EFFECT OF WORKING CAPITAL MANAGEMENT ON THE FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NAIROBI COUNTY, KENYA

Abstract

The purpose of this study was to examine effect of working capital management on the financial performance of Small and Medium Enterprises in Nairobi County, Kenya. This study looked at the effect of management of all the components of working capital management namely; cash management, accounts payable management, accounts receivable management and inventory management on profitability of Small and Medium Enterprises. The study adopted a descriptive research design. The study population comprised of SMEs in Nairobi County which fall within the Top 100 SMEs in Kenya. A sample size of 28 SMEs which represented 30% of the target population was selected through stratified random sampling in a heterogeneous population. The data collected was analyzed through correlation and regression methods using SPSS version 22. The findings revealed that that cash management, inventory management, accounts payable management and accounts receivable management are all significant determinants of financial performance of SMEs in Nairobi County and demonstrated knowledge of working capital management in the Top 100 SMEs in Nairobi County which contributed to the outstanding outcome in the level of financial performance. The findings also indicated that the most important variable in the model was accounts payable management (? = 0.457). This was followed by cash management (? = 0.235), accounts receivable management (? = 0.182) and inventory management (? = 0.179) in that order. The study, therefore, recommends that Small and Medium Enterprises need to have a cash balance policy, inventory management policy, accounts payable management policy and accounts receivable policy because the policies impact positively on the overall financial performance.

Key Words: Cash Management, Accounts Payable Management, Accounts Receivable Management, Inventory Management