Working Capital Management Practices And Growth Of Small And Medium-Sized Enterprises In Nyeri County, Kenya

ABSTRACT

In Kenya, Small and Medium Enterprises (SMEs) have continued to face a mountain of challenges and struggle to achieve significant growth despite their importance to the Kenyan Economy. Imprudent working capital decisions have been highlighted in literature as some of the principal causes of their stagnation and decline in growth. Nevertheless, there is scarce empirical evidence on whether working capital management activities significantly affect growth of these institutions. Notably, evidence has been provided to show that most of them lack an established working capital management system that guides the working capital decisions. The specific objectives were to determine the effect of cash, debtors, creditors and inventory management practices on growth of SMEs in Nyeri County, Kenya. Hypotheses were tested at 0.05 significance level. The study was anchored on: trade-off theory of liquidity, the cash conversion cycle theory and the economic order quantity model. The study adopted explanatory research design. the target population comprised of a total of 841 SMEs operating in Nyeri County, Kenya. Proportionate stratified random sampling was used to select a sample of 89 SMEs. Purposive sampling technique was used to pick respondents from the 89 SMEs. Questionnaires were used as the suitable data collection tool which was analyzed using statistical software. The study found that cash management practices had positive and statistically significant effect on the growth of SMEs (p= 0.000); debtors management practices had a positive and statistically significant effect on the growth of SMEs (p=0.000). Additionally, creditors management practices had a positive but statistically insignificant effect on the growth of SMEs (p=0.196) whereas inventory management practices had a positive but statistically insignificant effect on the growth of SMEs (p= 0.263). From correlation analysis, the study found a positive relationship between cash management practices and growth (r = 0.790, p = 0.000) at 5% level of significance. Debtors management practices had a positive relationship with growth (r = 0.771, p = 0.000); creditors management practices had a positive relationship with growth of SMEs (r = 0.267, p = 0.019) whereas inventory management practices had a positive relationship with growth (r = 0.551, p = 0.000) at level of significance. The study recommends that SMEs in Nyeri County should formulate cash management policy to guide the effective maintenance of liquidity at optimal levels and ensure proper implementation of cash budgeting and planning framework. SMEs should also review the credit policy to ensure effective credit administration decisions. In addition, there should be a clear policy that spells out effective account payables management practices that ensures optimal credit purchases as well as stipulate creditors’ settlement criteria. Moreover, management of SMEs in Nyeri County should formulate inventory management policy which focuses on ensuring that optimal stock levels are maintained to avoid overstocking and under stocking of certain products.