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ABSTRACT

This research is about assessing the impact of working capital management practices on the performance of Small and Medium Enterprises located in Eldoret Central Business district. The general objective of this study was to assess the impact of working capital management on SMEs performance, while the specific objectives were; to analyze the impact of cash management practices on performance of SMEs, to establish the impact of trade credit management practices on performance of SMEs and to assess the impact of inventory management practices on performance of SMEs. The study sought to test the following hypothesis: HO1: Cash management practices have no impact on SMEs performance. HO2: Trade credit management practices have no impact on SMEs performance. HO3: Inventory management practices have no impact on performance. The literature reviewed includes working capital management; working capital theories; cash management; trade credit management and inventory management. The study is expected to benefit other researchers, the traders, government and lenders. A conceptual framework was developed where independent variable was working capital management while the dependent variable was performance of SMEs. A 5 point likert scale was used to record the responses. A descriptive survey design was used. The area of study was Eldoret Central Business District. The target population was 300 accountants and book keepers in the area of study. Stratified sampling was used. The sample size was 171 accountants and book keepers which was determined using Yamane‟s (2009) formula at alpha level of 0.01 and confidence level of 99%. Primary data was collected using questionnaires and presented using charts. The researcher used both descriptive statistics and inferential statistics to analyze collected data. The research findings showed that there was a positive relationship between the influence of cash (r=.126, p

CHAPTER ONE

INTRODUCTION

1.1 Back ground of the study
Small and Medium Enterprises are important to almost all economies in the world, especially to those in developing countries and within that broad category and to those with major employment and income distribution challenges. Working capital management is also important because of its effects on the firm‟s profitability and risk, and consequently its value (Smith, 1980). For instance high inventory levels reduces the cost of possible interruptions in the production process or of loss of business due to the scarcity of products, reduces supply costs, and protects against price fluctuations, among other advantages (Blinder and Manccini,1991). Consequently, granting trade credit favors the firm‟s sales in various ways (Brennan, Maksimovic and Zechner, 1988; Petersen and Rajan, 1997, Emery, 1987,Smith, 1987, and Ng, Smith and Smith, 1999). However, firms that invest heavily in inventory and trade credit can suffer reduced profitability. Thus, the greater the investment in current assets, the lower the risk, but also the lower the profitability obtained. Decisions about how much to invest in the customer and inventory accounts, and how much credit to accept from suppliers, are reflected in the firm‟s cash conversion cycle, which represents the average number of days between the date when the firm must start paying its suppliers and the date when it begins to collect payments from its customers (Shin and Soenen, 1998, Deloof,2003). The small scale enterprises (SMEs) play an important role in the Kenyan Economy. According to the Economic Survey 2006, the sector contributed over 50 percent of new jobs created in the year 2005. Despite their significance, Kenya National Bureau of Statistics, 2007 indicate that three out of five businesses fail within the first few months of operation as cited by Bowen et al (2009) due to several challenges.
Because of their small size, a simple management mistake is likely to lead to closure of a small enterprise as there is no chance for management to learn from its past mistakes. Lack of planning, improper financing and poor management have been cited as the main causes of failure of small enterprises (Longenecker et al., 2006). Lack of credit has also been identified as one of the most serious constraints facing SMEs thus hindering their development (Oketch, 2000; Tomecko &Dondo, 1992;
Kiiru, 1991).In addition to these, education is also one of the factors that impact positively on growth of firms (King and McGrath, 2002). As with many developing countries, there is limited research and scholarly studies about the SME sector in Kenya. The 1999 National Baseline Survey conducted by Central Bureau of Statistics, ICEG and K-Rep Holdings provided comprehensive picture of SMEs in Kenya. Mead (1998) observes that the health of the economy as a whole has a strong relationship with the health and nature of small scale enterprise sector. Given this scenario, an understanding of the dynamics of SMEs is necessary not only for the development of support programs for SMEs, but also for the growth of the economy as a whole. Given the importance of these small businesses to the Kenyan economy and the informal way in which they are managed, there is need to conduct an enquiry to investigate effect of working capital management on the performance, especially of SMEs in Eldoret Central Business District. Most researchers have focused their analysis on larger firms although some few have offered studies on SME‟s in service, manufacturing, finance and agricultural industry. For instance Mathuva(2010) focused on the influence of working capital management on corporate profitability of firms listed at the Nairobi Securities Exchange. Gakure, Cheluget, Onyango and Keraro (2012) on the other hand analyzed the relationship between working capital management and performance of 15 manufacturing firms listed at the Nairobi Securities Exchange for a period of five years from 2006 to 2010. Omesa, Maniagi, Musiega and Makori (2013) examined the relationships between Working Capital Management and Corporate Performance of 20 manufacturing firms listed on the Nairobi securities exchange for 5 years from 2007-2011 was selected. Finally, Nyabwanga, Ojera, Lumumba, Odondo & Otieno (2012). However, these studies provide no evidence on the relationship between working capital management and performance of SMEs in Eldoret Central Business District during the period 2013-2014
In this context, the objective of the current work is to assess the impact of working capital management practices on performance for a panel made up of 300 accountants and book keepers in SMES located in Eldoret central business district during the period 2013-2014 Performance is the end result of the whole organization‟s systems in relation to its objective. Ittner and Larcker (2000) suggested that financial data have limitations as a measure of company performance. The two note that other measures, such as quality, may be better at forecasting, but can be difficult to implement. This study focuses on financial measures of profitability, liquidity and growth. Profitability can be measured by ratios such as Return on Investment (ROI), Return on Equity (ROE),Return on Assets (ROA) while the Optimal Growth is measured by total shareholder return creation and profitability perspective ( Handschuh et al. ,2011) This work contributes to the literature in two ways. First, no previous evidence exists for the case of SMEs in Eldoret central business district. The second contribution is that, unlike the previous studies the study aims at analyzing the impact of working capital management on the performance of SMEs in trade industry trading in the area of study.
1.2 Statement of the problem
Small and Medium Enterprises are major pillars of economic development in Kenya and other developing countries. According to the Economic Survey of Kenya (2006), the sector contributed over 50 percent of new jobs created in the year 2005. However the National Bureau of statistics 2007 reported that three out of five of these businesses fail due to lack of planning, financing and poor management, lack of credit and the level of education of entrepreneurs (Bowen Michael et al, 2009, Oketch, 2000, King and McGrath,2002). Although the problem of finance has been identified as one of the major constraints to performance of SMEs, existing literature does not specify the impact of working capital management which is one of the major aspects of finance, on the performance of SMEs. This study aims at analyzing the impact of working capital management on the performance on SMEs in Eldoret Central Business District.
1.3 Objectives of the study
The purpose of the study was to assess the impact of working capital management on the performance of SME s in Eldoret central business district. The study seeks to achieve the following specific objectives:i. To analyze the impact cash management practices on SMEs performance in Eldoret central business district.
ii. To establish the impact of trade credit management practices on SMEs performance in Eldoret central business district.
iii. To assess the impact of Inventory management practices on SMEs performance in Eldoret central business district.
1.4 Hypothesis testing
The study sought to test the following hypothesis: HO1: Cash management practices have no impact on SMES performance. HO2: Trade credit management practices have no impact on SMES performance. HO3: Inventory management practices have no impact on SMES performance.
1.5 Significance of the study
This study is important because it is intended to benefit the traders, government suppliers, lenders, customers, employees, the community and other researchers. The government is expected to use the report to formulate policies that will help support, monitor and regulate SME sector. It will also assist financing institutions to understand the financial management practices of these firms and their performance. Such information will also be useful to non-governmental organizations playing vital roles in the development of entrepreneurial skills.
1.6 Justification of the study.
According to the economic survey (2006), the sector contributed over 50 percent of new jobs created in the year 2005. Despite their significance, past statistics indicate that three out of five businesses fail within the first few months of operation (Kenya national bureau of statistics,2007) due to lack of planning, improper financing and poor management, lack of credit (Longenecker, et al., 2006, Oketch, 2000; King and McGrath, 2002). Since working capital management is an aspect of management, while management, planning, education and credit are ingredients of SMEs performance, the research objective was to assess how working capital management affects the performance of SMEs in Eldoret central business district an area where no such research had been carried before. The study area was also deemed convenient for the study due limited time and finances.
1.7 Scope and Limitation of the study
1.7.1 Scope of the study
The study was carried out at Eldoret Central Business District area for a period of one year starting from October 2013 to September 2014. The targeted respondents were SME traders in this market.
1.7.2 Limitations
The limitation of the study is that it covers a small portion of the small and medium scale enterprises in the Uasin Gishu County due to time and financial constraints. The situation even worsens when dealing with small scale enterprises. These firms do not keep proper records and one would have to constantly deal with estimates and guesses to arrive at a conclusion as regard purchases, sales, operating costs, Assets and liabilities. The other problem was absentee directors who were to authorize their accountants to disclose their financial in formation The respondents whose directors had the information and were absent were left out.
1.8 Operational definition of terms.
Accountant: Is a person who prepares accounting reports. Book keeper: Is a person concerned with systematic recording of financial information Capital: capital is money that is used to generate income or make investment. It includes financial assets such as cash marketable securities or capital asset such as plant, machinery, premises, furniture etc in the books of accounts. Organizational performance: Organizational performance is the ability of the organization to achieve its goals and objectives. Small and medium enterprises (SMEs): These are firms whose sales turnover ranges between Ksh 2,000,000 to Ksh100,000,000 and have employed 5-50 employees. Working capital management: Working capital management involves administration of current assets and current liabilities which consists of optimizing the level of current assets in partial equilibrium context. Working capital: It is the difference between current assets and current liabilities. The major elements of current assets are inventories, accounts receivables and cash (in hand and at bank) while that of current liabilities are accounts payable and bank overdrafts.

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