Influence of Working Capital Management Practices on Financial Performance of Small and Medium Manufacturing Enterprises in Nairobi County, Kenya

Abstract

The purpose of this study was to find out the influence of working capital management on financial performance of Small and Medium manufacturing Enterprises in Nairobi County in Kenya.The research employed a survey design comprising of quantitative data collection approach. The target population was 176 SMEs from manufacturing sector. The study applied both probability and non probability sampling procedures to obtain a sample of 121 SMEs required for the study. To achieve the objective of the assessment, primary data was gathered using questionnaires. Secondary data was gathered from past published scholarly articles explaining theoretical and empirical information on the influence of working capital management on the financial performance of SMEs growth in manufacturing sector. Inferential statistics such as Pearson correlation coefficient was used to analyze quantitative data. Pearson correlation coefficient was used to determine the relationship between working capital management and financial performance. The probability value (P- value) was used to test whether the calculated chi-square was significant or not..The findingsof the study revealed that about 83.7 percent of SMEs rarely or sometimes prepare cash budgets, and preparing and reviewing cash budgets are frequently based on monthly periods. At the same time, 85.3 percent of responding SMEs sometimes and often have shortage of cash while about 59.6 percent always and often have a surplus of cash. Nevertheless, only 19 percent of SMEs deposit their cash surplus into bank accounts while up to 58.9 percent of responding SMEs invested cash surplus for profit purposes.The findings of receivable management practices of SMEs in the sample revealed that51.3 percent of SMEs sometimes sell their products or services on credit and 43.1 percent often set up credit policies for the customers. However, there are still 1.6 percent of SMEs that tend to sell on credit to anyone who wishes to buy. The study revealed that 37.2 percentof SMEs review their levels of receivables and bad xix debts monthly. As a result, the percentage of bad debts is controllable and maintained at a relatively low level.It was noted that 58.7 percent of responding firms answeredthat they determine inventory level based on owner/manager’s experience while 34.0 percent based on historical data. Approximately, 7.3 percent used theories of inventory management Based on the above findings, the study recommends that the government should be able to come up with good working capital management policies to guide the SMEs in their working capital management in order to maximize their returns. This is because proper working management practices are essential for the success of SMEs in Kenya.