Working Capital Mgt

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Effects of Working Capital Management on the Growth of Small and Medium Enterprises in Kenya: A Case of Small and Medium Textile Enterprises in Nairobi Central Business District

Waheho E. W

Abstract

Several Kenyan businesses operate in different business sectors of Small and Medium Enterprises (SMEs) and contribute wealth to Kenyan economy in terms of value creation. For the success of any Kenyan enterprise, the financial management of assets is so crucial. Thus, this research focused on the effects of working capital management on the growth of SMEs with specific interest in the clothing and textile sector within the Nairobi Central District. The variables of the study included; cash management, receivables management, payables management and inventory management. In this study, descriptive survey design was adopted. The population for this study included the small and medium enterprises which retail clothing and textile in Nairobi.

The study targeted both owners and employees in these businesses with a sample size of 80 respondents. The research instrument used a structured questionnaire. Descriptive statistics were used to analyze the data. This was presented in pie charts, graphs, bar charts and tables. Multiple regression was used to generalize the results from the sample to the population.

The study concluded that SMEs in the clothing and textile sector in Nairobi are not good at managing their working capital. Owners/managers experience was found to be more important than application of theories of both inventory and cash balances in majority of the SME in the study. The SMEs lacked resources to manage their receivables. The study recommended that SMEs establish a credit control department with a full-time credit officer and follow credit control policy procedures. SMEs must also have collection policies to ensure that amounts owing are collected as quickly as possible.

Introduction

Small and medium enterprises – in the African context, firms with between 11 and 100 workers – are an important category of businesses in most countries. In Kenya, for example, there were an estimated 370,000 SMEs compared to only 1,000 large enterprises in 2006 (ROK, 2006). African SMEs can be formally registered or operate outside of the formal business system. Generally, the larger the enterprise, the more likely it is to have formal registration of some type.

Small and medium-sized enterprises (SMEs) in any country contribute to economic growth. In Kenya, the SMEs play an important role in employment and wealth creation, income distribution, accumulation of technological capabilities and spreading the available resources among a large number of efficient and dynamic small and medium size enterprises (IDRC, 1993). According to the Economic Survey (ROK, 2009) the SME sector contributed 79.8% of new jobs created in that year in Kenya. Small and medium-sized enterprises (SMEs) are sometimes classified differently in various countries. The classification of the enterprises for this study is based on the Government of Kenya’s 1998 Development Plan and the Sessional Paper No.2 of 2005 (ROK, 1998, 2005). According to the documents, firms are classified by the number of fulltime employees which they engage. Firms which employ less than five full-time workers are referred to as micro enterprises. Those employing between 5 and 49 workers are called small scale enterprises (SEs) and those with 50-99 full-time employees are medium enterprises (MEs) while those with 100 and above full time workers are referred to as large enterprises (ROK, 2005).

According to the Kenya National Bureau of Statistics (ROK, 2007), three out of five businesses fail within their first three years of operation. One of the most significant causes of failure is the negative perception towards SMEs (Bowen, Morara, & Muriithi, 2009). Potential clients perceive the small business as lacking the ability to provide quality...
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