Influence of financial literacy on financial performance of small and medium enterprises in Ruiru Town, Kenya

Abstract

Financial literacy has been identified as one of the key competencies required for the establishment, management and thriving of SMEs. However, the exact effect financial literacy has on the financial performance of SMEs has not been fully established by the past literature thus the need for further research in this area. This study sought to establish the influence of financial literacy on the financial performance of SMEs in Ruiru sub county, Kiambu County, the specific objectives emanating from this study were; to identify the influence of personal saving skills, entrepreneurship skills, book keeping skills and skills on access to banking services on the financial performance of small and medium enterprises in Ruiru Sub County. A descriptive survey design was adopted in conducting the study. The study population entailed the 334 owners of registered SMEs in Ruiru Sub County and who have undergone some financial literacy training. The target population of this study was 334 SMEs operating in Ruiru town. A sample of 100 respondents was selected out of the total population using stratified sampling to get the sample of respondents and with the aid of the Yamanes’ formula. The study used primary data which was collected using questionnaire which comprised of both open ended and close ended questions each addressing the study's objectives. The data collected was analyzed using SPSS and the significance of the results tested using inferential statistics such as analysis of variance. The results of the multiple regressions revealed that there is significant strong positive relationship between financial literacy; personal savings skills, entrepreneurship skills, access to banking services skills and book keeping skills on financial performance of SMEs; growth in profitability, sales revenue turnover and return on equity. From the results, the study concluded that high levels of financial literacy among SME owners led to higher financial performance of SMEs. The study recommended that awareness be created to the SMEs on the importance of being financially literate by encouraging the SME owners to participate in financial literacy training programmes. Secondly, trainers should consider including information technology skills related modules as one of units on which participants will be trained on, this is because information technology helps an entrepreneur do business on line hence increase his competitive edge.