RESEARCH PROPOSAL (Diploma)

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Factors affecting financial performance in the SME sector in Kenya: A case

study of Ngong Muguku Poultry Farm Ltd.

BY

IBRAHIM MUSA

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILMENT OF


THE REQUIREMENT FOR THE AWARD OF A DIPLOMA IN BUSINESS
MANAGEMENT SUBMITTED TO THE KENYA INSTITUTE OF
MANAGEMENT

SEPTEMBER 2023

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DECLARATION

Declaration by the Student

This Research Study is my original work and has not been presented to any other
examination body. No part of this research proposal should be reproduced without
my consent or that of The Kenya Institute of Management.

Name……………………………………..Signature………………………
Date……….

KIM/ ……. /…….

Declaration by the Supervisor

This Research Proposal has been submitted for examination with my approval as
the Kenya Institute of Management Supervisor.

Name…………………………………Signature………………..
Date…………………….

Lecturer Supervising

For and on behalf of the Kenya Institute of Management

Name…………………………………Signature……………………
Date…………………

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DEDICATION

I dedicate this Research Project to Natasha Joseph for your inspiration Thank you
all.

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ACKNOWLEDGEMENT

I sincerely thank Almighty God for everything in my life. I thank my Supervisor,


Mr Alex Chege for hi scholarly critique, many valuable suggestions, tireless
assistance, guidance, and professional advice that kept me going.

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ABSTRACT

The main aim of the proposed research is to investigate the factors influencing the
financial performance of small and medium-sized poultry enterprises (SMEs) in
Kenya, with a specific focus on Ngong Muguku Poultry Farm Ltd. In Kenya,
SMEs, particularly those in the poultry farming sector, play a significant role in the
economy, contributing to job creation and economic growth. However, these
enterprises face challenges, such as limited access to financing and market
information, which hinder their growth and profitability. The study employs a
descriptive research design and purposive sampling to gather data from Ngong
Muguku Poultry Farm Ltd. A structured questionnaire will be used to collect
primary data, which will be analyzed using Appropriate statistical tools like IBM
SPSS and Microsoft Excel. The research seeks to fill existing gaps in the literature
by exploring the specific barriers that poultry farmers encounter in accessing credit
and how these constraints affect their financial performance.

The study will also examine the influence of internal factors, such as managerial
competence and business strategy, and external factors, including the market
environment and regulatory framework, on the financial performance of Small,
and Medium Enterprises (SMEs) in the poultry farming sector. The findings of this
research will provide valuable insights for SMEs in Kenya, policymakers, and
other stakeholders in understanding the dynamics of financial performance in the
poultry farming industry. It will offer recommendations to address the challenges
faced by poultry farmers and promote sustainable growth in this vital sector of the
Kenyan economy. Ethical considerations and validity and reliability measures have
been integrated to ensure the quality and integrity of the research findings.

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Contents
DECLARATION..................................................................................................................................
DEDICATION....................................................................................................................................
ACKNOWLEDGEMENT.....................................................................................................................
ABSTRACT.........................................................................................................................................
LIST OF ABBREVIATIONS................................................................................................................
CHAPTER ONE..................................................................................................................................
INTRODUCTION TO THE STUDY........................................................................................................
1.0 Introduction......................................................................................................................
1.1 Background of the Study..................................................................................................
1.2.1 Ngong Muguku Poultry Farm Ltd............................................................................
1.3 Statement of the Problem.................................................................................................
1.4 Objectives of the Study....................................................................................................
1.4.1 General Objective.....................................................................................................
1.4.2 Research Questions......................................................................................................
1.4.3 Specific Objectives...................................................................................................
1.5 Significance of the Research............................................................................................
1.5.1 Management of Muguku Poultry Farm Ltd..............................................................
1.5.2 Policy Makers...........................................................................................................
1.5.3 Other Researchers.....................................................................................................
1.6 Limitations of the Research..............................................................................................
1.6.1 Time and Resource Constraints................................................................................
1.6.2 Limited Sample Size................................................................................................
1.6.3 Timeframe Constraints.............................................................................................
1.7 Scope of the Study............................................................................................................
CHAPTER TWO...............................................................................................................................
LITERATURE REVIEW......................................................................................................................
2.1 Chapter Introduction......................................................................................................
2.2 Review of critical literature............................................................................................

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2.2.1 Poultry farming and its impacts to the economy.....................................................
2.2.2 Financial Practices..................................................................................................
2.3 Empirical review............................................................................................................
2.4 Summary of Research Gap.............................................................................................
2.5 Theoretical Framework..................................................................................................
2.6 Conceptual Framework..................................................................................................
2.6.1 Financial Performance............................................................................................
2.6.2 Internal Factors.......................................................................................................
2.6.3 External Factors......................................................................................................
2.6.4 Financial Performance as the Outcome..................................................................
CHAPTER THREE.............................................................................................................................
RESEARCH DESIGN AND METHODOLOGY......................................................................................
3.1 Introduction....................................................................................................................
3.2 Research Design.............................................................................................................
3.3 Target population...........................................................................................................
3.4 Sampling........................................................................................................................
3.5 Data Collection...............................................................................................................
3.6 Validity and Reliability..................................................................................................
3.1 Data Analysis.................................................................................................................
REFERENCES...................................................................................................................................
APPENDIX I.....................................................................................................................................
QUESTIONNAIRE............................................................................................................................
APPENDIX II....................................................................................................................................
BUDGET..........................................................................................................................................

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LIST OF ABBREVIATIONS

IFC ----------------------The International Finance Corporation

MSMEs -----------------Micro, Small, and Medium Enterprises

SMEs --------------------Small, and Medium Enterprises

KIPPRA -----------------Kenya Institute for Public Policy Research and Analysis

GDP --------------------- Gross Domestic Product

IFC ----------------------- International Finance Corporation

KEPOFA -----------------The Kenya Poultry Farmers' Association

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CHAPTER ONE

INTRODUCTION TO THE STUDY

1.0 Introduction

This chapter provides the foundational aspects of the research, including the background of the
study, the statement of the problem, the research objectives and questions, the significance of the
study, the limitations inherent in the research, and the scope of the study.

1.1 Background of the Study

In most economies, especially in developing countries, SMEs play a crucial role in terms of
economic development. These enterprises constitute the majority of businesses globally and
significantly contribute to job creation and global economic growth. SMEs represent around 90%
of companies and over 50% of employment worldwide (The World Bank, 2021). In emerging
economies, formal SMEs contribute up to 40% of the national income (GDP), and when informal
SMEs are considered, this number is even higher.

To meet the increasing global workforce, which is projected to require 600 million jobs by 2030,
SME development has become a top priority for governments worldwide. In emerging markets,
SMEs generate the most formal job opportunities, accounting for 7 out of 10 jobs (The World
Bank, 2021). However, access to finance remains a significant challenge for SMEs, the second
most common obstacle hindering their growth in emerging markets and developing countries.

Despite their potential, SMEs encounter obstacles that impede their growth. One significant
challenge they confront is the limited access to financial resources. According to Ryan et al.
(2014), SMEs face restrictions in securing external financing as banks prioritize funding for
larger enterprises over small ones. Unlike their larger counterparts, SMEs encounter greater
difficulty in obtaining bank loans. As a result, they often rely on internal funds or seek financial
assistance from friends and family to establish and operate their businesses. The IFC estimates
that approximately 65 million firms, constituting 40% of formal MSMEs in developing nations,

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have an unmet financing requirement totaling $5.2 trillion annually (IFC, 2017). This unmet
financing need is roughly 1.4 times the current level of global MSME lending.

In a study by Eniola & Entebang (2015), unfavorable government policies affected SMEs'
performance adversely, leading to a decrease in the total credit provided by commercial and
merchant banks to SMEs. Similarly, Kinyua (2014) found that SMEs in Kenya faced limited
funding sources due to strict regulations imposed by lending institutions, resulting in a failure to
secure credit from banks. In previous studies, Ngui (2014) highlighted the slow rate of new firm
formation and the tendency for already established SMEs to collapse within five years. Another
report by UNDP focused on Kenyan SMEs and revealed the challenges they face in accessing
funds despite numerous lending institutions in Kwale and Kitui counties. Yobes et al. (2015)
examined the impact of lease competence and structure on SME performance, aiming to identify
favorable lease terms that positively influence SME cash flows. The study concluded that the
limited competencies of lessee managers hindered their ability to pay rental fees, subsequently
affecting SMEs' cash flows. In addition, Protegerou et al. (2017) explored the importance of
human capital for new firms, while Blasco & Pertold_Gebicka (2013) examined employment
policies and their impact on employees' working conditions, noting a lack of adherence to these
policies. However, these studies failed to address the internal decisions made by SMEs regarding
funding, operational costs, and the adoption of technology to enhance efficiency.

SMEs in Kenya still encounter challenges despite their significant contribution to the country's
economy. Before examining the longevity of SMEs in Kenya, it is crucial to understand the
characteristics that render them vulnerable in accessing finances and the internal weaknesses that
affect their operations. This study will consider factors such as research and development, the
economic environment, human resources, technological aspects, and the associated cost
implications, explicitly focusing on Kenya's informal poultry farming sector (Munyaka et al.,
2015).

There is currently no universally accepted definition for MSMEs at the global level. However,
several key factors are typically considered when establishing their classification, such as the
number of employees, turnover, and capital. In Kenya, MSMEs are defined differently
depending on the specific circumstances (KIPPRA, n.d.). Generally, they are identified as

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enterprises that employ 1-99 individuals. Specifically, micro-enterprises have less than ten
employees, small enterprises have 10-49 employees, and medium-sized enterprises use 50-99
individuals (KIPPRA, n.d.).

MSMEs play a crucial role in Kenya's economy, contributing to more than 90 percent of the total
labor force and serving as a significant driver of poverty reduction and economic development
(KIPPRA, n.d.). They bring about innovation, enhance competitiveness, provide goods and
services, and foster entrepreneurial skills. The country is home to over 7.4 million MSMEs,
employing approximately 14.9 million Kenyans across various sectors. The majority of these
MSMEs operate informally. The significance of MSMEs in promoting GDP growth and
employment is emphasized in Kenya's Vision 2030, the nation's long-term development
roadmap.

1.2.1 Ngong Muguku Poultry Farm Ltd

Ngong Muguku Poultry Farm Ltd. is a renowned Kenyan company with a rich history that spans
back to 1965 when the visionary Nelson Muguku founded it. This poultry farm has grown into a
major player in the industry, specializing in producing day-old commercial layer and broiler
chicks. The story of its inception is fascinating and sheds light on its founder's determination and
entrepreneurial spirit. Nelson Muguku's journey began when he made a significant investment by
purchasing the 22-acre Star Ltd farm from a white veterinary doctor for Kshs 100,000. This was
a considerable amount during that time, but it laid the foundation for what would become a
highly successful venture. With the acquisition of the farm, he swiftly rebranded it as Muguku
Poultry Farm, signaling the start of something extraordinary.

The ambitious Muguku immediately set up a hatchery on the farm, equipped with a 9,000-egg
incubator. This move allowed him to focus on producing chicks, making a strategic shift that
would prove to be a game-changer for his business. As the hatchery flourished, the farm's
reputation grew, and it wasn't long before Muguku Poultry Farm gained recognition for its high-
quality products and services. In those early days, the farm experienced remarkable growth, and
its popularity caught the attention of some prominent figures in Kenya. Among its esteemed
clientele were Governor-General Malcolm MacDonald and the country's first Prime Minister,

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Jomo Kenyatta. This endorsement from influential leaders further solidified the farm's position in
the industry and boosted its credibility.

Today, Muguku Poultry Farm stands as a testament to Nelson Muguku's vision and dedication.
While it initially started with multiple facets, including egg production, over the years, the
company has specialized and honed its expertise in producing day-old commercial layer and
broiler chicks. This focused approach has allowed them to perfect their processes and provide
unmatched quality in their niche. With the advent of the digital age, Muguku Poultry Farm has
embraced technology to expand its reach and connect with a broader audience. The company
now maintains a dynamic Facebook page where interested parties can access valuable
information about their products and services. Through social media, they share updates,
customer testimonials, and tips related to poultry farming, showcasing their commitment to
customer satisfaction and support.

The organizational culture of Muguku Poultry Farm Limited is centered on teamwork,


innovation, and customer satisfaction. The company values the contributions of every employee
and encourages open communication and collaboration among all team members. The company
recognizes the importance of the current legislative framework on animal agricultural practices,
particularly the principles set forth by the World Organisation for Animal Health (OIE). These
principles aim to respect, promote, and advance animal welfare worldwide. Furthermore, they
acknowledge Kenya's commitment to sustainable development goals and their compatibility with
animal welfare. SDG 12, which focuses on responsible production and consumption, reinforces
the significance of animal welfare in achieving these goals.

As the poultry industry in Kenya continues to evolve and incorporate new technologies, Muguku
Poultry Farm Ltd. believes in adopting a precautionary approach to mitigate risks associated with
industry expansion. Their policies are proactive rather than reactive, aiming to safeguard the
welfare of animals and the sustainability of their operations.

The company recognizes and complies with relevant global laws and policies that regulate
international trade in live animals and animal products. They adhere to the guidelines provided
by the World Trade Organisation (WTO) and its associated treaties, ensuring safety measures in
food, animal health, and plant health. Muguku Poultry Farm Ltd. harmonizes its practices with

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international codes and standards, such as those set by the OIE. They also adhere to the
International Air Transport Association (IATA) Live Animal Regulations for the safe and
humane transportation of animals by commercial airlines.

Muguku Poultry Farm Ltd. acknowledges the importance of regional laws and policies that
promote animal welfare in Africa. They support the African Union Inter-African Bureau for
Animal Resources' Animal Welfare Strategy for Africa and actively participate in its
implementation through the AU-IBAR's multi-stakeholder platform. They also recognize the
IGAD Regional Animal Welfare Strategy and its goals of compliance with OIE animal welfare
standards and mainstreaming welfare into all animal production and utilization activities within
IGAD member states.

The company acknowledges the provisions of the Treaty for the Establishment of the East
African Community, emphasizing cooperation, integration, and development in the agriculture
and food security sector. While the Treaty does not specifically address smallholder farmers'
interests, Muguku Poultry Farm Ltd. aims to raise living standards by fostering cooperation and
integration.

Despite the absence of a standalone statute for poultry farming in Kenya, the company complies
with national policies, strategies, and institutions responsible for implementing regulations
related to poultry farming. They support ongoing efforts to pass bills such as the Poultry
Development Bill 2012, the Animal Health Bill, and the Veterinary Public Health Bill, which
seek to regulate and promote safe and healthy poultry farming practices per international
standards. In addition, they adhere to various national legislations and strategies impacting
animal welfare and agricultural practices, including provisions under the Constitution of Kenya
2010, Agricultural Sector Development Strategy, Penal Code, Prevention of Cruelty to Animals
Act, Veterinary Surgeons Para-Professionals Act, Animal Diseases Act, Environmental
Management & Coordination Act, and the Pharmacy and Poisons Board Act.

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Figure 1.1 Organization structure

CEO

Extension Processiong
Administration Trade Depatment
services depatment

Aministrative
Intenal Insectors Quality manager Logistic staff
officers

Messagers Technicians Processing staff marketing staff

Hatchary Sales and Accont


Security guards
attendants clerks

1.3 Statement of the Problem

Researchers and industry experts widely agree that a significant obstacle to enhancing financial
performance in any industry is the limited understanding of the factors that influence it. Studying
the factors that impact an organization's financial performance is imperative to facilitate
continuous improvement. Local poultry farming, recognized as a crucial element in the economic
transformation of specific regions in the country, is practiced by numerous small-scale farmers
and contributes significantly to the overall economy (Wong et al., 2017). Poultry farmers are
regarded as entrepreneurial individuals who offer innovative solutions to pressing social
problems. They display ambition and persistence in addressing societal issues and introducing
new ideas for widespread change. By identifying problems within their environment, they enter
the field and provide solutions, ultimately influencing society to adopt new approaches.
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In today's context, poultry farming in Kenya faces various conditions and constraints that hinder
enterprise success. These include funding shortages and a lack of field extension officers. Due to
their size, poultry farmers have little control over input costs and output prices, often resulting in
insufficient profits and causing high-cost firms to exit the business. The researcher's study aims
to critically evaluate the factors that affect the financial performance of small and medium-scale
poultry enterprises, focusing on Ngong Muguku Poultry Farm Ltd.

1.4 Objectives of the Study

1.4.1 General Objective

The general objective of this study will be to critically evaluate the financial factors affecting the
performance of small and medium-scale poultry enterprises with a focus on Ngong Muguku
Poultry Farm Ltd.

1.4.2 Research Questions

i. What is the market influence on the financial performance of Ngong Muguku Poultry
Farm Ltd.?
ii. How do financial management practices, such as budgeting and financial reporting,
influence the financial performance of Ngong Muguku Poultry Farm Ltd?
iii. What is the impact of market conditions, including competition and customer
demand, on the financial performance of Ngong Muguku Poultry Farm Ltd?
iv. How do government policies and regulations affect the financial performance of
Ngong Muguku Poultry Farm Ltd?

1.4.3 Specific Objectives

i. To determine the market influence on the financial performance of Ngong Muguku


Poultry Farm Ltd.
ii. To assess the relationship between financial management practices and the financial
performance of Ngong Muguku Poultry Farm Ltd.
iii. To examine the impact of factors, such as market conditions and government policies,
on the financial performance of Ngong Muguku Poultry Farm Ltd.

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1.5 Significance of the Research.

1.5.1 Management of Muguku Poultry Farm Ltd

The theories and practices explored in this study contribute in several significant ways. Firstly,
for farmers, understanding the relationship between enterprise growth and factors such as
training, finance, entrepreneurial culture, and market dynamics within the missing middle will
help identify barriers to the proper development of poultry enterprises. The study's findings shed
light on strategies that poultry businesses can employ to overcome obstacles related to finance,
training, entrepreneurial culture, and market access, ultimately enabling successful growth.
Current and prospective poultry farmers can benefit from this study by gaining insights into the
complexities of the business, identifying areas for growth improvement, and seeking strategies to
address them. Recognizing their weaknesses will enable them to handle and diagnose issues
effectively.

1.5.2 Policy Makers

The government can leverage the results of this study to inform economic planners and
policymakers. This knowledge can be utilized to understand the requirements for training,
financing, entrepreneurial culture, and market development that successful poultry startups need.
Using this information, economic policies and strategies can be crafted to combat poverty and
unemployment by promoting entrepreneurship. This will be particularly relevant for Finance,
Economic Development, and Youth Development ministries.

1.5.3 Other Researchers

Other researchers, practitioners, consultants, and business students interested in poultry farming
enterprises can also utilize this study as a valuable source of knowledge and a foundation for
further research. It will be a helpful resource for borrowing ideas and expanding an
understanding of this field.

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1.6 Limitations of the Research

1.6.1 Time and Resource Constraints

In this study, one major limitation lies in the constraints of respondents' time and resources.
Balancing their regular duties with completing the questionnaires posed a challenge, potentially
affecting the quality and comprehensiveness of responses. Furthermore, the reliance on online
surveys required participants to have access to at least a smartphone, which may have excluded
some individual farmers who lacked the necessary technological resources.

1.6.2 Limited Sample Size

Another notable limitation of the research was the small sample size, consisting of only 60
participants from the target population. This limited number of participants may have hindered
the generalizability of the findings, as the sample might not fully represent the entire SME sector
or poultry farmers in Kenya. As a result, the implications and conclusions drawn from this study
may not apply to the broader population.

1.6.3 Timeframe Constraints

The research was conducted within a specific timeframe, which could have restricted the
comprehensive understanding of the long-term factors influencing financial performance in the
poultry farming sector. Financial performance is subject to various factors that may evolve, and a
short timeframe might not have captured the complete range of influences at play.

1.7 Scope of the Study.

This research will seek to comprehensively examine the financial factors influencing the
performance of small and medium-scale poultry enterprises, with a specific emphasis on Ngong
Muguku Poultry Farm Ltd, located in Kenya. While the geographical scope is centered on Ngong
in Kenya, the implications of the findings are expected to resonate with small and medium-scale
poultry enterprises more broadly. The research population for this study primarily comprises
employees and other stakeholders associated with Ngong Muguku Poultry Farm Ltd. It also
extends to individuals with expertise and insights into the poultry farming industry in Kenya. To
gather in-depth data, a sample size of 45 participants will be engaged through surveys,

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interviews, and observations. The geographic focus on Ngong is because it hosts the case study,
Ngong Muguku Poultry Farm Ltd, but the research intends to shed light on financial dynamics
applicable to similar poultry enterprises across Kenya.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Chapter Introduction

This chapter delves into the extensive body of literature encompassing books, scholarly articles,
and other pertinent sources that offer descriptions, summaries, and critical evaluations of the
research problem. The chapter also thoroughly examines theoretical literature, critical literature,
a concise overview, identifies existing gaps, and establishes a conceptual study framework.

2.2 Review of critical literature.

2.2.1 Poultry farming and its impacts to the economy.

In developing nations, urban growth and better living standards have led to changes in people's
diets. This shift involves moving away from eating mainly grains and towards consuming more
meat, dairy products, fruits, and vegetables. As part of this dietary shift, the demand for meat is
increasing, which is good news for the meat industry (Bergevoet & Engelen, 2014).

The global meat production is expected to grow by around 14 percent by 2030 compared to the
period between 2018 and 2021. This growth is primarily driven by the rising demand for poultry
meat (OECD-FAO, 2021). Poultry meat and eggs are widely accepted as culturally suitable
sources of animal protein. It is projected that by 2030, poultry meat will make up 41 percent of
the total meat consumed worldwide (OECD-FAO, 2021). In Kenya, there is a prediction that
poultry meat consumption will increase from 55 thousand metric tons in 2000 to 165 thousand
metric tons in 2030 (Robinson & Pozzi, 2011).

Poultry encompasses a diverse array of domesticated bird species, including chickens, ducks,
geese, turkeys, guinea fowls, quails, and pigeons. The practice of poultry farming holds
significant appeal in developing nations due to its space-efficient nature when compared to
traditional livestock and staple crop production methods (Khaleda, 2013). Furthermore,
embarking on poultry ventures demands lower initial capital investments, and the returns are
often realized more swiftly than in other livestock enterprises. As a case in point, the production

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of chickens in Kenya surged from 44 million in 2016 to an estimated 57 million in 2020 (FAO,
2022). Indigenous chickens constitute a substantial 84% of this production, with the remaining
16% comprising layers (8%), broilers (6%), and other poultry species (2%) (Omondi, 2022).

In the Kenyan context, poultry farming serves multifaceted roles within households. Not only
does it contribute to the family's sustenance by providing a source of meat and eggs, but it also
acts as an economic lifeline through the sale of these products and the utilization of poultry
manure. Additionally, it functions as a reservoir of capital, enabling households to make
investments for their future (Bett et al., 2011).

Various studies have revealed that in the realm of valuable agricultural goods like horticulture
and livestock products, there exists a connection between producers and the value chains through
contract farming (Narayanan, 2014). To illustrate, in the poultry sector, the production of broilers
can become closely linked with a leading company that supplies farmers with necessary
resources, while farmers take care of housing and bird management. This leading company then
facilitates the broiler market and compensates farmers for their bird housing and management
efforts (Narayanan, 2014). In contrast, some farmers independently handle the production and
marketing of broilers (Okello et al., 2010).

Poultry farming is a crucial sector of the agricultural industry in Kenya a already mentioned
above. However the market is not isolated as it is influenced by various external factors,
including global and regional markets.

Trade and Market Dynamics

Trade and market dynamics exert a profound influence on Kenya's poultry farming industry,
shaping its competitiveness and performance in multifaceted ways. One prominent facet of this
influence identified in literature is the importation of poultry products. Cheaper imported poultry
items can saturate the market, potentially lowering the prices of domestic poultry products, and
making it increasingly challenging for local farmers to maintain a competitive edge (Kithinji,
2017). As regional trade agreements, such as the East African Community (EAC) Common
Market Protocol, facilitate the free movement of goods, Kenyan poultry farmers must continually

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adapt to these ever-changing market conditions. This not only requires maintaining competitive
prices but also improving product quality to stand out in the marketplace.

Another crucial aspect of external market dynamics is the export opportunities they present. By
adhering to international quality standards and regulations, Kenyan poultry producers can access
regional and global markets, diversifying their customer base and boosting revenue. The East
African Community, for instance, provides a substantial potential market for Kenyan poultry
products, and access to these markets can significantly enhance the profitability and growth
prospects of domestic farmers.

Moreover, global market volatility poses a significant challenge. Fluctuations in global feed
prices, driven by external factors like weather conditions and commodity price fluctuations, have
a direct impact on production costs for Kenyan poultry farmers. Such fluctuations can cause
price instability, making it challenging for farmers to maintain consistent pricing structures and
long-term planning. In this context, resilience in the face of market volatility requires effective
cost management strategies and the ability to adapt to changing external conditions.

Pricing and Market Competition

Fluctuations in global feed prices significantly impact production costs for Kenyan poultry
farmers (Wanjiru, 2018). As poultry production is heavily dependent on feed costs, variations in
international grain markets, such as the price of maize and soybean, can lead to increased costs
for Kenyan farmers. When feed prices rise, domestic poultry producers may be forced to increase
the prices of their poultry products to maintain profitability. This, in turn, affects consumer
demand, as higher prices can lead to decreased consumption, especially among price-sensitive
consumers. Consequently, this interplay between global feed prices and domestic pricing
decisions underscores the vulnerability of the Kenyan poultry market to external economic
factors.

In addition to feed prices, external market influences, such as the importation of cheaper poultry
products, can create intense competition for local producers (Muriuki & Onyango, 2018). When
lower-cost imported poultry products flood the market, they can undermine the competitiveness
of domestic producers. These external market dynamics lead to competitive pressures, forcing

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local poultry farmers to find ways to reduce their production costs and improve the quality of
their products to remain competitive. As a result, the Kenyan poultry industry faces the challenge
of balancing the need for competitiveness with the necessity of ensuring fair prices for
consumers, making it a complex and dynamic sector within the country's agricultural landscape.

Moreover, external market dynamics have the potential to impact pricing not only at the
consumer level but also within the industry itself. In response to market fluctuations, poultry
farmers may resort to price wars, further affecting industry stability (Wanjiru, 2018). The
pressure to reduce prices to remain competitive can lead to lower profit margins, which may, in
turn, affect the sustainability of poultry farming in Kenya. Consequently, these challenges
necessitate adaptive pricing strategies and a focus on cost management to ensure the long-term
viability of the industry.

Disease Management

The poultry sector in Kenya, like many other parts of the world, faces challenges related to the
emergence and spread of various avian diseases. External market influences also play a
significant role in shaping disease management practices in this industry.

One key challenge in disease management is the transboundary movement of avian diseases
influenced by international trade (Xinhua|, 2021). According to Wamwayi et al. (2020), Kenya's
poultry industry is interconnected with neighboring countries like Uganda and Tanzania and
global markets. Therefore, the emergence of avian diseases in one region can quickly spread to
Kenya through the movement of birds, poultry products, and people, affecting local flocks. This
necessitates stringent disease surveillance, early detection systems, and collaboration with
international organizations to prevent and manage the spread of diseases.

The implementation of international health standards, such as those set by the World
Organisation for Animal Health (OIE), is another important facet of disease management
influenced by external markets. These standards require poultry farmers to adhere to specific
biosecurity measures and vaccination protocols to ensure the safety and quality of poultry
products for both domestic consumption and export. Failure to comply with these standards can

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result in trade restrictions and barriers, affecting the profitability and market access for Kenyan
poultry farmers (Wamwayi et al., 2020).

The adoption of modern technology and practices in disease management is increasingly


influenced by external market trends. The global poultry industry constantly evolves, with
advancements in disease detection, vaccination, and biosecurity measures. To remain
competitive and meet international market requirements, Kenyan poultry farmers are encouraged
to adopt these innovative technologies. This necessitates investments in research and
development, training, and the adoption of best practices to effectively manage and prevent
diseases, ensuring the industry's long-term sustainability (Ondiek et al., 2018).

Technology Adoption

The adoption of modern technologies in poultry farming in Kenya is also influenced by external
market dynamics. Global trends in poultry production, such as automation, improved breeding
techniques, and disease management, can drive innovation in the domestic industry. Farmers
who can adapt to these technologies may achieve higher productivity and competitiveness in the
international market (Ondiek et al., 2018).

2.2.2 Financial Practices


The term finance is conventionally defined as the study of funds management and how these
funds are allocated to achieve specific objectives of an entity (Hayes, 2021). Hayes (2021)
further asserts that the primary aim of effective financial management is to maximize returns
while simultaneously mitigating financial risks. For small businesses, financial management
practices are of paramount importance and form the cornerstone of their success (Busenitz et al.,
2003). The financial literature suggests that the optimal implementation and dedication to
financial management practices lead to enhanced performance for farms. Well-managed farms
not only exhibit operational efficiency (Hunjra et al., 2010) but also have a greater likelihood of
sustaining and strengthening themselves, thus promoting their growth and development, which is
especially vital for small and medium-sized enterprises (SMEs) (Abe et al., 2015).

Inefficiencies in financial management practices, on the other hand, are associated with subpar
financial performance and, ultimately, the failure of SMEs (Abe et al., 2015). Therefore,

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understanding and implementing sound financial management practices are crucial for
businesses, as they directly impact their ability to thrive, grow, and endure in the marketplace
(Busenitz et al., 2003).

Annual Budget Process


The annual budget process is universally recognized as an indispensable financial planning tool
(Kerosi, 2018). Its primary function is to create a framework for projecting income and expenses
over specified time periods. Blumentritt (2006) defines the annual budget process as the
systematic allocation of an organization's financial resources to its various units, activities, and
investments. Budgets serve as a means of income control, enabling the establishment of priorities
and the setting of targets to guide coordination, ultimately translating business objectives into
practical outcomes. This process also involves assigning responsibilities to budget holders,
typically managers, and allocating resources. Furthermore, budgets are instrumental in
conveying management-set targets to employees, motivating staff, enhancing operational
efficiency, and monitoring performance. An effective budgeting process should achieve three
critical objectives: maintaining fiscal discipline, achieving allocative efficiency, and ensuring
operational or technical efficiency.

The annual cash budget process is an essential financial management tool, providing a detailed
plan that outlines anticipated cash receipts and payments, enabling organizations to assess their
financial position at a specific time (Ekpenyong, 2016). Effective management of fixed assets
involves the tracking and safeguarding of an entity's non-current assets. Simultaneously, capital
structure management encompasses the planning and control of an organization's capital
structure. On the other hand, risk management ensures an organization's stability even when
confronted with financial uncertainties. To optimize financial performance, it is imperative that
these practices are not treated as separate entities but rather integrated into a cohesive
framework.

Ekpenyong (2016) asserts that the annual budget process serves as a tool for financial
management, regularly formulating performance plans and budget requests that delineate
performance goals, output measures, and outcome expectations within various activities, all
aimed at achieving performance objectives within a specified time frame. This process is
advantageous as it transforms annual plans into measurable benchmarks, thus defining the levels

16
of performance for each objective during the budget period. Additionally, budgeting compels
managers to strategize, set targets, and establish goals before commencing activities, enhancing
focus on the upcoming month or year. It further aids in evaluating the prevailing operational
conditions and facilitates forecasting and the implementation of necessary adjustments
(Anderson, 1996).

Budget preparation also provides a means to engage with all supervised personnel through their
respective managers and teams. At the end of a period, budgets enable managers to assess
performance, identify problematic areas, and offer solutions to existing issues. Continuous
budget analysis is an integral part of managerial responsibilities, as it guides operational
activities and provides a framework for evaluating performance post-task completion. When
realistic goals are established, comparing actual results with budgeted targets becomes a valuable
tool for assessing organizational performance (Vaznoniene & Stončiuviene, 2012).

Furthermore, budgets represent a key accounting measure for evaluating a company's


performance. The organization's reward system, including compensation and promotion, is
frequently linked to the achievement of specific performance levels, often measured in
accounting terms. By establishing formal performance measurement frameworks and
incentivizing individuals based on their performance, organizations aim to encourage maximal
contributions toward the achievement of corporate objectives (Horngren et al., 2010). In
conclusion, the integration of these financial management practices is crucial for optimizing an
organization's financial performance and aligning its strategies with its financial goals.

Working Capital Management(WCM)


Working capital management is defined by Okoye et al. (2020) as the practice concerned with
the efficient handling of current assets, current liabilities, and the intricate relationships existing
between them. In contrast, Shin et al. (1998) emphasize that working capital management
encompasses the administration of all facets of both current assets and current liabilities, thus
making working capital the lifeblood of a company. The primary objective of working capital
management is to ensure a company maintains sufficient cash flow to meet its short-term debt
obligations and operating expenses. It is worth noting that an effective working capital
management system can significantly enhance a company's profitability. Two critical aspects of
working capital management involve ratio analysis and the management of individual working

17
capital components. Ratio analysis assists management in identifying areas that require attention,
such as inventory management, cash management, accounts receivable, and payables
management. In the context of small and medium-sized enterprises (SMEs), working capital
management includes overseeing cash, receivables, payables, and inventory to maintain the
appropriate level of investment in current assets, aligning with their financial objectives
(Yogendrarajah et al., 2017). Understanding the importance of working capital necessitates an
examination of the working capital cycle, which is considered the core of working capital
management. As Sarbapriya (2011) points out, the working capital cycle encompasses the major
dimensions of business operations and, importantly, any mismanagement within this cycle can
have detrimental consequences. Hence, achieving a balance between the components of working
capital is crucial for the uninterrupted operation of a business. Furthermore, to fulfill the primary
objective of financial management, which is to maximize shareholder wealth, businesses need to
generate sufficient sales and profits. However, sales do not immediately translate into cash, and
the time required for the transformation of inventory items into cash is known as the operating
cycle or working capital cycle. Therefore, working capital management revolves around the
planning, organization, and control of current assets and liabilities, including cash, bank
balances, inventory, receivables, payables, overdrafts, and short-term loans (Mathuva, 2010).

Capital Structure Management (CSM)


Capital Structure Management) involves the oversight of an organization's capital structure. A
company's capital structure refers to the combination of funding sources it utilizes, which
typically consist of two key elements: debt and equity. Debt can be categorized as either short-
term or long-term, while equity may involve common stock, preferred stock, or retained
earnings. It's important to note that short-term debt, such as working capital requirements, is also
considered part of the capital structure. In stable market conditions, companies strategize to
determine their optimal capital mix. This optimal mix is the combination of capital sources that
results in the lowest weighted average cost of capital (WACC). WACC is a weighted average of
the costs associated with each component of the capital structure, taking into account their
relative proportions. The WACC, as explained by Zawaideh & Ahmad (2013), is subsequently
employed to calculate the net present value (NPV) for capital budgeting in corporate projects. A
lower WACC corresponds to a higher NPV, making the pursuit of a lower WACC an optimal
goal when making financial decisions.

18
2.3 Empirical review

Kenyan poultry farmers encounter challenges that impede their growth, profitability, financial
performance, and contribution to sustainable development. One prominent issue these farmers
face is the lack of access to credit, which is widely recognized as a major problem in Kenya's
poultry industry (Anne et al., 2014). This credit constraint significantly affects the farmers'
ability to choose appropriate technologies for their operations, as it restricts the range of options
available to them. Consequently, many farmers may be compelled to use unsuitable technologies
simply because they can only afford them (Ndirangu et al., 2015).

Even in cases where credit is accessible, the farmers may still face limitations on their freedom
of choice due to the lending conditions imposed. For instance, these conditions may require
purchasing expensive and immovable equipment that can serve as collateral for the loan. Such
constraints further restrict the farmers' capacity to select technologies that best suit their needs
and preferences, hindering their potential for success and sustainable development in the poultry
sector.
Credit constraints pose significant challenges to small enterprises in Kenya, as the
underdeveloped capital market compels entrepreneurs to resort to self-financing or borrowing
from friends and relatives (Muriithi, 2021). Limited access to long-term credit options forces
these enterprises to rely on expensive short-term financing, resulting in increased costs and
financial instability. Moreover, the high cost of credit, coupled with exorbitant bank fees, further
hampers the economic prospects of small businesses (Kenya Bankers Association, 2022).

A notable example highlighting the demand for credit among low-income entrepreneurs is the
2008 financial crisis in Kenya (Odundo et al., 2015). During this period, the rise of Pyramid
schemes preyed on vulnerable entrepreneurs, offering them hope and the promise of financial
freedom through easy access to loans. This phenomenon underscores the desperate need for
affordable credit options among small enterprises.

In addition to credit challenges, small-scale farmers face significant hurdles due to limited
market information (Wanjala et al., 2020). Despite much trade-related data and
national/international databases, many small enterprises rely heavily on personal contacts or
local networks for market information (Muturi et al., 2018). The inability to interpret statistical

19
data and the lack of reliable internet connectivity, particularly in rural areas, contribute to this
reliance on traditional methods (Karanja et al., 2022).

2.4 Summary of Research Gap

The literature review highlights several research gaps related to the factors affecting financial
performance in the SME sector in Kenya, specifically focusing on poultry farmers. Limited
Access to Financing is a primary obstacle to SME growth is the limited access to financing.
Existing studies emphasize SMEs' challenges in accessing credit, particularly in the poultry
industry. However, there is a need for further research to explore the specific barriers and
constraints that poultry farmers in the study area face in accessing credit and the impact of these
constraints on their financial performance.

2.5 Theoretical Framework

The primary obstacle hindering the growth of SMEs is their limited access to financing (Afande,
2015; Eniola and Entebang, 2015; Albuquerque et al., 2017; Kinyua A., 2014). This study
explores theories on the sources of finance in light of this context. The Pecking Order Theory
(POT) is one such theory that outlines a hierarchical order for firms' financing decisions (Matias
& Serrasqueiro, 2017). Agliardi et al. (2016) identified the preferred financing sources in POT as
internal, debt, and equity. Proença et al. (2014) noted that small companies utilize internal
financing, but this choice depends on the firm's internal funding capacity to meet its needs at
each stage. Matias & Serrasqueiro (2016) confirmed that SMEs tend to align their financing
decisions with the predictions of POT. In cases where firms cannot generate sufficient internal
funds, short-term debt becomes the preferred choice over long-term debt, as Proença et al. (2014)
suggested.

Management characteristics also influence preferences for financing options. Informed


managers, as studied by Chen et al. (2013), tend to choose internal financing, while optimistic

20
managers focus on maximizing profitability to enable internal financing and ensure optimal cash
inflows from debt financing. Even though debt financing incurs finance costs, risk-averse
managers, according to Proença et al. (2014), still opt for external funding. Equity financing is
often not considered due to the direct connection between debt financing and funding deficits
identified by Chen et al. (2013).

The Trade-Off Theory (TOT) serves as an approach to balance the advantages and disadvantages
of debt financing. This theory has been categorized into static TOT and dynamic TOT (Dang et
al., 2012). In the Static TOT hypothesis, a firm's optimal debt ratio is determined by weighing
the costs and benefits of borrowing, assuming the firm's assets and investment plans remain
constant. Mwarari & Ngugi (2013) indicate that firms prefer debt over equity until they reach a
significant point of financial distress. Tangible assets have lower financial pain than intangible
assets (Mwarari & Ngugi, 2013).

The Relationship Lending Theory (RLT) guides lending practices in countries with varying
institutional settings, including legal, judicial, social, and tax systems (Namara et al., 2017).
Retap et al. (2016) highlighted factors contributing to a successful quality lending index,
including trust, commitment, information sharing, closeness, satisfaction, and relationship
quality. Berger et al. (2011) emphasize the importance of a good relationship between the
lending officer of a financial institution and the management of SMEs.

Therefore, SME management teams must engage in significant deliberation before making a
final decision regarding external financing. Each financing option carries risks but also comes
with associated benefits. Risk-averse investors tend to opt for internal financing, which may
provide limited opportunities for raising sufficient funds for business expansion. Establishing
positive relationships within the bureaucracies involved in credit issuance is crucial for better
resource allocation to the productive sector of an economy.

21
2.6 Conceptual Framework

2.6.1 Financial Performance

Financial performance refers to SMEs' overall financial health and profitability in the poultry
farming sector. It can be assessed using various financial indicators such as return on investment
(ROI), net profit margin, gross profit margin, and liquidity ratios.

2.6.2 Internal Factors

Internal factors encompass the characteristics and resources within SMEs that may influence
their financial performance. These factors include:

 Managerial Competence: The skills, experience, and knowledge of poultry farm


managers in finance, operations, and marketing.
 Business Strategy: The strategic choices made by SMEs in terms of market positioning,
differentiation, cost leadership, and innovation.
 Organizational Structure: The formal and informal arrangements within SMEs, including
reporting relationships, division of labor, decision-making processes, and coordination
mechanisms.
 Financial Management: The effectiveness of financial planning, budgeting, accounting,
and control systems employed by SMEs.
 Human Resources: it is the quality and competencies of the workforce, including their
training, motivation, and retention strategies.

2.6.3 External Factors

External factors refer to the elements outside the control of SMEs that may impact their financial
performance. These factors include:

 Market Environment: The size, growth, and competitiveness of the poultry farming
market, as well as factors such as demand-supply dynamics, market segmentation, and
customer preferences.

22
 Regulatory framework: these are the laws, regulations, and government policies that
govern the poultry farming sector, including licensing requirements, taxation policies,
and compliance burdens.
 Access to Finance: The availability and accessibility of financial resources for SMEs,
including bank loans, venture capital, grants, and other forms of funding.
 Infrastructure: The quality and adequacy of physical infrastructure, such as
transportation, energy, and telecommunications, which supports the operations and
distribution of poultry farms.
 Technological Factors: entails the adoption and utilization of modern technologies and
innovations in poultry farming, such as automated feeding systems, improved breeds,
disease control measures, and efficient production practices.

2.6.4 Financial Performance as the Outcome

A combination of internal and external factors influences the financial performance of SMEs in
the poultry farming sector. These factors interact with each other and determine the ultimate
financial outcomes of SMEs. The study examines the relationships and causal links between the
identified factors and financial performance indicators.

23
CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction
This chapter focuses on the research methodology and procedures to conduct the study. It outlines
the approaches and techniques the researcher will utilize to conduct the investigation effectively.
The chapter includes a comprehensive discussion of the research design, target population,
sampling design, data collection procedures and instruments to be employed, and proposed data
analysis methods.

3.2 Research Design


A descriptive research design will be adopted for this study. According to William (2006), a
descriptive research design is a methodological approach to systematically gather information to
provide an account of a phenomenon, scenario, or group. In this study, the design will help to
answer questions about the current status of the research subject and align with the study
objectives. This design will be more suitable for surveying the behavioral aspects of poultry
farming's financial performance and related variables.
3.3 Target population
The study will focus on Ngong Muguku Poultry Farm Ltd. to comprehensively explore the
intricate factors that influence the financial performance of small and medium-sized enterprises
(SMEs) within the Kenyan context. The selection of this particular enterprise offers a focused
lens through which the multifaceted dynamics affecting financial performance in the SME sector
can be critically examined. With the farm boasting an operational staff of around 30 employees

24
functioning across various hierarchical tiers, it provides a nuanced and rich environment for the
study.
Level of Management Number of Employees
Top Management 2
Supervisory 10
Technicians 8
Frontline Workers 10
Total 30
3.4 Sampling
The study will utilize a purposive sampling method. Census sampling, also known as judgmental
or selective sampling, is a non-probability sampling technique commonly used in qualitative
research studies. This sampling method is suitable for research studies where the researcher aims
to select participants with specific characteristics or in-depth knowledge of the research topic.
According to Martínez-Mesa (2016), the sample size refers to the number of items selected from
the sample frame or accessible population for observation.
Bullen (2013) asserts that a sample size of 10% of the accessible population will provide a
sufficiently representative sample. Considering the population of 89 poultry farming enterprises,
a sample size of 45, representing 50.56%, will be considered.
3.5 Data Collection
The study will collect primary and secondary data using a structured (closed-ended) questions
questionnaire. The researcher will design and distribute an online questionnaire to respondents
via email or WhatsApp Social media app. The data analysis will involve the initial steps of
coding, editing, and tabulation as a basis for further analysis. The data will then be analyzed
using descriptive statistics such as mean, variance, and standard deviation.
3.6 Validity and Reliability

To ensure the validity of the research findings, the questionnaire will be pre-tested on a small
sample of individuals similar to the target population. Their feedback will be used to refine the
questionnaire and make necessary adjustments. Moreover, the study will employ content validity
by involving experts in the field to review and validate the questionnaire's content.

25
Reliability will be maintained by ensuring consistency in the data collection process. The
researcher will provide clear instructions to the respondents and closely monitor the distribution
and collection of questionnaires. To assess the internal consistency of the questionnaire, a pilot
test will be conducted, and the Cronbach's alpha coefficient will be calculated.
3.1 Data Analysis
The data analysis method will involve analyzing the data using Excel and presenting it through
frequency tables and charts. The initial coding, editing, and tabulation steps will be conducted as
a foundation for subsequent analysis. The data will be further analyzed using descriptive
statistics, including mean, variance, and standard deviation.

26
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APPENDIX I

33
QUESTIONNAIRE

Dear Participants,

I am a student at the Kenya Institute of Management (KIM), currently pursuing a diploma in


Business Management. As part of my academic requirements for graduation, I am conducting a
research study on the topic of "Factors Affecting Financial Performance in the SME Sector in
Kenya," specifically focusing on Ngong Muguku Poultry Farm Ltd.

Your valuable input is essential for the successful completion of this research project. Please take
a moment to fill out the following questionnaire. All information provided will be confidential
and used solely for this research.

Section A: General Information

1. Position/Role:
a. Manager/Owner
b. Employee (e.g., technician, farmworker)
c. Other (please specify) ___________
2. How long have you worked at Ngong Muguku Poultry Farm Ltd?
a. Less than 1 year
b. 1-5 years
c. 6-10 years
d. More than 10 years

Section B: Access to Financing

3. Do you think it's difficult for Ngong Muguku Poultry Farm Ltd to get loans or
financial help when needed?
a. Yes
b. No
4. If yes, what do you think makes it difficult? (Select all that apply).
a. High-interest rates

34
b. Limited options for loans
c. Need to provide something valuable as security (like land or equipment)
d. Takes a long time to get a loan
e. Other (please specify) ___________
5. Has the difficulty in getting loans affected the farm's ability to choose the right
equipment and tools?
a. Yes
b. No

Section C: Market Information

6. How do you usually discover what's happening in the poultry farming market?
(Select all that apply.)
a. Talking to people you know
b. Asking others in the farming community
c. Looking for information on the internet
d. Reading farming magazines or newspapers
e. Other (please specify) ___________
7. Do you think it's hard for Ngong Muguku Poultry Farm Ltd to get information
about the poultry market?
a. Yes
b. No

Section D: Financial Performance

8. How would you rate the financial health of Ngong Muguku Poultry Farm Ltd in the
last year?
a. Very Good
b. Good
c. Okay
d. Not Good

35
9. In your opinion, which things inside the farm have the biggest financial impact on
how well it does? (Select up to 3)
a. How well the farm is managed
b. The choices the farm makes about what to do
c. How the work is organized
d. How the money is managed
e. The people who work here
10. In your opinion, what outside factors have the biggest impact on how well the farm
does financially? (Select up to 3)
a. How big the poultry farming market is
b. The rules and regulations that apply to the farm
c. Whether it's easy to get money when needed
d. The quality of roads and utilities
e. The technology the farm uses

Thank you for participating in this survey. Your input is essential to our research.

APPENDIX II

36
BUDGET

Item Item Description Item Cost (Kenyan


No. Shillings)
1. Airtime 5,000
2. Writing materials (4 reams of paper) 3,000
3. Transportation/Travel expenses 15,000
4. Typing/Printing 1st, 2nd drafts, and Final 8,000
proposal
5. Internet expenses 8,000
6. Miscellaneous 7,000
Total 46,000

37

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