Accounting Practices and Financial Performance of SMES in Garissa Township Subcounty, Kenya

Abstract

Research has widely indicated that one of the main sectors that contribute to economic advancement is the Small and Medium Enterprises (SMEs) as it crucially enables provision of employment opportunities as well as facilitate poverty reduction to majority of households. Despite their major contributions to the economy, many of the SMEs don't grow into large scale organizations due to various constraints they experience. Anchored on the Proprietary, Balanced Scorecard Theory, Agency and the Positive Accounting theories, this study interrogated the relationship between accounting practices, that is, budgeting practices, costing practices, internal control practices as well as financial reporting practices and financial performance of the SMEs, focusing on Garissa Township. Out of the 456 registered SMEs, 213 were determined through Yamane formula then sampled through stratified random procedures. Quantitative primary data was collected through structured questionnaires and then a multiple a regression model used to establish the relationship between the variables. It was indicated that budgeting (? = 0.325; P-Value < 0.05); costing (? = 0.500; P-Value < 0.05); internal control (? = 0.536; P-Value < 0.05) and financial reporting (? = 0.395; P-Value < 0.05) had a positive and significant effect on financial performance of SMEs in Garissa Township Subcounty. This leads to the recommendations for a need by the SMEs to prioritize important budgeting practices such as basing budgeting process on operational costs, ensuring there is budgeting on sales and preparing investment budgets to monitor investment expenditure. SMEs are also encouraged to consider involving top management and financial accountants in the process of budgeting, focus on budgeting that involves cash operations on a daily basis, long-term goals of the business and budget goal clarity.

Key Words: Budgeting, Costing, Internal Control, Financial Reporting, Financial Performance