The effect of working capital management on performance of small enterprises in Kenya

Abstract

Small enterprises have played a critical role in provision of employment, goods for export, income to the government and general value addition. Nevertheless, they face myriad of challenges in managing working capital. The study evaluates the effect of working capital management on the performance of Small Enterprises in Kenya. The research aims at establishing the effect of working capital management-Cash conversion cycle, Inventory turnover days, accounts payable days and accounts receivable days on financial performance of Small Enterprises. Net profit was used as the basis of determining the financial performance of the Small Enterprises. The study investigated small enterprises with more than ten employees in Kirinyaga County. The study used both cross-sectional and correlational research design to determine the effect and relationship between the independent and dependent variables. The study population was Small Enterprises within the county from which a sample of 40 firms used and was obtained through simple random sampling. Questionnaires were administered to the owners of each selected SMEs in order to obtain the primary data. The data obtained was analyzed using multiple regression model to examine the effect of working capital management on the performance of Small Enterprises. The results indicates that’s the accounts payable had a positive but insignificant effect on the profit made by SMEs (Coefficient 742.855, p-Value 0.478). Accounts receivable had a negative but insignificant effect on the profit made by SMEs (Coefficient -2977.465, p-Value 0.399). Inventory management had a negative but significant effect on the profit made by SMEs (Coefficient - 38445.823., p-Value 0.013). The study concludes that managers can increase profits through shortening Inventory turnover and accounts receivable days. Moreover they can increase profitability through negotiating for better credit terms with their suppliers so that they are able to increase accounts payable days since longer account payable days has positive effect on profitability