Financial Management Practices And Financial Performance Of Registered Micro And Small Enterprises In Nairobi City County, Kenya

ABSTRACT

Micro and Small Enterprises have a huge responsibility of promoting economic development of many nations in the world today. However, in third-world countries, sector has recorded poor performance even though they take a huge fraction of local businesses. It has been established that approximately 80% to 90% of MSEs collapse their operations within a decade. However, studies from developed nations find financial management practices to contribute immensely to MSEs’ unfavourable business performance. This study establishes the relationship between financial management practices and financial performance of MSEs, and centres its investigation on MSEs in Nairobi County, Kenya, which has limited data on their financial management. The objectives of the study included examining the effects of capital budgeting on financial performance of MSEs; determining the effects of working capital management practices on financial performance of MSEs; and assessing the effects of capital structure decisions on financial performance of MSEs in Nairobi County, Kenya. In line with the above, the literature suggests that most research on the financial performance of MSEs is based on any one or a combination of the following key theories and frameworks: The Modern Portfolio Theory, the Signalling Model, and the Pecking Order Theory. The evaluation was done using questionnaire tailored towards collecting primary data to establish the effects of financial management practices on financial performance of MSEs. Since this study covers a broad study, a cross-sectional descriptive survey research study design was used guided by quantitative approach to data collection, analysis and reporting through some elements of qualitative approach of data. The target population of this study were owners, managers or accountants of MSEs operating in Nairobi County since they are the decision makers who ought to be familiar with the use of budgets. The target population of the study was 56, 055 MSEs. The researcher used simple random sampling to arrive at a sample size of 384 licensed MSEs of the total population with at least one respondent in each. Each strata had an equal proportion of respondents for questionnaires and to generate data collection units. The questionnaire was structured in five-point scale in line with the objectives set out to be achieved in the study. The data was analysed using SPSS and presented using frequency distribution tables, charts and graphs. For analyses of the relationships between independent and dependent variables, multiple regression analysis model was used. The model determined the relationship between financial management practices and financial performance of MSEs and showed that the firms’ overall financial performance was positively affected by the FMPs. The findings specifically showed that capital budgeting and capital structure management practices each had a significant positive effect on the company’s financial performance with WCM practices being the least contributor to the effect. On the other hand, the study found out that working capital management, as a leading financial management practice among MSEs has a significant negative influence on their financial performance. The findings of the study also established that the majority of the respondents disagreed that the company was making adequate return on their assets and the respondents were dissatisfied with the firm’s performance. It was therefore recommended that the management of MSEs should put in place the most appropriate financial management practices to help them improve their return on assets. The MSEs need to improve on the process of preparing and publishing the firms’ financial statements and capital structure as well as making sure that the management fully make use of debt facilities within their capabilities.