Working Capital Management and Financial Performance of Small and Medium Enterprises in Garissa County, Kenya

Abstract

Small and medium-sized enterprises (SMEs) in the County of Garissa have had a dwindling net profit between 2007 until 2013. Success has been marked by several hurdles that include improper business records, substandard technical competence, illiteracy in matters of finance, and mismanagement of working capital. As a result, the overarching purpose of the study was to investigate the influence of working capital management on the financial performance of SMEs in the Kenyan county of Garissa. The study was motivated by the following specific goals: To find out the effect of the account receivable management, inventory management, account payable management and cash management on financial performance on SMEs in Garissa County. The was guided by the financing advantage theory, cash conversion cycle theory, transaction cost theory and stakeholder theory. The study employed a causal research design. According to the county administration of Garissa, 243 SMEs were targeted. A sample of 149 SMEs were selected using simple random sampling. According to the county administration of Garissa, 243 SMEs were targeted. Simple random sampling was used to draw a total of 149 SMEs. Secondary data was evaluated using quantitative methods that included descriptive statistics and inferential statistics. Tables were used to present the data. According to the study's regression results, accounts receivable management had a minimal influence on return on assets. Inventory management has a major detrimental impact on SMEs' financial performance. Cash management has a beneficial and considerable impact on the performance of SMEs. The study concluded that managers can increase return on an asset through shortening inventory turnover and increasing accounts payable days. The study’s target population was 243 registered small and medium enterprises in Garissa County. Simple random sampling was used. The sample size comprised of 149 SMEs. The analysis used secondary data. The data has been obtained utilizing secondary data collecting schedules from the financial records of 149 SMEs. Descriptive statistics used for analysis were mean, frequencies, percentage, and standard deviation. The inferential analysis used correlation and regression coefficients. The study found that account receivable management, inventory management, account payable management and cash management had a significant positive influence on the financial performance of small and medium enterprises. The study concluded that managers may boost return on assets by reducing inventory turnover and boosting accounts payable days. Furthermore, they may boost return on assets by negotiating better credit terms with their suppliers, allowing them to increase accounts payable days, which boosts return on assets. The study recommends small and medium enterprises owners/directors should develop a policy on credit collection detailing the policies and practices to be followed by the organization. The small and medium enterprises owners should rigorously follow up on debts, assess consumers before providing debts, give incentives for early debt payments, and build a solid debt management strategy. The small and medium enterprises owners and managers should try to reduce the time it takes to transform raw resources into completed items. The small and medium enterprises may generally keep the standard payment interval longer than the average collection period to limit receivables payments for short-term needs, lowering finance expenses.