Effect of working capital management practices on financial performance: A study of small scale enterprises in Kisii South District, Kenya
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Publication Date
2012-05-09Author
Nyamao, Nyabwanga R
Patrick, Ojera
Martin, Lumumba
Odondo, Alphonce J
Simeyo, Otieno
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Show full item recordAbstract/ Overview
Small-scale enterprises (SSEs) are acknowledged in Kenya as significant contributors to economic
growth. Despite this, it is estimated that up to 40% of the start-ups fail by year 2 and at least 60% close
their doors by year 4. Working capital management is credited as one of the causes of these failures.
The purpose of this study was to assess the effect of working capital management practices on the
financial performance of SSEs in Kisii South District. The study adopted a cross-sectional survey
research design which allowed the collection of primary quantitative data through structured
questionnaires. The target population was 159 managers of 101 trading and 58 manufacturing SSEs.
Stratified random sampling technique was used to obtain a sample of 113 SSEs comprising 72 trading
and 41 manufacturing enterprises. The data were analyzed using both descriptive and inferential
statistics. Consequently, the findings of the study were that working capital management practices
were low amongst SSEs as the majority had not adopted formal working capital management routines and
their financial performance was on a low average. The study also revealed that SSE financial
performance was positively related to the efficiency of cash management (ECM), the efficiency of receivables
management (ERM) and efficiency of inventory management (EIM) at 0.01 significance level. The
coefficient of determination (R2) indicated that 63.4% of the variations in financial performance (FP)
could be explained by changes in ECM, ERM and EIM. The study concluded that working capital
management practices have an influence on the financial performance of SSEs, hence there was the need for
SSE managers to embrace efficient working capital management practices as a strategy to improve
their financial performance and survive in the uncertain business environment. The study corroborates
other research findings that established a positive relationship between working capital management
practices and financial performance.
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- Department of Economics [103]