Cash Management and Financial Performance of Small and Medium Business Enterprises in Nakuru County, Kenya
Paul Oteyo, Onyando
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The Government of Kenya has put much emphasis on SMEs’ development to enhance self-employment as well as poverty minimization and economic growth acceleration. Even though they are significant, available evidence shows that SMEs crumble within only a few months after establishment. This study aimed at assessing cash management and how it affects small and medium enterprises (SMEs) financial performance in Nakuru County, Kenya. It identified cash planning, cash and bank reconciliation, cash position and credit management as the independent variables. Financial performance, whose measure has been based on net profit margin, was used as the dependent variable of study. Many studies have been conducted with regard to SMEs and general financial performance, but none has since narrowed down to look into the cash management component and how it affects financial performance. Several studies have been referenced to indicate cash management as a possible factor affecting SMEs’ financial performance. The study also referred to three theories for its review; the pecking order theory, trade-off theory and Keynes liquidity theories. The research was based on a survey study where a cross-sectional study of SMEs was conducted. 73 SMEs were examined using quota sampling as the design basis. A total of 45 medium enterprises and 28 small enterprises were examined. Data collection was carried out using questionnaires and personal interviews as the collection instruments. The target respondents were owners of SMEs and their managers. Descriptive and regression analysis were conducted with the help of SPSS software. The study found that majority of SMEs practices timely reconciliation, frequent bank and cash reconciliations and Establishment of an internal control system. Majority of SMEs maintained cash flow statements and established internal cash monitoring mechanisms. However, majority of SMEs did not conduct prequalifying debtors before granting credit and Liquidity analysis of SME before accepting credit sales. Preparing cash budgets and Understanding the firm’s cash operating cycle were highly prevalent among participating SMEs. There was a strong positive correlation (r=0.859) between cash management and financial performance whereby 73.7% of performance of SMEs could be attributed to cash management. There was a significant relationship (F =19.60 (4,74), P=0.000) between cash management and financial performance. Credit management (p=0.003) and cash planning (p=0.003) were significant. The research found out that many SMEs situated in Nakuru County, Kenya fail to conduct formal cash management practices. Even so, SMEs in Nakuru County, Kenya undertake part of their cash management practices formally in cases where they lack written-down policy statements regarding cash management practice. The study recommended that there is dire need for the management as well as staff charged with managing cash to undergo training in managing financial performance metrics in order for operation-level decisions to be attached to the expected outcomes.