Effect of cash management practices on financial sustainability of small and medium scale enterprises in Kericho central business district, Kenya

Abstract

Cash Management is imperative in every business organization as cash is said to be the life blood of any business. The essence of cash management is to ensure positive cash flow for smooth business operation. Small and Medium enterprises are vital contributors to the overall performance of an economy and play a crucial role in developing the economy and in creating employment, thus providing employment and income opportunities to a large number of people. One of the serious challenges faced by most business managers is how to effectively and efficiently manage cash in order to maximize their profits and ensure financial sustainability. The purpose of the study was to determine the effect of cash management practices on financial sustainability of SMEs in Kericho Central Business District. The study specifically sought to; examine the effect of cash flow forecasting, liquidity management, budget management and cash control on financial sustainability of SMEs in Kericho Central Business District. The study was anchored on cash conversion cycle model and cash management models. The study may be significant to SMEs who will inform them of the best cash management strategies to adopt and County Governments may use the findings of this study in policy formulation. The study employed descriptive research design. The target population of the study was 102 SME operating in Kericho Central Business District where a sample size of 81 SMEs was sampled using Israel formula. Simple random sampling was used in selecting respondents. Primary data was collected from the respondents through structured questionnaires. Validity of the research instrument was ensured by use of content validity where the instrument was checked by the research supervisors and experts in Accounting and Finance. Reliability of data collection instruments was ascertained through test re-test method where the research instruments was pretested using 50 SMEs in Litein Business District where a Chronbach Alpha coefficients of 0.7804 implying that the research instrument was reliable. Descriptive statistics like mean and standard deviation were used to summarize data. Inferential statistics such as correlation coefficients was used to test the noncausal relationship between variables while regression analysis was used to test the research hypotheses at 5% significance level with the aid of SPSS version 25. The results indicated that there was disagreement among most respondents on whether they were able to project how and when cash would be received and spent. The overall R2= 0.525 which indicates 52.5 percent of the variation in the dependent variable is explained by the independent variables are included in the model. The F-statistics of the regression (F (4, 61) =27.769) was statistically significant (p<0.05). Coefficient for cash flow forecasting was 0.500 with p-value <0.05, coefficient for liquidity management was 0.417 with a p-value<0.05, coefficient for budget management was 0.114 with a p-value<0.05, the coefficient for cash control was 0.225 with a p-value<0.05. The study concludes that SME operators are not able to project how and when cash would be received and spent. The study also conclude that SME operators are not able to identify potential cash problems and deciding on how to adjust it to improve the organizations cash position. The study recommends that training be conducted to SME operators so that they are able to project how and when cash would be received and spent. It also recommends that business mentorship should be carries out by relevant government ministries to enhance SME operators’ capacity to draw simple business budget.