Thesis:

Effect of cash management practices on financial performance of small and medium enterprises in Kisii county, Kenya

This study sought to examine the effect of cash management practices on the financial performance of Small and Medium Enterprises (SMEs) in Kisii County, Kenya. The specific objectives were to: assess the effect of the cash conversion cycle, evaluate the influence of accounts receivable management, and determine the effect of accounts payable management on the financial performance of SMEs. The study was motivated by the persistent financial challenges facing SMEs in Kenya, particularly liquidity issues, poor debt recovery, and limited cash flow forecasting, which contribute significantly to high failure rates among these enterprises. The study adopted a descriptive research design and employed a quantitative approach to investigate relationships between variables. A structured questionnaire, organized around the three core variables and financial performance indicators, was used to collect data from a stratified random sample of 316 SMEs. Of these, 274 completed questionnaires were returned, giving an excellent response rate of 86.7%. The data were analyzed using SPSS Version 28, applying both descriptive statistics (means and standard deviations) and inferential statistics through multiple linear regression. To ensure validity, the research instrument underwent expert review and pilot testing involving 5% of the sample. Content validity was confirmed by aligning the instrument with both theory and practice in SME finance. Reliability was tested using Cronbach’s Alpha, with all variables exceeding the 0.70 threshold: cash conversion cycle (0.812), accounts receivable (0.795), accounts payable (0.784), and financial performance (0.828). These results confirmed that the questionnaire had high internal consistency and was suitable for statistical analysis. Findings from the study revealed that all three cash management practices had a positive and statistically significant effect on financial performance. The regression model explained 45% of the variance in financial performance (R² = 0.450). Among the variables, the cash conversion cycle (B = 0.321) had the strongest influence, indicating that SMEs that shorten the duration between inventory purchases and customer payments tend to enjoy better liquidity and profitability. Accounts receivable management (B = 0.278) also contributed significantly, suggesting that enterprises that enforce structured credit terms and follow-up procedures achieve better cash flow stability. Accounts payable management (B = 0.246) had a positive effect as well, indicating that SMEs which align supplier payments with incoming cash and prioritize strategic relationships with vendors maintain stronger operational continuity. The study concludes that efficient cash management is critical for improving the financial health of SMEs. It recommends that SME owners adopt formal cash planning tools, enforce consistent receivables collection systems, and build payment plans that reflect realistic inflow projections. Policymakers are encouraged to promote financial literacy and develop supportive infrastructure to help SMEs institutionalize best practices in internal cash management. For future research, a longitudinal approach is recommended to assess the longterm impact of cash management practices on business growth. Further studies should also consider incorporating external financial factors such as taxation, market competition, and credit access to provide a more holistic view of SME financial performance dynamics.