative effects on financial results and ROI. The study concludes that transport and logistics companies in Nairobi employ very limited credit management practices. The study also concludes that while the relationship between credit management practices and performance is mixed in this study, there is a pattern emerging where when credit management practices lead to an improvement in sales (volume and growth), it negatively impacts the overall performance of the firm (financial results and ROI). This is true for all the credit management practices used in this study except for customization according to solvency risk, credit insurance for sales, and conducting formal analysis for reasons for late payment. The study recommends as follows. First, the transport and logistics companies in the SME sector should embrace better credit management practices by employing qualified personnel to be in charge of credit management. Secondly, the transport and logistics companies in the SME sector should decide, at a strategic level, what is important between better sales or better overall performance of the firms. Lastly, it is important that other firms borrow from the results of this study for practical purposes. Further, for policy purposes, it is important that employees be trained and certified in credit management in order to improve this important discipline in institutions