An assessment of the effect of working capital management practices on financial performance: a study of small scale enterpris es in Kisii South District, Kisii County, Kenya

Abstract

The purpose of this study was to assess the effect of working capi tal management practices on the financial performance of Small Scale Enterprises (SSEs) in Kisii South District. The study adopted Across- sectional survey research design which allowed the collection of primary quantitat ive data through structured quest ionnaires. The target population was 159 managers of 101 trading and 58 manufacturing SSEs. Stratif ied random sampling technique was used to obtain a sample of 113 SSEs comprising 72 trading and 41 manufacturing enterprises. The data were analyzed using both descript ive and inferential statist ics. Consequently, the f indings of the study were that Working capital management practices are low amongst SSEs as a majority has not adopted formal working capi tal management routines and their financial performance is on average low. The study also revealed that SSE financial performance is positively related to efficiency of cash management (ECM), ef ficiency of receivables management (ERM) and efficiency of inventory management (EIM) at 0.01 significance level. The coefficient of determination (R2) indicates that 63.4% of the variations in f inancial performance (FP) could be explained by changes in ECM, ERM and EIM. The study concluded that working capital management practices have an influence on the f inancial performance of SSEs hence the need for SSE managers to embrace eff icient working capital management practices as a strategy to improve their f inancial performance and survive in the uncertain business environment. The study corroborates other research findings that established a posit ive relationship between working capital management pract ices and f inancial performance. Key words: Working Capital Management, Financial Performance, Small Scale Enterprises