Selected financial factors influencing financial performance of small and medium enterprises in Kenya

Abstract

Small and medium enterprises plays major role in the growth of the national economy through employment creation and poverty alleviation. Most of them perform poorly and about half of them are closed within the first year of operation from literature review. The study sought to determine the influence of access to credit, starting capital, interest on loans and loan re-paying plans on the financial performance of small and medium enterprises in Kenya. The study adopted explanatory research design. The target population was heads of finance departments in the 100 top small and medium enterprises in Kenya. Stratified random sampling technique was used to select 80 small and medium enterprises. This study used primary data, which was collected by structured questionnaires from the sample. A pilot test was conducted to assess the validity and reliability of the research instrument. Data was analyzed by use of both inferential and descriptive statistics with the help of statistical software SPSS. Descriptive statistics composed of calculation of percentages, and frequencies, measures of central tendency (mean) measures of dispersion (standard deviation). The results were presented using tables and figures which included bar charts and pie charts. The study found that access to credit had a positive and significant influence on the financial performance of small and medium enterprises in Kenya (β1= 0.402, P-value=0.000). In addition, the study revealed that starting capital has a positive and significant influence on the financial performance of the small and medium enterprises in Kenya (β2= 0.195, P-value=0.021). The study also established that interest on loans had an inverse and statistically significant influence on the financial performance of the small and medium enterprises in Kenya (β3= -0.245; P-value=0.003). Loan repayment plans had a positive and significant influence on the financial performance of the small and medium enterprises in Kenya (β4= 0.347; P-value=0.003). Combined, access to credit, capital, loan interest and re-payment plans have a statistically significant influence on the financial performance of small and medium enterprises in Kenya. The study recommends that the financial institutions and the government Authorities should allocate more funds to the Youth Enterprise Development Fund and Women Enterprise Fund from the current 18.7% of the National budget. Develop a saving culture where they can save money in commercial banks, microfinance institutions and Sacco’s so that they can access to starting capital from these financial institutions. Small and medium enterprises in Kenya should have proper records and develop a saving culture so as to access credit and starting capital from financial institutions.