Effect of Financial Literacy on Profitability of Small Scale Enterprises in Kibuye Open Air Market, Kisumu County, Kenya

Abstract

Financial literacy occupies a center stage in the quest to achieve an overall degree of business performance and profit making in an organization. Thus, financial literacy or lack of it plays an important role in the success or failure of many businesses. While many studies have provided documentary evidence suggesting that financial literacy education is effective, there's little evidence to show that financial literacy is an important predictor of financial behavior in the developing world. Even though entrepreneurs in Kibuye market have some financial knowledge regarding financial management in their . businesses; they still register losses, which then raise the concern of the use of knowledge they have acquired. Research findings in Kenya have shown that over 50% of small scale entrepreneurs continue to have deteriorating performance with three in every five small scale enterprises failing within months of establishment. The purpose of the study was to find the effect of financial literacy on the profitability on small scale enterprises in Kisumu County, Kenya. The specific objectives were:· the extent to which financial literacy is adopted by the small scale enterprises, the effect of keeping accounting and financial records on the profitability of the small scale enterprises, the frequency of access to bank credit -facilities on small scale enterprises and the effect of accessibility of bank credit facilities by small scale enterprises. Cross sectional survey research design was used in this study. The study was carried out in Kibuye market, Kisumu County; Kenya. Target population was 5000 small scale enterprises. A sample size of356 was determined using simple random sampling technique, Data were collected using structured questionnaire. Validity of instrument was established by a team of experts in the area of the study while reliability of the instrument determined using Cronbach alpha coefficient method. Data were analyzed using descriptive statistics and inferential statistics and presented in statistical tables, bar graphs and pie charts. The results revealed that adoption of financial knowledge and access to financial services both have a positive and significant influence on the profitability (~""0.201, p=0.38; ~=0.096, p=0.048) respectively. The findings also revealed that keeping financial records and frequency of access to financial Services also have a positive influence on the profitability (~=0.012,. p=0.979; ~=0.024, p=0.827) respectively. The findings conclude that financial literacy influences profitability in small scale enterprises. The findings are expected to contribute in the policy formulation in the industry and consider the appropriate training methods in financial training to the small business owners in Kenya.