Financial Management Practices And Financial Performance Of Small And Medium Manufacturing Enterprises In Kericho County, Kenya

ABSTRACT

Manufacturing SMEs play a crucial role in building and sustaining the economy in Kenya. They ensure that goods and services are provided to the citizens, reduction of poverty and promotion of other sectors of the economy. Despite their importance, manufacturing SMEs in Kericho County continue to perform poorly. Majority of the manufacturing SMEs (seventy two percent) recorded return on capital employed of less than five percent with only twenty eight percent of SMEs generating return on capital of over five percent in 2015. Performance of the SMEs in 2015, average return on capital on manufacturing SMEs was three percent. Similarly, in 2014, thirteen percent of SMEs in Kericho County had return on capital above ten percent, with forty one percent of manufacturing SMEs having negative returns. This performance is well below the average performance of SMEs comparable to developing countries of fifteen percent. The study general objective was to determine the effect that financial management practices have on the performance of manufacturing small and medium enterprises in Kericho County. The specific objectives were; to determine the effect of capital budgeting practices, working capital management practices and financing practices on the organizational performance of manufacturing SMEs in Kericho County and to determine the moderating effect of firm size on the financial management practices and organizational performance of manufacturing SMEs in Kericho County. The study used descriptive cross-sectional research design. The target population were all the manufacturing SMEs licensed at Kericho County. Sampling was done based on the location of the SMEs and their size. Data was collected using questionnaires containing open and closed ended questions. Likert scale was assessed to evaluate the study variables. Descriptive statistics, correlation and regression analysis were used to analyse the data. The study found out three main financial management practices adopted by the SMEs whereby; the most utilized financial management practice was Capital Budgeting, followed by Working Capital Management and lastly the Financing Practices. All the financial management practices were established to have a positive effect on the SMEs' performance. However, the financial management practices were found out to have moderate extents of adoption which indicates they were yet to be fully utilized in achieving improved performance. The findings also revealed that SME size had a positive but moderate influence on the SMEs. The found out that the financial management practices had a significant positive effect on the performance of the SMEs. The study therefore makes the conclusion the available financial management practices have a positive and significant effect on the current performance of the SMEs in Kericho County. Therefore, effective implementation and utilization of the financial management practices in the SMEs will translate to better and improved performance in the firms. The study recommends that managers/owners of the SMEs to make utilization of financial management practices as a key priority. The study also recommends that the managers/owners of the SMEs to highly consider their organizations’ sizes while undertaking any managerial decision. The study recommends that the government and other regulatory bodies to create favourable policies on the implementation of financial management practices in the SMEs.