The determinants of cashholding and their effect on the cash level of small and medium enterprises in Nairobi, Kenya
Much of the previous research into the cash holding and its effect on finn mechanism has concentrated generally on developed countries. Not much known local study has focused on relationship between the determinants of working capital management i.e. inventory, debtors, creditors, and the cash level of Kenyan SMEs. This study therefore sought to fill the existing research gap by carrying out a survey study on the relationship between the determinants of working capital management i.e. inventory, debtors, creditors, and the cash level of SMEs. The main purpose of the study was to investigate into relationship between the determinants of working capital management i.e. inventory, debtors, creditors, and the cash level of SMEs. This research was conducted through a survey study. The target population of this study was the sampled 205 SMEs. This paper utilized the finn's financial statements and other data used in various previous research projects. This study collected descriptive data also. The data received was analyzed by multiple regression analysis. From the findings, the study established It suggests that firms with greater cash flow volatility hold more cash in order to provide a safe cushion for smooth operations. The results support the notion that firms with higher leverage hold less cash, which is consistent with pecking order and free cash flow theories. As per the pecking order theory, when firms' investments are in excess of retained earnings, high levels of debt and little cash holdings occur simultaneously and are better resolved for performance to be effective in a very great extent. The study further established This result suggests the agency problem is prevalent in SMEs firms, where managers try to avoid raising external funds for keeping the investment information of the company to themselves. Finn size, cash flow and industry sigma are significant at 1 % level in the cross sectional regression analysis. The positive coefficient on cash flow-to-assets ratio supports the pecking order theory which suggests that firms finance investments first with the retained earnings and then go for debt and if effectively implemented and utilized. This study therefore recommends that in order to avoid many impediments, SMEs should make sure that its strategies are sufficient to enable administration and management of credit with management prudence and getting them advice promptly.