Effect of working capital management practices onfinancial performance: A study of small scale enterprises in Kisii South District, KenyaSmall 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 was analyzed using both descriptive and inferential statistics. Consequently, the findings of the study were that, working capital management practices were low amongst SSEs as 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 efficiency of cash management (ECM), 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 influence on the financial performance of SSEs, hence there was 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.
Key words: Working capital management, financial performance, small scale enterprises. INTRODUCTION
Management of working capital which aims at maintaining an optimal balance between each of theworking capital components, that is, cash, receivables, inventory and payables is a fundamental part of the overall corporate strategy to create value and is an important source of competitive advantage in businesses (Deloof, 2003). In practice, it has become one of them important issues in organizations with many financial executives struggling to identify the basic working capital drivers and the appropriate level of working capital tohold so as to minimize risk, effectively prepare for uncertainty and improve the overall performance of their businesses (Lamberson, 1995).
The existence of efficient working capital management practices can make a substantial difference between the success and failure of an enterprise and it is of particular importance to the managers of small scale enterprises, because it is they who strive for finances and the opportunity cost of finances, for them is usually on the higher side (Kwame, 2007). As established by Padachi (2006), efficient management of working capital is vital for the success and survival of the SSEs which needs to be embraced to enhance performance and contribution to economic growth. However, as observed by Atrill (2006), there is evidence that many small scale enterprises are not very good at managing their working capital despite their high investments in current assets in proportion to their total assets and this has been a major cause of their high failure rates as compared to large businesses. According to him, majority of the small scale enterprises operate without credit control department implying that both the expertise and the information required to make sound judgments...
Please join StudyMode to read the full document