The Relationship Between Financial Planning And The Financial Performance Of Small And Medium Enterprises In Nairobi City Centre Kenya

Abstract

Small and medium enterprises have grown in importance in the global economy during the last couple of decades. Although SMEs are growing speedily they face a range of challenges which work against their progress. Lack of financial knowledge has been a major setback to SMEs progress. Inefficient financial management may damage SMEs profitability and, as a result, complicate the difficulties of SMEs. Conversely, efficient financial management will help SMEs to strengthen their profitability and, as a result, these difficulties can partly be overcome. This study was motivated by the need to investigate the financial planning practices used by SMEs and their impact on the financial performance of the SMEs. The target population of this study was 332 SMEs operating in the Nairobi CBD. A questionnaire-based survey method was used to collect data. Data collected was mainly quantitative in nature and was appropriately analyzed using descriptive statistics, while inferential statistics involved regression and ANOVA. The study found that most SMEs practised financial planning practises by such as periodical budget estimations, activity-based budgeting and financial analysis. These financial planning practices had positive impacts on the performance of the SMEs good maintenance of capital, managing risks, increased the efficiency of operations and expanded the capacity of the SMEs to embrace opportunities. Further financial planning has eased financial crisis, made credit accessible, reduced losses caused by human errors, provide collaterals for securing loans and act as a frame work to guide the activities of the businesses. The study recommended that awareness be created to the SMEs on the importance of the financial planning in business operations.