Inventory Management Practices and Financial Performance of Small and Medium Scale Enterprises in Laikipia County, Kenya
Wanjira, Jeremiah Nyaga
Njagiru, John Mungai
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Despite the instrumental role that they play in the economy, most SMEs fail within their first tears of operation. Poor working inventory management practices is identified underlined as among the principal causes of SMEs failure. This is particularly so for the lack a formal inventory management system, as they, in most cases rely on subjective inventory management decisions. Most researchers and theorists postulate that the manner by which inventory is managed considerably impacts on profitability and risk of firms. The study focused on the effect of inventory management practices on financial performance SMEs in Laikipia County, Kenya. The period considered was between financial years 2013/2014 and 2015/2016. The study specifically assessed the effect of inventory management on financial performance. Performance was indicated through profitability indicators i.e. return on investment (ROI) and profitability in relation to turnover (Net Profit Margin). The study relied on a target population of 765 SMEs with operations in Laikipia County as gathered from the National Chamber of Commerce and Industry (2017). A combination of proportionate random sampling technique and purposive sampling was employed to attain at a sample size of 100 business owners from 100 SMEs selected. The study used primary and secondary data. Primary data was collected using questionnaires managed by the drop and pick method. The instruments were tested for validity and reliability using pretesting, seeking expert opinion and using Cronbach’s Alpha Reliability test. Secondary data was gathered from the SMEs books of accounts, management reports and other available resources. The researcher made use of the Statistical Package for Social Scientists (SPSS) for analysis. The study used both descriptive and inferential statistics generated using bivariate and multivariate analysis to test the hypothesis. The results indicated that SMEs’ financial performance as indicated by the profitability metrics namely return on assets and net profit margins was considerably low. As explained by R Square, the Coefficient of Determination, 75.50% of the variation in the Financial Performance (the dependent variable) is explained by variability in inventory management. To that effect, only 24.50% of variation in the financial performance was explained by other predictors not included in the model. Regression analysis results demonstrated that inventory management had positive effects on performance. The Pearson Correlation Analysis results indicated positive and statistically significant association between inventory management and financial performance. The study recommended pursuit of measures to improve the model of inventory management implemented by small scale firms.