The relationship between risk management and financial performance of the top 100 small and medium enterprises in Kenya

Abstract

In today’s dynamic commercial environment, risks are increasing and risk management is becoming an integral part of any organization; especially for the Small and Medium enterprises, which due to limited resources and weak structural features are more vulnerable to the harmful effects of risks. The relationship between risk management and financial performance has been explored in other studies with sectors such as banking being covered almost exhaustively; however, few studies have been conducted in the SME sector. This study was therefore an attempt to establish the nature of relationship between risk management and financial performance of the SME sector in Kenya. The study employed risk management practice as a multidimensional construct so as to help provide a relevant trajectory for understanding financial performance of the top 100 SMEs in Kenya. The study therefore attempted to address the following research question: To what extent have the top 100 SMEs in Kenya adopted the various risk management techniques? How do the various risk management techniques employed relate with the financial performance? To achieve this, the study adopted a descriptive research design. A sample size of 50 SMEs located within Nairobi and its environs were selected from a population consisting of the top 100 SMEs in Kenya for the year 2013 using judge mental sampling. The response rate was 80%, which comprised 40 SMEs. Data was collected using a questionnaire and analyzed using SPSS version 17. The findings revealed that the top 100 SMEs in Kenya applied risk acceptance and risk diversification to a ‘great extent’ compared with other techniques such as loss prevention, risk avoidance and risk transfer, which were moderately applied by SMEs. The study also found out that risk management techniques ,that is risk avoidance, loss prevention, risk transfer and risk diversification had a negative effect on financial performance (ROA) with beta coefficients of -0.022,0.029, -0.032 and -0.007 respectively. Risk acceptance according to the study had a positive effect on financial performance (ROA) with a beta coefficient of 0.028.In general the study found out that risk management constructs have a strong positive correlation with the financial performance (ROA) of SMEs with a correlation coefficient of 0.823. From the findings, the researcher concluded that applied risk management techniques had a positive effect on the financial performance of the SMEs and thus recommended that management, owners and other relevant stakeholders to make risk management a core business process in order to improve returns.