THE IMPACT OF FUNDING SOURCES ON WORKING CAPITAL

MANAGEMENT BY SMALL AND MEDIUM ENTERPRISES IN

NAIROBI’S CENTRAL BUSINESS DISTRICT

BY

MUSA N. DUMBUYA

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

SPRING 2019
THE IMPACT OF FUNDING SOURCES ON WORKING CAPITAL
MANAGEMENT BY SMALL AND MEDIUM ENTERPRISES IN
NAIROBI’S CENTRAL BUSINESS DISTRICT

BY

MUSA N. DUMBUYA

A Research Project Report Submitted to the Chandaria School

of Business in Partial Fulfillment of the Degree of Masters in
Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

SPRING 2019
 STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any
other college, institution, or university other than United States International University -
Africa in Nairobi for academic credit.

Signed: ………………………………… Date: ……………….

Musa N. Dumbuya (ID 614230)

The project has been presented for examination with my approval as the appointed
supervisor

Signed: …………………………………. Date: ………………

Prof. John Mirichii

Signed: ………………………………….. Date: ……………….

Dean, Chandaria School of Business

ii
 COPYRIGHT

© Copyright by Musa N. Dumbuya, 2018

All rights reserved. No part of this project report may be produced or transmitted in any
form or by any means, electronic, mechanical, including photocopying, recording or any
information storage without prior written permission from the author.

iii
 ABSTRACT

Small and Medium sized Enterprises (SMEs) encompass a heterogeneous group of

businesses ranging from a single artisan working at home and producing handicrafts to
sophisticated software product firms selling in specialized global niches. Governments
throughout the world are nowadays turning their attention to small-scale enterprises
because attempts to promote economic progress by establishing large industries have
usually failed to improve the lives of the majority of the populations concerned.
Challenges faced by SMEs in many parts of the world have been widely studied but those
faced by SMEs in Nairobi’s CBD in Managing Working Capital is yet to be studied.

The purpose of this study was to determine the challenges faced by SMEs in Nairobi’s
CBD in managing working capital. The research was guided by the following three
specific research objectives: the effect of funding sources on working capital
management, the effect of SME management on the management of working capital, and
the effect of ethical perceptions and beliefs of the owners of SMEs on working capital
management. To realize this, a descriptive research design is adopted. The total
population of this study comprised of the 2014 list of top 100 SMEs in Nairobi from
which a sample of forty eight (48) was drawn using Yamane (1967) formula. Data was
collected using a structured questionnaire, cleaned, coded and formatted before being
analyzed using Statistical Package for Social Sciences (SPSS) to obtain both descriptive
and inferential statistics. The results were then presented inform of tables and figures.

The analysis revealed that the variable funding sources strongly influence working capital
management practices in most of the SMEs in Nairobi’s CBD. It was also revealed that
funding sources had a significant and positive correlation with SME owner’s ethical
practices. The study also revealed that funding sources had a positive and significant
influence on effective management of working capital.

The analysis indicates that 84.3% of observed change in effective management of

working capital was caused by a combination of the variations in funding sources,
working capital management practices, and SME owners’ ethical practices. The P- value
of 0.000 was established, implying that the regression model was significant at the 95%
significance level.

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From the findings, it was established that one unit change in funding sources results in
0.058 units increase in effective management of working capital, one unit change in
working capital management practices results in 0.056 increases in effective management
of working capital, while a unit increase in SME owners ethical practices results in
0.0498 unit increase in SME owners’ ethical practices. At the same time when funding
sources, SME management and ethical perceptions and beliefs are held constant,
effective management of working capital increased by 0.903.

The study concluded that most SMES rely on banks as a means of securing their savings
although they were limited on the amount of funds requested as loans from the banks. It
was also concluded that majority of SMES make credit sales with an aim of increasing
the sales volume. However, many of the institutions were keen in undertaking formal
credit investigation on the customers before engaging them in debt. The change in
effective management of working capital are affected by the changes in funding sources,
working capital management practices, and SME owners’ ethical practices although the
firms have a challenge in cash flow management to the extent thay they experience a
challenge of paying salaries on time. Despite this challenge, the firms strive to maintain a
good relationship with the suppliers by making timely payments. It was also concluded
that there is a need for the institutions to seek favorable credit terms by having adequate
security for loan applied or seek loans from other financial institutions not necessarily
banks. SMEs should also uphold ethics to minimize cases of theft and work stoppage in
the firms. Further, payments to suppliers should be made in time to ensure a constant
supply of the goods and services and therefore constant sales.

The study recommended that there is a need for the institutions to seek favorable credit
terms by having adequate security for loan applied or seek loans from other financial
institutions not necessarily banks. SMEs should also uphold ethics to minimize cases of
theft and work stoppage in the firms. Further, payments to suppliers should be made in
time to ensure a constant supply of the goods and services and therefore constant sales.
The study recommends that future research on the topic should be conducted in other
towns within Nairobi County so that an industry wide analysis can help to uncover the
factors that explain better performance for some industries and how these best practices
could be extended to the other industries.

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 ACKNOWLEDGEMENTS

I give thanks to the Lord almighty for giving me the energy and strength to complete my
studies. I also thank my family and appreciate the support they gave me throughout the
study period. Last but not least, I thank my supervisor Prof. John Mirichii for the
guidance he gave me during this research; may God bless him.

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 TABLE OF CONTENTS

STUDENT’S DECLARATION ........................................................................................ii

COPYRIGHT ................................................................................................................... iii
ABSTRACT ....................................................................................................................... iv
ACKNOWLEDGEMENTS ............................................................................................. vi
LIST OF TABLES ............................................................................................................ ix
LIST OF FIGURES ........................................................................................................... x
LIST OF ABBREVIATIONS .......................................................................................... xi

CHAPTER ONE ................................................................................................................ 1

1.0 INTRODUCTION........................................................................................................ 1
1.1 Background of the Problem ........................................................................................... 1
1.2 Statement of the Problem ............................................................................................... 6
1.3 General Objective .......................................................................................................... 7
1.4 Specific Objectives ........................................................................................................ 7
1.5 Importance of the Study ................................................................................................. 7
1.6 Scope of the Study ......................................................................................................... 8
1.7 Definition of Terms........................................................................................................ 8
1.8 Chapter Summary ........................................................................................................ 10

CHAPTER TWO ............................................................................................................. 11

2.0 LITERATURE REVIEW ......................................................................................... 11
2.1 Introduction .................................................................................................................. 11
2.2 Effect of Funding Sources on Working Capital Management ..................................... 11
2.3 The Effect of SME Management on the Management of Working Capital ................ 15
2.4 Effects of Ethical Perceptions and Beliefs of SMEs Owners on Working Capital
Management ....................................................................................................................... 18
2.5 Chapter Summary ........................................................................................................ 24

CHAPTER THREE ......................................................................................................... 25

3.0 RESEARCH METHODOLOGY ............................................................................. 25
3.1 Introduction .................................................................................................................. 25
3.2 Research Design........................................................................................................... 25

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3.3 Population and Sampling Design ................................................................................. 25
3.4 Data Collection Method ............................................................................................... 28
3.5 Research Procedures .................................................................................................... 28
3.6 Data Analysis Methods ................................................................................................ 29
3.7 Chapter Summary ........................................................................................................ 29

CHAPTER FOUR ............................................................................................................ 30

4.0 RESULTS AND FINDINGS ..................................................................................... 30
4.1 Introduction ..................................................................................................................30
4.2 General information .....................................................................................................30
4.3 Effects Of Lack Of Funding On Working Capital Management In SMES .................33
4.4 Effects of SME Management Practices on Working Capital Management .................37
4.5 Effects of Owners of SMEs Belief and Ethical Perception on Working Capital
Management .......................................................................................................................41
4.6 Descriptive Statistic .....................................................................................................45
4.7 Regression and Correlation Coefficients .....................................................................46
4.8 Chapter Summary ........................................................................................................ 50

CHAPTER FIVE ............................................................................................................. 51

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ........................ 51
5.1 Introduction ..................................................................................................................51
5.2 Summary ......................................................................................................................51
5.3 Discussion ....................................................................................................................52
5.4 Conclusion ...................................................................................................................55
5.5 Recommendations ........................................................................................................56

REFERENCES .................................................................................................................. 58
Appendix: Data Collection Instrument .............................................................................. 64

viii
 LIST OF TABLES

Table 3.1: Population Distribution .................................................................................... 26

Table 3.2: Sample Size per Strata ...................................................................................... 28
Table 4.1: Gender of Respondents ..................................................................................... 30
Table 4.2: Age of Respondents .......................................................................................... 31
Table 4.3 Funding Sources ................................................................................................ 33
Table 4.4: Correlation between the variables of Funding .................................................. 36
Table 4.5: Management Practices ...................................................................................... 37
Table 4.6: Correlation of Variables of Management Practices .......................................... 41
Table 4.7: SME Owners Ethical Practices ......................................................................... 42
Table 4.8: Correlation of SMES Owners Belief and Ethical Perception ........................... 45
Table 4.9: Descriptive Statistics ........................................................................................ 46
Table 4.10: Correlation Coefficients.................................................................................. 47
Table 4.11: Regression Coefficients .................................................................................. 49
Table 4.12: Model Summary ............................................................................................. 49
Table 4.13: Analysis of Variance (ANOVA) .................................................................... 50

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 LIST OF FIGURES

Figure 4.1: Highest Education ........................................................................................... 31

Figure 4.2: Nature of Enterprise ........................................................................................ 32
Figure 4.3: Marital Status .................................................................................................. 32
Figure 4.4: Number of Employees ..................................................................................... 33
Figure 4.5: Bank account .................................................................................................. 34
Figure 4.6 : Frequency of Banking .................................................................................... 34
Figure 4.7: Access to Credit Facilities ............................................................................... 35
Figure 4.8: Gets Funds Requested ..................................................................................... 35
Figure 4.9: Adequate Security for Loan Applied............................................................... 36
Figure 4.10: Selling On Credit ........................................................................................... 37
Figure 4.11: Undertaking of Formal Credit Investigation ................................................. 38
Figure 4.12: Piles Up of Goods for Resale ........................................................................ 38
Figure 4.13: Record Keeping ............................................................................................. 39
Figure 4.14: Undertake Regular Stock Taking .................................................................. 39
Figure 4.15: Re order level policy ..................................................................................... 40
Figure 4.16: Fairness to Employees ................................................................................... 42
Figure 4.17: Fair Remuneration ......................................................................................... 43
Figure 4.18: Salaries Paid On Time ................................................................................... 43
Figure 4.19: Suppliers Paid on Time ................................................................................. 44
Figure 4.20: Credit Facilities Paid on Time ....................................................................... 44

x
 LIST OF ABBREVIATIONS

- Central Business District

CBD

- Cash Conversion Cycle

CCC

- Chartered Institute of Management Accountants

CIMA

- Gross Domestic Product

GDP

- Small and Medium Enterprises

SME

- Statistical Package for Social Sciences

SPSS

- Working Capital Management

WCM

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 CHAPTER ONE

1.0 INTRODUCTION
1.1 Background of the Problem

According to Fisher, Eillen, Rebecca and Reuber(2000), the term Small and Medium-
sized Enterprises (SMEs) encompasses a heterogeneous group of businesses ranging from
a single artisan working at home and producing handicrafts to sophisticated software
product firms selling in specialized global niches. SMEs have varying definitions among
different countries. What is and what is not an SME is usually defined by the number of
employees in the firm. According to Fisher et al. (2000), developed nations will have a
higher size threshold in their definition of SMEs than those in less developed countries. In
Mauritius, SMES are firms with ten to forty nine employees while in Japan firms with
less than three hundred employees are considered SMEs. According to Khalique, Isa,
Shaari, and Ageel (2011), enterprises that employ between 50-150 full time employees in
Malaysia are considered medium size, those employing between 5-50 persons are
considered small, while those employing less than 5 employees are considered micro
enterprises. For the purpose of this paper, an SME is defined as a firm with one to fifty
employees.

Memba, Gakure and Karanja (2012), posit that nowadays governments throughout the
world are turning their attention to small-scale enterprises because attempts to promote
economic progress by establishing large industries have usually failed to improve the
lives of the majority of the populations concerned. They add that Small and Medium
Enterprises (SMEs) are now viewed as important in even and equitable economic
development. Small and medium-sized enterprises (SMEs) play a critical role in a
nation’s economy.

According to Paik (2011), Small Business Administration estimated SMEs to represent

99.7 % of all employer firms in the United States of America in 2010 that SMES
employed about 50% of the private sector workforce and paid more than 45% of total
private payroll in the country. He further contends that similar economic effects are found
in the United Kingdom in 2010, where SMEs accounted for about 50% of the GDP of
United Kingdom (UK) and almost 60% of manufacturing employment.

1
According to Smit and Watkins (2012), the importance of small businesses is recognized
in numerous African countries such as Togo, Uganda, Ghana, Cote D’ivoire, Nigeria,
Kenya, Malawi, Burkina Faso and many others. Further SMEs are dominant in numbers
in most economies. They note that in First World countries like the United States of
America and the United Kingdom, SMEs play an important role in the economy,
accounting for an estimated one third of industrial employment and a lower percentage of
output whereas in Third World countries where SMEs dominate economically active
enterprises, SMEs prosperity is considered far more important than in First World
countries.

Sunday (2011), highlights that SMEs play a key role in economic growth and
development of a nation. He states that SMEs account for at least 60% of Gross Domestic
Product (GDP) in the United States of America (USA). For example, an SME like
Microsoft in the USA started by Bill Gates and Paul Allen on 4th April 1975 with only 11
employees later grew into a well-known corporate body with 128,076 employees as at
30th June 2014. In the Malaysian economy, the role of SMEs is considered the backbone
of the economy (Khalique et al., 2008). They add that Malaysian SMEs, particularly
those in the manufacturing sectors, play a very important role in the development of the
economy. According to them, SMEs comprised of 99.2% of the business establishments
in Malaysia in 2006 with a contribution of 47.3% of the GDP. Moreover, the role of
SMEs in job creation was also very important and vital. Further, they stated that in 2006
SMEs employed 65.3% of the national workforce in Malaysia.

Muchina and Kiano (2011) also established that in developing countries, over 90% of all
firms outside the agricultural sector are SMEs and that they generate a significant portion
of GDP. They indicate that in Ecuador, 99% of all private companies have less than fifty
employees and account for 55% of employment while in Morocco 93% of all industrial
firms are SMEs and account for 38% of production, 33% of investments, 30% of exports
and 46% of employment. Closer home in Kenya, the SME sector contributed over 50% of
all new jobs created in 2005 and contributed an estimated 18% of the GDP in 2010
(G.O.K, 2012).

According to Khalique et al. (2008), more than 50% of SMEs generally collapse within
the first five years of operation. In Kenya, regardless of the contribution SMEs make in

2
the economy and the support to the sectors earmarked by the government, SMEs continue
to face the threat of failure, with past statistics indicating that three out of every five
SMEs fail and close within the first few years of starting (Sonia, 2009).

The government of Kenya in its blue print “Vision 2030” aims at moving Kenya towards
an industrialized middle-income country, capable of providing a high quality of life for all
its citizens by the year 2030. In this blue print, the government acknowledges that SMEs
will need to be strengthened (Kenya Vision 2030: The Popular Version, G.O.K, 2010)
Bhattacharya (2001) has defined working capital as the excess of current assets over
current liabilities. This is a common definition in many finance textbooks. Stice and Stice
(2013) share this view that current assets and liabilities expected to be paid within a year
are current items.

According to Agyei-Mensah (2012), effective working capital management can free up

cash and generate more earnings today. This is particularly important in tight credit
markets. He adds that a continuous improvement program focused on cash management,
accounts receivable performance and inventory management is part of fundamental
business management. He posits that the path to success is a disciplined approach that
challenges management to improve the working capital metrics every day. Firms can
generate operational capital by minimizing their investment in fixed assets through
renting or leasing plant and equipment but they cannot avoid investing in key current
assets such as cash, trade debtors, and stock.

The relationship between sales growth and the need to finance current assets is close and
direct. The major objective of working capital management is to maintain the optimum
balance for each of the working capital components. This includes the firm ensuring that
it is able to continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable, and
cash. However, such cash may more appropriately be “invested” in other assets or applied
in reducing liabilities. Each component of working capital (namely inventory, receivables
and payables) has two dimensions: time and money (Agyei-Mensah, 2012).

In managing capital, time is money. Getting money to move faster around the cycle, for
example collecting monies due from debtors more quickly enables the business to
generate more cash or to borrow less to fund working capital. Consequently, this will

3
reduce the cost of borrowing or result to additional free cash available to support
additional sales growth or investment (Agyei-Mensah, 2012). Further, Moyer et al. (2001)
submit that effective cash management is particularly important for small firms for
various reasons. One, to prepare financial plans to support application for bank loans;
two, to overcome the problem of limited access to capital that the SMEs generally face;
three, to avoid cash shortages that entrepreneurial firms with rapid growth face including
run out of cash; and four, cash resources to boost entrepreneurial firms and avoid their
habits of frequently operating with only a minimum of cash resources owing to the high
cost of loans and limited access to capital.

Working capital refers to the cash a business requires for day-to-day operations, or more
specifically to cash resources used in financing the conversion of raw materials into
finished goods, which the company then sells for revenue. The most important items of
working capital are cash, inventories, account receivables, and account payables. The
better SME’s manage their working capital the lesser the need to borrow (Agyei-Mensah,
2012).

Optimizing cash flow is a major issue in ensuring the firm’s financial viability and
sustainability. An efficiently organized cash flow reflects the financial health of the
company. The need to optimize cash flows arises primarily from the movement of
material flows of funds in the required quantities at the right time and with the use of the
most efficient sources of funding. When companies have cash deficiency they are not able
to effectively undertake working capital management (Gafurova, 2015). Even companies
with cash surpluses generally need to manage working capital to ensure that those
surpluses are invested in ways that will generate suitably high returns for the business.
Implementing an effective working capital management system is an excellent way for
many SME to improve their earnings. The difficulty in gaining access to resources and
financial markets is due largely to the fact that SMEs usually have little or no collateral.
The few financial institutions and the Microfinance institutions that give credit to SME’s
charge very high interest rates to make up for the high risk of granting credit to SME’s.
This prompts entrepreneurs to look for other avenues to fund their businesses, which
includes resorting to borrowing from friends and family, ploughing back profit, and
using own savings among others to avail funds which are usually inadequate. Due to the
challenges SME’s go through in securing funds to operate their activities, it is prudent for

4
them to effectively and efficiently manage the available components of working capital in
order to generate funds to support business operations (Bhattacharya, 2001).

According to Mathur (2003), working capital management encompasses the management

of all the individual constituents of the working capital, i.e. the debtors, creditors,
inventories stock, and cash, both individually and collectively. It is therefore more
complex and requires necessary financial knowledge and information. The working
capital of the firm is ever changing with every purchase or sale, because with every
purchase or sale transaction, the net current assets and current liabilities change. It is
dynamic system as financial resources are continuously transformed from one type of
asset to another in what is known as the operating cycle of the business (Ryan, 2008).
Ryan (2008) further adds that working capital management is the process of ensuring that
all aspects of this dynamic system operate efficiently where inventories are maintained at
minimum levels necessary to meet the needs of production and of customers, receivables
and payables are settled promptly to minimize bad debts, and cash is put to other use
within the business or is returned to investors in form of dividends.

The term operating cycle of a business is sometimes loosely used to imply its cash
conversion cycle (CCC). The operating cycle starts with the acquisition of inventory
either as stock for resale or for processing to finished goods that are later sold either on
credit or by cash. The cycle then ends when cash is collected from the credit (Ross,
Westerfield & Jordan, 2008). Ross et al. (2008) continue to define CCC as the number of
days it takes before cash is collected from sales measured from when payment for the
inventory or raw materials from a sale is actually made. Operating cycle is therefore
longer than CCC. The difference between the two is the time it takes to pay for the credit
purchases. For example if it takes 30 days for the firm to pay its suppliers, another 45
days to resell the goods and another 60 days to collect the cash from credit sales, then the
operating cycle will be 135 days ( i.e 30days+45days+60days=135days), while the CCC
will be 105 days( i.e 45days+60days=105days).

According to Ross et al. (2008), financial managers are concerned with three key
decisions: Capital budgeting decisions, Capital structure decisions, and Working capital
decisions. Capital budgeting decisions entails what long term investments a firm should
undertake or what lines of business the firm will be in and what sort of buildings,
machinery, and equipment it will need. Capital structure decisions involve finding out
5
where the firm will get its long-term financing to pay for its investments, whether the
firm will bring in other owners or whether it will borrow the money. Working capital
decisions involves finding out how the firm will manage its everyday financial activities
(including collecting from customers and paying suppliers). In a nut shell working capital
management is one of the core functions of management and is one of the pillars in
financial management of a firm. Proper working capital management will ensure the firm
always has the cash to meet its liabilities as they fall due.

1.2 Statement of the Problem

The subject of working capital management in relation to SMEs has been widely studied
by academicians. This area in finance has been looked at in various ways. Sunday (2011)
covered ‘Effective Working Capital Management in Small and Medium scale Enterprises’
using the working capital ratios to measure the effectiveness of working capital in the
selected firms. The study revealed that the selected firms were involved in overtrading
and illiquidity, their main concern being profit maximization.

Muchina and Kiano (2011) covered ‘Influence of Working Capital Management on

Firms Profitability: A case of SMEs in Kenya’, with the results indicating that SMES face
challenges in determining stock turnover period and cash conversion cycle which
significantly affect their profitability. The study by Sonia (2009) on ‘Working capital
management in SMEs’ focused on the analysis of the determinants of Cash Conversion
Cycle (CCC).

Khalique et al. (2011) concentrated on general management challenges faced by SMEs in

Malaysia. From the various studies highlighted it is clear that SMEs in many parts of the
world face challenges in working capital management while studies on the challenges
facing SMEs in Nairobi’s CBD are not fully exhausted. Further, the environment in
which SMES operate in developed countries is quite different from one in which SMES
operate in developing countries like Kenya. Therefore, there was a need to carry out
studies on how SMEs manage their working capital in less developed countries, hence the
motivation behind this study.

6
1.3 General Objective

The main objective of the study was to investigate the impact of funding sources on
working capital management by small and medium enterprises in Nairobi’s central
business district.

1.4 Specific Objectives

The specific objectives of this study were:

1.4.1 To determine the effect of funding sources on working capital management in

SMEs

1.4.2 To determine the effect of SME management on working capital management in

SMEs.

1.4.3 To establish the effect of ethical perceptions and beliefs of the owners on working
capital management of SMEs.

1.5 Importance of the Study

1.5.1 Small and Medium Enterprises

The importance of the study stems from the fact that SMEs failure rate is quite high and
thus the findings in this study will help SMES in Nairobi to better manage their working
capital.

1.5.2 Policy Makers

This research will be significant to policy makers as it sheds light on impact of funding
sources on working capital management and give possible solutions and
recommendations of the challenges faced.

1.5.3 Financial Institutions

To financial institution, the finding of this study with regard to the adequacy of collateral
will help in determining the amount of loan levels that the firm can issue to SMEs as well
as any exemptions that can be made in line to collateral needs when loan is applied for.

7
1.5.4 Scholars

The findings of this research will help other scholars understand the problems of working
capital management of SMES. In addition, the research results will be used as a reference
for future studies.

1.6 Scope of the Study

This study covered a portion of the Small and Medium-sized Enterprises in Nairobi’s
CBD with between 1 to 50 employees. The target population was all SMEs in the Nairobi
CBD. Nairobi CBD is home to hundreds of SMEs and therefore, a sample was selected
and studied from the SMEs on the 2014 list of top 100 SMEs in Kenya. The total number
of SMEs operating in the Nairobi CBD in this list was 54 and a sample of 48 was
selected. Lack of cooperation was undoubtedly the greatest challenge encountred by the
researcher. Respondents were naturally suspicious and uneasy when asked to cooperate in
a study whose consequences they were not aware of. To calm and set at ease the
respondents, the researcher explained to them the nature of the study and that it was
purely an academic undertaking and that the researcher would hold information divulged
in great confidentiality.

1.7 Definition of Terms

1.7.1 Small and Medium sized Enterprises

A firm that is owner managed and employs between 10 to 49 employees (Fisher et al.,
2000).

1.7.2 Working capital

Working capital, is that part of the capital of a firm that is employed in its day-to-day
trading operations and consisting mainly of trading stocks, debtors, and creditors
(Appah,2011).

1.7.3 Current Assets

Assets that forms part of the circulating capital of a business and turned over frequently in
the course of trade. The most common current asset is stock in trade, debtors, and cash
(Gafurova, 2015).

8
1.7.4 Current Liability

Amount owed by a business to other organizations and individuals and that should be
paid within one year. It generally consists of trade creditors, bills of exchange payable,
taxation, social-security creditors, proposed dividends, accruals, deferred income,
payments received on account, bank overdrafts and short term loans. Any long-term loan
repayable within one year from the balance sheet date is also be included (Bhattacharya,
2001)

1.7.5 Operating Cycle

The length of time it takes the firm to acquire goods or raw materials, convert them into
finished products, sell the finished products and collect the cash (Ross, et al., 2008).

1.7.6 Cash Conversion Cycle (CCC)

The operating cycle less the time, it takes to acquire the goods for resale or raw materials
(Ross et al., 2008).

1.7.7 Debtors

Debtor is those who owe money to the organization and expected to be paid within a
period of one year. A distinction is made between one who is expected to pay debt during
the current accounting period and one who will not pay until later (Hisrich, 2004).

1.7.8 Creditor

One to whom an organization or person owes money. The balance sheet of a company
shows the total creditors and a distinction is made between creditors who ought to be
paid during the coming accounting period and those who ought to be paid after the
accounting period (Pieterson, 2012).

1.7.9 Inventory

Also called stock, these are the goods an organization has for the purposes of trade. It
includes raw materials components, work in progress and finished products (Reuvid,
2006).

9
1.7.10 Gross Domestic Product (GDP)

The aggregate value in monetary terms of all goods and services produced by an economy
for its use during a period, usually one year (Pieterson, 2012).

1.8 Chapter Summary

This chapter describes the background of working capital management with regard to
small and medium enterprises. The chapter also looked into the research problem and
justifies the reason for undertaking this research. In addition, the significance, limitations,
and definition of terms of the study were highlighted. Chapter two reviews the literature
and provides an insight of the challenges faced by SMEs in working capital management.
In chapter three, the research methodoly is discussed, while in Chapter four the results
and findings are presented. Finally in chapter five, the dicussions, conclussions and
recommendations are presented.

10
 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter reviews the literature on the challenges faced by Small and Medium
Enterprises in the management of working capital. The literature discusses the effect of
lack of adequate funding on working capital management, the effect of SME management
on management of working capital and the effect of unethical practices and beliefs of
owners of SMEs on working capital management.

2.2 Effect of Funding Sources on Working Capital Management

Sources of working capital are many and include family loans, owners’ equity, share
capital, loans from friends, leasing, supplier advances, hire purchasing and bank loans.
Bank loan is the most common source of finance for SMEs in Kenya. According to
Reuvid (2006), bank financing normally include term loans, overdrafts and asset finance.
Moreover, according to Hisrich (2004), another common bank finance facility is credit
line financing, which is the major form of working capital financing and is popular with
SMEs. According to Agyei-Mensah (2012), access to finance continues to be a major
challenge to SMEs in other African countries like Ghana.

2.2.1 Difficulty in Accessing Financial Services

SMEs face many difficulties in their endevour to access financial services. Memba et al.
(2012) says that the challenges limiting SMEs access to financial services include lack of
tangible collateral coupled with inappropriate and inadequate legal and regulatory
framework that does not recognize innovative strategies for lending to SMEs. Hisrich
(2004) also shares the view that lack of collateral limit SME’s access to financial
services. He posits that when SMEs lack tangible security, banks and other financial
institutions can decide to advance loans based on the positive character or reputation of
the SMEs or the SME good credit standing. However, the amount advanced is limited due
its high exposure to risk of default considering that most SMEs have very uneven cash
flows.

11
Banks and other financial institutions have contributed to the challenges in accessing
formal finance by SMEs because the institutions have limited capacity to understand and
deliver services to SMEs. Formal financial institutions, and especially commercial banks,
believe that SMEs are a high risk and therefore lending to them is not commercially
viable (Hisrich, 2004).

According to Agyei-Mensah (2012), an investor who injects funds into SME business,
either as debt or equity will want to closely monitor the SME to ensure compliance with
the agreed contract and to compel the SME to respect the interests of the financier. SMEs
find it more challenging complying with the financiers’ contract than larger corporations
do because relative to large firms, SMEs are more likely to be informal. Consequently,
financial institutions and particularly banks are likely to ration credit to SMEs extending
only the portion of credit requested or applied for by the SMEs, even when the borrower
(SME) is willing and capable of paying a higher interest rate than larger companies pay.

2.2.2 Limited Access to Resources

SMEs are often faced with the challenge of limited access to financial and other
resources, including time to train workers who often have little formal education. The
SME sector is characterized by a wide clash of growth and profitability, relative to larger
enterprises (Agyei-Mensah, 2012). SMEs also portray a larger year-to-year volatility in
earnings. Further, it is perceived that SMEs inherently have higher risk because their
survival rate is considerably lower compared to larger firms. The challenges in accessing
financial resources is largely attributed to the fact that SMEs’ usually have inadequate or
no assets to act as collateral for loans compared to the large firms. The few financial
institutions such as banks and microfinance institutions that extend credit to SME’s set
high price for credit facilities to compensate for the high risk they face (Sunday, 2011).
Besides, it is usually not easy to differentiate between personal finances of the SME
owner from those of their firm. This difficulty is evidenced by the fact that the owners use
the firms’ vehicles as collateral to acquire loans for both business and private purposes. In
other instances, home appliances are used in the business operations. Furthermore, the
relationship between the firm and its stakeholders is likely to reflect personal
relationships to a much higher extent than in larger firms, where such relationships are
formalized and the distinction between the firm and the owners is very clear. While SMEs
tend to largely reflect the personalities of their proprietors, larger firms are unique and
separate from the owners (Berger &Udell, 2006). The actors in such firms like auditors,

12
board of directors and executives are meant to meet set standards in corporate
governance, and all their actions are supposed to be transparent. This is not the case with
SMEs that tend to reflect much more closely the personalities of their owners.

There are also potential agency challenges in SME business while the financier will
require the borrower to operate in such a way that the probability of credit repayment is
maximized. SME borrower may take up riskier businesses in search of higher returns.
Again, financing is secured; he SME may be tempted to change the initial goal and pursue
extremely risky projects, which is driven by expectations of higher return, largely
beneficial to the entrepreneur. The financier normally will prefer less risky projects to
increase the loan repayment probability (Berger & Udell, 2006). This challenge, which is
potentially inherent in all types of financing, is greater in smaller organizations and in
particular restricts the SMEs from gaining finance especially from formal financing
sources such as banks.

There is also the challenge of lack of information. Information asymmetry is a bigger

problem in SMEs than in larger firms. The SME entrepreneur or proprietor will normally
have access to better information regarding the business operations than the financiers.
Besides, the SME has the freedom to decide whether to share all the information, part of
the information or nothing with the outsiders (Appah, 2011). As a result, outsiders are
limited to the information made available to them by the entrepreneur. The entrepreneur
or the proprietor is also likely to have less technical capabilities and less knowledge in the
particular area of trade than those in larger firms (Karanja, 2012). They may however
better adapt to an uncertain environment. The SMEs also lack access to appropriate
technology, management skills, and training that impede their development.

2.2.3 Management of Funds

Khazi (2006) demonstrates the relationship between sources of funds and effective
management of working capital by discussing the effect of excess and shortage of funds
to the performance of the SMEs. Holding excess funds means that there is an opportunity
cost in form of returns that the business foregoes. On the other hand, shortage of funds
will disrupt the firm’s operations. Such a situation requires that organizations design and
implement appropriate funds management system to ensure that the best return is derived
from every single coin held by the business at any time.

13
The management of small-scale and medium-size businesses should establish and
strengthen the internal controls over funds and other resources to reduce mismanagement
and misappropriations (Berger & Udell, 2006). These may include segregation of duties
such as approvals and authorization of expenditure, design and implementation,
approvals, and authorization of physical controls, ensuring accuracy in accounting,
effective supervision of employees, and daily banking of funds received to reduce internal
fraud (Wilkes, 2006).

Khazi (2006) further recommends that small-scale businesses should introduce incentives
to motivate their employees to use the company funds as intended. For example,
businesses can increase salaries, wages, and non-monetary rewards (like presents or gifts)
to all employees who diligently carry out their duties in accordance with company
policies. This will reduce the number of embezzlement cases and theft of business funds
and develop a culture of commitment, honesty, transparency, and accountability that in
turn will lead to efficient management of funds. The management of small-scale and
medium-size businesses should therefore employ competent staff who have experience
and skills in funds management. This will go a long way in putting the company funds
into viable ventures and enhance profitability. Further, SMES need to have available
capital in order to operate efficiently, enter into new business ventures or to expand their
businesses (Gafurova, 2015).

2.2.4 Effect of Sources of Funds on Profitability

Wilkes (2006) argues that if a firm does not manage its funds properly it can easily go
into liquidation due to cash flow constrains. This may manifest as failure to pay
outstanding liabilities to suppliers and wages to employees, and failure to meet the costs
of the day-to-day operations. This has an adverse impact on the performance of the
SMEs. According to Beck, Demirgüç-Kunt, Laeven, and Maksimovic (2006), a firm that
keeps too much funds foregoes a return, which it would otherwise have earned if it
invested the funds in profitable ventures. This is because funds can be lent out even for
short periods to earn interest. The organization must therefore establish and install
programs on sourcing and use of funds to ensure that there is a balance between benefits
and costs. This impact on the working capital of the firm, especially on small scale and
medium enterprises.

14
Shaw (2006) explains that an organization that properly manages its funds and maintains
a positive balance on bank accounts may increase its profitability. Having positive funds
balance enables a firm to take advantage of discounts from suppliers, purchase more
inputs to expand the business and enables the company to venture into investments that
are more profitable.

There is also the issue of informational barrier. Asymmetric information is a more serious
problem in SMEs than in larger firms. The entrepreneur has access to better information
concerning the operation of the business than the suppliers of finance and has
considerable leeway in deciding whether to share such information with outsiders (Berger
& Udell, 2006). Hence, it may be difficult for the business financiers to determine
whether the entrepreneur is making erroneous decisions and to understand the business
adequately. As a result, SMEs often cannot obtain long-term finance in the form of debt
and equity. In addition, although SMES may be more adapted to operating in an uncertain
environment, the entrepreneur is also likely to have less training and therefore less know-
how on the daily operations of the business than those in larger organizations.

2.3 The Effect of SME Management on the Management of Working Capital

According to McChlery, Meechan, and Godfrey (2004), proper financial management is

vital in the survival and growth of every business. In a research conducted in Quebec-
Canada for the Chartered Institute of Management Accountants (CIMA),they identified
some of the reasons which spur and hinder sound financial management systems in
SME’s to include the access to computerized accounting systems for periodic financial
reporting; interference by firm directors or owners with the company funds; the level of
employee motivation; qualifications and competence of accounting personnel; the costs
and benefits of accounting experts to the firm; and pressure from financiers as they seek
collateral for financing. They further indicated that an important number of those
organizations surveyed in Quebec were viewed as practicing sound financial
management. This included the employment of working capital management and capital
budgeting techniques. Data in the study confirm that some of these factors spur the
application of sound financial management in organizations. Based on the findings of the
study SME owners and managers are encouraged to install and use proper accounting
information systems.

15
In their study on barriers and catalysts to sound financial management systems in small
sized enterprises, McChlery et al., (2004) identified several factors that act as hindrances
to the development of sound financial management systems. First is the lack of internal
accounting staff and lack of motivation, training, and qualification. This can act as a
significant hindrance to the development of sound management systems. Secondly, some
of the accountants employed by the firm do not add any value to the firm and appear not
to have insight to the needs of SMEs. Quite a number of firms surveyed in that study
indicated their disappointment at the little support and advice that was extended to them
by some of their external accountants. They personally believe that they do not usually
get minimal advice on the development of their financial systems especially in the aspect
of management accounting. Thirdly poor overall support, inappropriate targeting, and
delivery of training are hindrances to the development of sound financial management
systems.

2.3.1 Short Term Financial Management Practices

In their study on short-term financial management, Maness and Zietlow (2002) presented
two models used for value creation. The first model is the receipts and disbursement
model that utilizes the amount of cash expected to be received and spent by the company
over the given period. The second model is the adjusted net income model, which
provides a representation of changes in asset and liability accounts. The two models
incorporated effective short-term financial management activities. However, the two
models are generic and do not take into consideration the unique firm or industry
influences. The authors discuss industry influences on short-term financial management,
and in a short paragraph observed, “An industry in which a company is located in may
have more influence on that company’s fortunes than overall GNP.” A careful review of
this 627-page textbook reveals only sketchy information on actual firm level working
capital management dimensions and virtually nothing on industry factors except for some
boxed items with titles such as “Should a Retailer Offer an In-House Credit Card” and
nothing on working capital management stability over time.

Financial management is considered one of the functional areas of management that

forms the focus to the success of any enterprise. A firm with an inefficient financial
management process may often result in the enterprise suffering from cash problems.
According to a research by Kawame (2010), unplanned financial management practices
are among the major causes of failure for SMES in Ghana. Such practices were also

16
found to affect the profitability of the company. Consequently, a firm’s profitability could
be reduced by utilization of inefficient financial management practices. Moreover, the
levels of uncertainty of the firm’s business environment has forced many firms to
excessively rely on equity and high liquidity, which adversely affect the financial position
and profitability.

According to Waweru and Ngugi (2014), financial innovations have an impact on the
performance of Small Enterprises in Kenya. This was because firms undertake innovation
with the aim of making profits. The study also established a statistical significance
between firms’ performance and working capital. Further, a study by Fatoki (2012), on
financial management in South Africa SMES with focus on financial planning and
control, accounting information, financial analysis, management accounting, working
capital management, and investment appraisal revealed that a majority of new micro-
enterprises do not undertake financial planning and control, financial analysis and
investment appraisal.

2.3.2 Accounts payable management practices

In a recent research on cash management practices of 123 small firms (SME’s) across a
variety of industries in the Canadian provinces of Quebec and Ontario, Anvari and Gopal
(cited in Agyei-Mensah, 2012) indicated that fifty three percent of the small firms
sampled projected their cash flows. Only twenty-six percent of the respondents to the
survey said they used formal techniques such as fixed percentage of sales, purchases, or
expenses in determining the level of their cash balances. Approximately seventy-one
percent of firms indicated that they regularly monitored their current accounts, with
smaller firms (SME’s) less likely to do so than the larger firms did.

Agyei-Mensah (2012) outlines the inventory management practices of a sample of 94

small businesses (SME’s) operating in a range of industries and located in the state of
Virginia. It was found that businesses, with higher inventory turnover rate, were more
likely to be using some form of inventory management system and to be evaluating the
financial attractiveness of investment in inventory using payback period or discounted
cash flow measures.

Although most of the respondents in the earlier study by Grablowsky and Rowell (1980)
had in excess of thirty percent of their capital invested in inventory, only six percent used
a quantitative technique such as “economic order quantity” to optimize inventory, and

17
fifty four percent had accounting systems which were unable to provide information on
inventory turnover, reorder points, and ordering costs. These findings on inventory
management practices of small firms (SME’s) in the study failed to take into account
recent inventory management techniques such as Just in Time, quality control
management, and product engineering techniques.

A survey conducted on accounts payable management practices, particularly those

relating to cash discounts by various academicians indicated that less than fifty percent of
small businesses (SMEs) owner-managers see accounts payable as a financing source for
their businesses(Agyei-Mensah, 2012). More than seventy percent of respondents in the
study said that they took advantage of cash discount when made available. The studies
however failed to comment on the level of usage of accounts payable management
practices by those firms (SMEs). The study was quiet on how frequent such firms
reviewed their accounts payable. In another survey on the accounts receivable
management practices of small businesses (SMEs) in Virginia, Grablowsky and Rowell
(1980), cited in Agyei-Mensah (2012), found negative practices to be predominant. About
ninety-five percent of firms that sold on credit had the tendency to sell to whoever wished
to buy. Only thirty percent of respondents subscribed to a regular credit reporting service
such as Bradstreet and Dun. Most firms did not have credit checking guidelines and
procedures and only about fifty-two percent enforced a late payment fee. Further thirty-
four percent of firms had no formal procedure for aging accounts receivable. Overall,
only twenty percent of the businesses in this survey engaged a full-time credit officer.
This factor had the most important influence on management of accounts receivables. In
the firms surveyed, many firms viewed accounts receivable levels as being exogenously
arrived at and beyond their active control. The finding that owner managers often neglect
accounts receivable management may however not be relevant today due to the
advancement in use of computer software’s on working capital management techniques
(Agyei-Mensah, 2012).

2.4 Effects of Ethical Perceptions and Beliefs of SMEs Owners on Working Capital
Management

2.4.1 Ethical Perception

According to Alvares, Merino and Gongzalez (2012), perception is determined by the

individual’s intellectual profile. Such profile refers to the set of individual traits that relate

18
to the varying actions and thought that managers engage in. Workplace Employment
Relations Survey (WERS) done in the year 2004 showed that employees in small firms
were more satisfied than those in larger one. As such, these employees tend to have a
higher job commitment to their job (Forth et al, 2006). However, there are claims that
small establishments are more prone to cases of unfair dismissal claims since the 1980s in
the UK. As a result of this trend, the UK saw the creation of statutory employment rights
in the late 1990s (Kersley et al, 2006). According to Hann (2012) SMEs have become
very vulnerable to the statutory rights issue due to lack of resources to keep updated with
the changes. In particular, lack of internal Human Resources (HR) expertise is the main
concern because of the owners being the final authority in the daily running of staff
welfares.

According to Phatshwane (2013), ethical perceptions and beliefs affect people’s attitudes
and the degree to which they accept unethical practices or the manner in which they view
ethical decisions made by other people. According to the study, examining managers’
ethical perceptions in different organizational and national settings has been useful in
shaping and informing ethical behavior and knowledge, hence the growth of academic
interest in this area. Researchers tend to agree that there has been more interest in the
study of ethical perceptions and behavior of large corporations as opposed to that of
smaller businesses. The study adds that the ethics of small business managers in usually
about ‘your business, your ethics, your gains and losses’ since business owners stand to
gain or lose directly from the outcome of ethical choices made by themselves and their
employees. This is in contrast to unethical decisions made by managers in larger
corporations, whose effects tend to have much more far-reaching effects on society,
because of financial losses either to investors or negative publicity brought to the firm or
the country. Managers of small businesses think that ethical standards are lower today
than in the previous decades and they feel that they are more ethical than lower level
managers are and other employees in their firms (Vitell, Dickerson & Festerrand, 2000).

To this end, Phatshwane (2013) suggests that entrepreneurial activities are directed along
the lines of a manager’s codes of ethical behavior. In recent years, the Kenya Government
has pinned its economic diversification strategy on the development of Small and
Medium Enterprises (SMEs). This is evidenced by the recent creation of the ministry of
industrialization and enterprise development and the subsequent introduction of the youth
enterprise fund and the women enterprise fund to enable women and youth to start up

19
small businesses. Some researchers suggest that SMEs in developing countries lack
awareness and understanding of business ethics and its importance in advancing one’s
business prospects.

Painter-Morland and Dobie (2009) state that in many African settings, small business
managers did not believe that corrupt practices are a problem in their society despite the
prevalence of bribery in many countries included in the study. The study results suggest
that small business managers are often brought into unethical business practices through
their association with larger business entities, which they need for financial survival. This
then becomes the ‘accepted’ state of doing business and given that subordinates are good
learners, they too become contaminated by practices that pervade organizations.

According to Klos (2006), the level of organization remuneration is a factor that has been
greatly discussed and according to various research, the extent of employee remuneration
varies between firms of different size, age, and category. Employee wages are also
determined by their productivity and this is entirely dependent on the employees’
knowledge, experience, and nature of the job. In addition, all types of incentive have
been found to influence employees’ motivation to work harder and thus increase a firm’s
productivity.

2.4.2 Beliefs of SMEs Owners on Working Cаpitаl

There is currently increаsing pressure on business orgаnisаtions to be ethicаl, in аddition

to running their operаtions in the most economicаl, efficient аnd effective mаnner
possible to increаse performаnce (Khombа & Vermааk, 2012). Due to continuаlly
chаnging competitive environments, businesses must аlso find new wаys of meeting
competition other thаn the trаditionаl wаys of offering better products, or lower prices
(McMurriаn & Mаtulich, 2006). It is importаnt to note thаt modern businesses employ
people with diverse bаckgrounds in terms of nаtionаlity, culture, religion, аge, educаtion
аnd socioeconomic stаtus. Eаch of these persons comes into the workplаce with different
vаlues, goаls аnd perceptions of аcceptаble behаviour. This diverse bаckground creаtes
ethicаl chаllenges for individuаls аs well аs mаnаgers (Аbiodun & Oyeniyi 2014).
Businesses hаve reаlised thаt ethicаl misconduct cаn be very costly not only for the
orgаnisаtion but аlso to society аs а whole (Аbiodun & Oyeniyi 2014). Furthermore,
todаy’s customers hаve become increаsingly mindful of the reputаtion of the businesses
they pаtronise. Consequently, smаll аnd medium-sized enterprises (SMEs) hаve become

20
the worst аffected since they lаck the funds, strаtegic informаtion аnd relevаnt аlliаnces
(Ononogbo, Joel & Edejа, 2016) to implement ethicаl prаctices.

Regаrdless of their size, business enterprises cаn no longer аfford to disregаrd business
ethics (Srаboni & Shаrmisthа 2011). SMEs, аnd not smаll, medium аnd micro enterprises
(SMMEs), аre chosen for this study becаuse they аre more formаl compаred to SMMEs.
It is notаble thаt SMEs, which hаve been plаying а leаding role in the business domаin in
the lаst few decаdes, hаve remаined outside the floodlights of review regаrding the issue
of business ethics (Werner & Spence 2004). There аre аlso continuous business fаilures
аs а result of unethicаl prаctices especiаlly those аssociаted with employees (Srаboni &
Shаrmisthа 2011). This in turn hаs аdversely аffected SMEs’ reputаtions (Ononogbo et
аl., 2016). With the expаnding role of SMEs globаlly, аn ethicаl аpproаch towаrds
business is imperаtive for them (Srаboni & Shаrmisthа, 2011). Hence, business
orgаnisаtions аnd mаnаgers need to behаve ethicаlly аnd protect their own business
interests (Аbiodun & Oyeniyi, 2014) if they аre to survive аnd remаin competitive.

There is аlso increаsing аwаreness of ethics, leаding societies to disаpprove of businesses

thаt аre found to be ethicаlly ill (Аhmаd, Аmrаn & Hаlim, 2012). However, the study of
the role аnd function of ethics in business orgаnisаtions hаs unfortunаtely focused
primаrily on lаrger enterprises, even though SMEs exert а strong influence on the
economies of аll countries, pаrticulаrly in the fаst-chаnging аnd increаsingly competitive
globаl mаrket (Nаidoo, Perumаl & Moodley, 2009). While mаny lаrge compаnies hаve
gаined their reputаtion by аpplying ethicаl stаndаrds, SMEs in developed countries аre
progressively becoming more аlert to the significаnce of trustworthy deаlings with
employees, clients, suppliers аnd society. However, SMEs in developing countries still
require more understаnding аnd аwаreness of the implicаtion of business ethics аnd its
benefits. They mаy be unаble to recognise such gаins due to lаck of а long-term vision
(Mаhmood 2008). The unique opportunities аnd chаllenges thаt SMEs encounter often
tempt them to diverge from ethicаl prаctices when interаcting with their stаkeholders,
especiаlly the employees (Srаboni & Shаrmisthа, 2011). Hence, the study of business
ethics hаs become imperаtive in todаy’s competitive business environment.

In developing countries, SMEs employ more thаn 70% of the lаbour force (Mаhmood
2008). For exаmple, in Thаilаnd, SMEs аccount for more thаn 90% of the totаl number of
estаblishments, 65% of employment аnd 47% of mаnufаcturing vаlue аdded, while in
Philippines, SMEs comprise 99% of the totаl mаnufаcturing estаblishments аnd

21
contribute 45% of employment аnd 18% of vаlue аdded in the mаnufаcturing sector
(Mаhmood 2008). In Аfricа, SMEs аccount for more thаn 90% of businesses аnd
contribute аbout 50% of gross nаtionаl product (GDP) (Kаmunge, Njeru & Tirimbа
2014). For instаnce, in Kenyа, SMEs contribute 40% of the GDP, over 50% of new jobs
аnd аccount for 80% of the workforce (Mwаrаri & Ngugi, 2013). In Ugаndа, SMEs
constitute over 90% of businesses operаting in the privаte sector; they contribute to 75%
of GDP аnd employ аpproximаtely 2.5 million people (Hаtegа 2007; Ugаndа Ministry of
Finаnce, Plаnning аnd Economic Development 2011).

2.4.3 Significаnce of Business Ethics To Smаll Аnd Medium-Sized Enterprises

It is importаnt to note thаt in the 21st century, power in the mаrket hаs shifted from
producers аnd sellers to buyers аnd consumers (Weinstein 2012). Where stаkeholders
hаve control over mаrkets аnd cаn аffect business performаnce, ethicаl prаctices аre
criticаl success fаctors when it comes to business (Twomey & Jennings 2011). Аs such,
business owners аnd employees must exercise good fаith in the prаctices they engаge in if
they аre to continuously mаke profits. Businesses thаt operаte without regаrd for ethicаl
vаlues аre likely to run into problems with the lаw, customers, employees аnd business
pаrtners. Consequently, business reputаtion will suffer аnd the loss of business from
unethicаl behаviour could be significаnt аnd difficult to erаse. Customers vаlue ethicаl
businesses аnd once а business hаs lost trust by being unethicаl, customers will seek
аlternаtives аnd much will be lost to competitors, or in the process of defending аgаinst
lаwsuits (Donovаn 2013). However, SMEs must be especiаlly cаutious to bаlаnce the
goаls of profits with the vаlues of individuаls аnd society by prаctising good business
ethics (Twomey & Jennings 2011). Hence, businesses need good ethicаl vаlues to
survive.

Ethicаl аnd sociаlly responsible prаctices benefit entrepreneurs finаnciаlly in the long run.
This meаns thаt behаviour аssociаted with mаintаining honesty аnd integrity, being
trustworthy, engаging in fаir commerciаl prаctices, tаking responsibility аnd being
аccountаble for one’s own аctions аre very importаnt for SMEs in the long run (Аhmаd
2009). Аccording to Goll аnd Rаsheed (2004), in fаst-chаnging аnd unpredictаble
environments, ethicаl аnd sociаlly responsible behаviour helps businesses to gаin support
from different externаl stаkeholder groups. Such behаviour provide them with some
protection from the unpredictаbility they fаce. Аs such, а business’s imаge аnd reputаtion
mаy be influenced by the good prаctices it exhibits to its customers аnd to the generаl

22
public (Jones 2000). The benefits of ethicаl prаctices enаble competitive аdvаntаge to be
аttаined аs а business distinguishes itself from its competitors (Аhmаd 2009). In fаct,
businesses with high ethicаl codes of conduct аnd а commitment to enhаncing integrity
аre not only profitаble but more likely to succeed in а commerciаlly competitive world
(Hаsnаh, Ishаk & Sobei 2015).

Аlthough some mаnаgers consider ethics progrаmmes in their orgаnisаtions to be very

expensive, аctivities thаt аre only societаlly rewаrding (McMurriаn & Mаtulich 2006),
businesses thаt аre viewed аs ethicаl by their key stаkeholders (i.e. customers, employees,
suppliers аnd public) do enjoy severаl competitive аdvаntаges such аs higher levels of
efficiency in operаtions, higher levels of commitment аnd loyаlty from employees, higher
levels of perceived product quаlity, higher levels of customer loyаlty аnd retention, аnd
better finаnciаl performаnce (Ferrell 2004). Hence, high stаndаrds of orgаnisаtionаl ethics
cаn contribute to profitаbility by reducing the cost of business trаnsаctions аnd building а
foundаtion of trust with importаnt stаkeholders (McMurriаn & Mаtulich 2006).

Business аctivities require the mаintenаnce of bаsic ethicаl stаndаrds, such аs honesty,
reliаbility аnd cooperаtion. Businesses cаnnot survive if their directors never tell the truth,
if buyers аnd sellers never trust eаch other or if the employees refuse to provide support
to eаch other аnd to customers (Brаnko, Drаgo & Zorаn 2015). Good ethics in terms of
being fаir, honest, responsible аnd upright helps to build credibility аnd trust for
businesses. Customers аnd other stаkeholders wаnt to engаge businesses аnd business
owners whom they cаn fully trust with their hаppiness, needs аnd wаnts, their money аnd
their sаfety, heаlth аnd well-being (Donovаn 2013). Therefore, SME owners must see
business investment, growth аnd sаles аs stemming from а circle of trust (Twomey &
Jennings 2011).

SMEs thаt ethicаlly conduct their businesses аre likely to hаve а positive effect on sаles
аnd profits, experience а lower incidence of stаff turnover, аs well аs increаsed
productivity, аs employees prefer to work аt аn ethicаl orgаnisаtion, eаsily аttrаct
potentiаl employees wаnting to work for the orgаnisаtion, thereby reducing recruitment
costs аnd helping the compаny get the right skills, аnd protect the business from а
possible hostile tаkeover by аttrаcting investors (Wiid et аl. 2013). Hence, SMEs need to
develop ethicаl policies аnd аdhere to them in their dаy-to-dаy operаtions.

23
The lаck of generаl ethics аmong SME owners аffects the growth opportunities of
business by negаtively impаcting customer loyаlty, brаnd building аnd deterring
investment pаrtners (Kаlyаr, Rаfi & Kаlyаr 2013). This аlso creаtes а stereotype аnd
perceptions of а generаl lаck of credibility аnd reputаtion аmong SMEs, thereby аffecting
their аbility to compete with lаrger businesses аnd to obtаin funding for development.
Hence, it is imperаtive for SMEs to аppreciаte the nаture аnd importаnce of business
ethics in order to develop strаtegies аnd solutions to effectively аddress existing
chаllenges аnd minimise business fаilure, increаse opportunities for growth,
competitiveness аnd performаnce, аnd improve their generаl reputаtion in industry аnd
community (Donovаn 2013).

2.5 Chаpter Summаry

This chаpter reviewed literаture on the effect of funding sources on mаnаgement of

working cаpitаl, the effect of SME mаnаgement on working cаpitаl mаnаgement аnd the
effect of unethicаl prаctices аnd beliefs by SMEs mаnаgers аnd owners on working
cаpitаl mаnаgement. Chаpter 3 describes the reseаrch methodology used аnd elаborаtes
on the reseаrch design, populаtion, аnd sаmpling design, dаtа collection methods,
reseаrch procedures, аnd dаtа аnаlysis methods used in the study.

24
 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the research methodology applied in the study. It specifically
provides the research design adopted the target population and sampling design, methods
used in data collection, research procedures, and data analysis adopted in conducting the
research. Finally, the chapter ends with a summary.

3.2 Research Design

Research design is the plan used in satisfying the research objectives and answering
research questions. The research was conducted within the conceptual structure. It is the
blue print for collection, measurement and analysis of data in a manner that aims at
combining relevance to research purpose with economy in procedures (Saunders, Lewis
& Thornhill, 2009).

The study adopted a descriptive research design in view of the fact that it is a study of
relatively short duration and involves a systematic collection and presentation of data to
give a clear picture of a particular situation. Descriptive design helps identify if a
relationship exists between variables, determine the frequency of occurrence, and finally
describe the state of a variable (Cooper & Schindler, 2003). This research design was
chosen because it would assist the researcher to obtain relevant information related to the
challenges faced by SMEs in Nairobi’s CBD in the management of working capital. A
survey was conducted using a standardized questionnaire. The dependent variable of the
study was the effective working capital management practices while the independent
variables were funding sources of working capital, management practices of SME
managers, and ethical perceptions and beliefs of SME owners.

3.3 Population and Sampling Design

3.3.1 Population

According to Saunders, Lewis and Thornhill (2009), population is the complete set of
cases or group members which the researcher wishes to draw conclusions. The population
of the study consisted of the top 100 SMEs located in the Central Business District (CBD)
of Nairobi, which are 54 in total. They include 4 in the manufacturing sector, 16 in the

25
service sector and 34 in the trading sector. Since all these SMEs are located within the
Nairobi CBD, it was easy to reach them and collect data from them for this research.
Primary data was collected from the managers of the SMEs while secondary data was
collected from SMEs reports, annual financial statements, budgets and monetary records,
cash flow statements, asset register, and tax schedules.

Table 3.1 Population Distribution

Industry Frequency Percentage

Manufacturing 4 7

Services 16 30

Trading 34 63

Total 54 100

3.3.2: Sampling Design

3.3.2.1 Sampling Frame

A sampling frame is the list from which the sample is drawn. Ideally, the sample frame
should be the target population (Kombo & Tromp, 2006). The population frame for this
study was composed of firms listed in top 100 SMEs in Kenya that are involved in
Service, Manufacturing, and Agribusiness.

3.3.2.2 Sampling Technique

This is the method used in drawing the sample from a population in a way that the sample
selected is representative of the population (Cooper and Schindler, 2003). There are
several techniques used for coming up with a sample size, namely convenience,
judgment, simple random sampling, stratified random sampling and cluster sampling.
Stratified random sampling was used to select the sample for this study. The technique
produces estimates of overall population parameters with greater precision and ensures a
more representative sample is derived from a relative homogenous population. This gives
every respondent among the accessible population a chance of participating equally

26
(Kothari, 2007). The strata was subdivided based on the sector, this include
manufacturing sector, service sector and trading sector.

3.3.2.3 Sample Size

A sample is a group or subgroup of participants obtained from the accessible population

(Mugenda and Mugenda, 2008). They further say that a sample of thirty percent is good
for social science researches. The sample is carefully selected to represent the whole
population. The sample size ensures that the information is detailed and comprehensive.
Due to limitations especially associated with time and cost, the whole population of 54
was not considered, and instead a random stratified sample of 48 SMEs was selected
using the following formula:-

N
𝑛= , where
1+𝑁(𝑒)2

N= Population;

e = margin of error or significance level at 0.05,

n = sample size

The formula was used to calculate the sample size with a 95% confidence level and
therefore,

n= 54/ (1+ (0.052))

= 54/1.135

= 47.57

= 48

A stratified sampling of 48 SMEs from the Central Business District (CBD) of Nairobi
were contacted and onstituted of 4 from manufacturing, 14 from sevice industry and 30
from trading sector as shown in Table 3.2 as follows.

Table 3.2 Sample Size Per Strata

Industry Frequency Percentage

27
Manufacturing 4 7

Services 14 30

Trading 30 63

Total 48 100

Only 40 responded representing 83% of all the SMEs in the Central Business District
(CBD) of Nairobi that were in the top 100 SMEs list released by the Nation media group
in Kenya. This sample was representative as Mugenda and Mugenda (2008) suggest that a
good sample is ten to thirty percent of the accessible population.

3.4 Data Collection Method

Primary data was collected and used in this study to facilitate the realization of the study
objectives. Primary data is that information collected directly from the sources (Kothari,
2007). To collect the primary data, a structured questionnaire was used. Kothari (2007)
terms a questionnaire as the most appropriate instrument due to its ability to collect a
large amount of information in a reasonably quick span of time. It is for the above reasons
that the questionnaire was chosen as an appropriate instrument for this study. The
questionnaire had four sections: general information, lack of funding, management
practices, and SMEs owner ethical practices. It contained both close-ended and open-
ended questions. The close-ended questions were necessary for ease of coding while the
open-ended questions were important for purposes of clarifications.

The variables on the key objectives of the study was measure in interval scales mostly
with a yes or no option to determine respondents’ agreement with the impact of funding
sources on working capital management by small and medium enterprises in Nairobi’s
central business district.

The research supervisor was consulted to ensure the questionnaire was valid. The
information obtained from the questionnaires was free from bias and researcher’s
influence and was therefore accurate. The questions addressed by the questionnaire
sought to gather descriptive data based on the research objectives.

3.5 Research Procedures

Before collecting the information the researcher first conducted a pilot test using the
questionnaire on a sample of 10 management staff of the SMEs forming the sample frame

28
and who were not included in the main study. The researcher sought appointments with
the respondents so as to administer the research instruments. The questionnaires were
administered by the researcher and a trained research assistant through a drop and collect
method.

The questionnaire was prepared based on specific objectives and was administered to the
respondents through drop- and-pick-later method where the respondents filled the
questionnaires and the researcher picked them later. This method is more efficient and
economical as compared to other methods such as observation. Leaving the
questionnaires with the respondents was appropriate because it gave the respondents
ample time to give true and accurate information. The letter of confidentiality of
information was presented to the respondents to assure them of the propriety of handling
the information provided.

3.6 Data Analysis Methods

In this study, descriptive approach was used to analyze the data collected. The data
collected was edited, summarized, and analyzed using Statistical Package for Social
Sciences (SPSS). The results were presented through graphical and numerical techniques
to enhance interpretation. This involved tallying up responses, computing percentages of
variations in response as well as describing and interpreting the data in line with the study
objectives and assumptions in order to allow greater understanding of results and
findings. Content analysis was used to analyze qualitative data collected from the open-
ended questions. To analyze the relationship between the dependent and independent
variable correlation and regression analysis was undertaken.

3.7 Chapter Summary

Chapter three describes the research methodology applied in the study. Descriptive
research approach was conducted using a structured questionnaire. The total respondents
was comprised of 48 SMEs located in the Central Business District (CBD) of Nairobi,
although only 40 responded. The chapter gives a detailed description of the research
design, population, and sampling design, data collection methods, research procedures
and data analysis methods. Chapter four discusses research findings.

29
 CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

This chapter presents analysis and findings of the study based on the specific research
objectives. The specific objectives include determining the effect of funding sources on
working capital management in SMEs, determining the effect of SME management on
the management of working capital and establish the effect of owners of SMEs ethical
perceptions and beliefs on their working capital management. The research questionnaire
was designed in line with the objectives of the study. The first section of the questionnaire
analyzed the general information of the respondents, the second section analyzed the
funding sources, the third section analyzed the management practices of SMEs, and the
fourth section considered the effects of SMEs owner’s ethical practices. The
questionnaires were administered to 48 SME owners within the CBD and only 40 were
returned-representing an 83% response rate. The second section of this chapter analyses
the general information of the respondents.

4.2 General information

The general information of the respondent’s data included gender, age, and marital status,
highest level of education, number of clients, number of outlets of the business, and the
number of employees in the respective firms.

4.2.1 Gender of Respondents

The study sought to establish the gender of the respondents and according to the findings,
67.5% of the respondents were male while 32.5 % were female as shown in Table 4.1.
This indicated that the response received include views from all the genders

Table 4.1: Gender of Respondents

Distribution Frequency Percentage

Male 27 67.5 %

Female 13 32.5%

Total 40 100%

30
4.2.2 Age of Respondents

From the findings majority of the respondents accounting for 47.5% were aged between
the ages of 36-45 years old. This was followed closely by those aged between 26-35 years
representing 32.5% of the respondents. Those aged between the 18-25 represented 10% of
the total, while those aged between 46-55 representing 7.5% of the total. The least was
those aged above 55 years and representing 2.5% of the respondents as shown in Table
4.2.

Table 4.2: Age of Respondents

Distribution Frequency Percent

18-25 years 4 10
26-35 years 13 32.5
36-45 years 19 47.5
46-55 years 3 7.5
Above 55 years 1 2.5
Total 40 100.0

4.2.3 Highest Education Level

As shown in Figure 4.1 the study established that majority of the respondents had a
university degree, representing 65% of the respondents. Those whose highest level of
education was secondary level represented 25% of the respondents while those whose
highest form of education was some other form of education represented 10% of the
respondents.

65
70

60

50

40 Sum of Frequency
25 26
30 Sum of Percent
20 10 10
10 4

0
Other Secondary education University

Figure 4.1: Highest Education

31
4.2.4 Nature of the enterprises

According to the findings, majority of the respondents were operating in partnerships and
this represented 40% of the respondents. This was closely followed by those who operate
other form of enterprises, representing 30% of the total while those operating in a limited
liability company represented 27.5%. Those operating in a sole proprietorship represented
2.5% of the respondents as shown in Figure 4.2.

40
40
35 30
27.5
30
25
16 Sum of Frequency
20
11 12 Sum of Percent
15
10
2.5
5 1
0
Limited liability Other Patnership Sole
proprietorship

Figure 4.2: Nature of Enterprise

4.2.5 Marital status of the respondents

The study established that 70% of the respondents were married while those who were
single represented 22.5% of the total respondents. Those who were divorced represented
7.5% of the total respondents as shown on Figure 4.3.

Divorced
7.5
3

Single
22.5
9

Married
70
28

0 10 20 30 40 50 60 70 80

percentage frequency

Figure 4.3: Marital Status

32
4.2.6 Number of Employees

As presented in Figure 4.4 majority of the respondents have more than 40 employees
representing 60% of the respondents and those with between 11-20 employees
represented 20% of the total respondents. Further, 15% of the respondents indicated that
they operated with between 30-40 employees while the least frequency was those with
between 1-10 employees, representing 5% of the total respondents.

30-40
15%

1-10
5%

30-40

1-10
More than 40 11-20
60% 20%
11-20

More than 40

Figure 4.4: Number of Employees

4.3 Effects Of Lack Of Funding On Working Capital Management In SMES

In this section the study sought to find out the effect of lack of funding on working capital
management in SMES. The effects are analyzed in Table 4.3 as below.

Table 4.3 Funding Sources

Statement Description YES NO Total

Does the firm have a bank account frequency 31 9 40
percentage 77.5% 22.5 100
Banking of daily proceeds frequency 18 22 40
percentage 45% 55 100
Access to credit frequency 26 14 40
percentage 65% 35 100
Gets all funds requested frequency 17 23 40
percentage 42.5% 57.5 100
Adequate security for loan applied frequency 11 29 40
percentage 27.5% 72.5 100

33
The findings show that 77.5% of the firms had a bank account, 45% banked their daily
proceed and 65% had access to credit. It was also noted that 42.5% get all the funds
requested and only 27.5% had adequate security for loan applied.

4.3.1 Bank account

The study sought to find out whether SMEs had bank account. As indicated in Figure 4.6,
out of the 40 respondents 77.5% have bank accounts while 22.5% do not have one.

NO
23%

yes
77%
yes NO

Figure 4.5: Bank account

4.3.2 Frequency of Banking

The study sought to find out whether SMEs banked their daily proceeds. As presented
Figure 4.6, out of the 40 respondents 45% bank daily cash proceeds while 55 % do not.

yes
45%
NO
55%

yes NO

Figure 4.6 : Frequency of Banking

4.3.3 Access To Credit Facilities

The study sought to find out whether SMEs had an access to credit facilities. As presented
in Figure 4.7 out of the 40 respondents 65% were positive while 35 % of the
respondents did not have access.

34
 70 65

60

50

40 35
Sum of frequency
30 26

20
14
Sum of percentage
10

0
no yes

Figure 4.7: Access to Credit Facilities

4.3.4 Getting Funds Requested

The study sought to find out whether SMEs get all the funds requested from financiers
and as presented in Figure 4.8 out of the 40 respondents only 42.5% said yes while
57.5% of the respondents did not.

70

60 57.5

50
42.5
40
Sum of frequency
30 23 Sum of percentage
20 17

10

0
no yes

Figure 4.8: Gets Funds Requested

4.3.5 Adequacy of Collateral

The study sought to find out whether SMEs had adequate security for loan applied and as
presented in Figure 4.9 out of the 40 respondents only 42.5% had adequate collateral
while 57.5% of the respondents did not.

35
 80 72.5
70
60
50
40 Sum of frequency
29 27.5
30 Sum of percentage
20 11
10
0
no yes

Figure 4.9: Adequate Security for Loan Applied

4.3.6 Correlation between the variables of Funding

The study sought to determine if there was a relationship between the firms having a
bank account and lack of funding on working capital management. From the results in the
correlation table (Table 4.3) there was a positive correlation between the firm having a
bank account and undertaking regular banking of proceeds (0.487, pvalue = 0.001);
access to credit (0.734, pvalue = 0.000); getting all funds requested (0.463, pvalue =
0.003); and adequate security for loan applied (0.332, pvalue = 0.036).

Table 4.4: Correlation between the variables of Funding

Funds
Account Banking Credit Access Security
Account Pearson Corr 1 .487** .734** .463** .332*
Sig. (2-tailed) .001 .000 .003 .036
Banking Pearson Corr .487** 1 .664** .950** .681**
Sig. (2-tailed) .001 .000 .000 .000
Credit Pearson Corre .734** .664** 1 .631** .452**
Sig. (2-tailed) .000 .000 .000 .003
Funds Pearson Corre .463** .950** .631** 1 .716**
Access Sig. (2-tailed) .003 .000 .000 .000
Security Pearson Corre .332* .681** .452** .716** 1
Sig. (2-tailed) .036 .000 .003 .000

36
4.4 Effects of SME Management Practices on Working Capital Management

The study also sought to find out the overal management practices of SMEs on the
management of their working capital . The effects are analysed in table 4.5 as follows.

Table 4.5: Management Practices

Statement Description YES NO Total

Selling on credit frequency 21 19 40
percentage 52.5% 47.5 100
Undertaking formal credit investigation frequency 25 15 40
percentage 62.5% 37.5 100
Experience large piles up of raw matearial or of frequency 19 21 40
goods for resale percentage 47.5% 52.5 100
Keep record of goods for resale or raw matearials frequency 26 14 40
percentage 65% 35 100
Undertake regular stock taking frequency 18 22 40
percentage 45% 55 100
Re order level policy frequency 26 14 40
percentage 65% 35 100

4.4.1 Selling On Credit

The study sought to find out whether SMEs do credit sales and out of the 40 respondents
52.5% agreed while 47.5% of the respondents disagreed. This is presented in Figure 4.10

60
52.5
50 47.5

40

30 Sum of frequency
21 Sum of percentage
19
20

10

0
no yes

Figure 4.10: Selling On Credit

37
4.4.2 Undertaking of Formal Credit Investigation

The study sought to find out whether SMEs undertaking formal credit investigation and
out of the 40 respondents 62.5% agreed while 37.5% of the respondents disagreed. This
is presented in Figure 4.11

70
62.5
60

50

40 37.5
Sum of frequency

30 25 Sum of percentage

20 15

10

0
no yes

Figure 4.11: Undertaking of Formal Credit Investigation

4.4.3 Piles Up of Goods for Resale

The study also sought to find out whether SMEs had piles up of goods for resale and out
of the 40 respondents only 47.5% agreed while the majority who are 52.5% of the
respondents disagreed. This is presented in figure 4.12

60
52.5
50 47.5

40

30 Sum of frequency
21 Sum of percentage
19
20

10

0
no yes

Figure 4.12: Piles Up of Goods for Resale

38
4.4.4 Record Of Goods For Resale Or Raw Matearials

The study also sought to find out whether SMEs keep record of goods for resale or raw
materials. Out of the 40 respondents majority who accounted for 65% agreed while only
35% of the respondents disagreed. This is presented in figure 4.13

70 65

60

50

40 35
Sum of frequency
30 26
Sum of percentage
20 14
10

0
no yes

Figure 4.13: Record Keeping

4.4.5 Undertake Regular Stock Taking

As presented in Figure 4.14 the study also sought to find out whether SMEs undertook
regular stock taking and out of the 40 respondents only 45% of the respondents agreed
while the majority 55% disagreed.

60
55

50
45

40

30 Sum of frequency
22 Sum of percentage
20 18

10

0
no yes

Figure 4.14: Undertake Regular Stock Taking

39
4.4.6 Re order level policy

Further the study also sought to find out whether SMEs had an existing reorder level
policy and out of the 40 respondents 65% of the respondents agreed while 35%
disagreed. This is presented in figure 4.15

70 65

60

50

40 35
Sum of frequency
30 26 Sum of percentage

20
14

10

0
no yes

Figure 4.15: Re order level policy

4.4.7 Correlation of Variables of Management Practices

The study sought to determine if there was a relationship between the impact of credit
sales on working capital management. From the result in the correlation Table 4.6 there
was a positive correlation between the firm undertaking credit sales and undertaking of
formal credit investigation (0.775, pvalue = 0.000); experience large piles up of raw
matearial or of goods for resale (0.951, pvalue = 0.000); keep record of goods for resale
or raw matearials (0.775, pvalue = 0.000); undertake regular stock taking(0.860, pvalue
0.000); and if the firms had a re order level policy (0.775, pvalue = 0.000).

40
Table 4.6: Correlation of Variables of Management Practices

Credit Investiga Large Stock

sale te pile Record take Reorder
Credit Pearson
1 .775** .951** .775** .860** .775**
sale Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)
Investigate Pearson
.775** 1 .737** 1.000** .666** 1.000**
Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)
Large Pearson
.951** .737** 1 .737** .904** .737**
pile Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)
Record Pearson
.775** 1.000** .737** 1 .666** 1.000**
Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)
Stock take Pearson
.860** .666** .904** .666** 1 .666**
Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)
Reorder Pearson
.775** 1.000** .737** 1.000** .666** 1
Correlation
Sig. (2-
.000 .000 .000 .000 .000
tailed)

4.5 Effects of Owners of SMEs Belief and Ethical Perception on Working Capital
Management

The researcher sought to establish the effects of owners of SMEs belief and ethical
perception on working capital management. The results are analysed and recorded
according to the findings in Table 4.7.

41
Table 4.7: SME Owners Ethical Practices

Statement Description YES NO Total

SME owner fair to his employees frequency 21 19 40
percentage 52.5% 47.5 100
SME owner renumerates fairly frequency 25 15 40
percentage 62.5% 37.5 100
The owner pays salaries on time frequency 19 21 40
percentage 47.5% 52.5 100
The owner pays suppliers by agreed date frequency 26 14 40
percentage 65% 35 100
Make timely payments for the credit facilities frequency 18 22 40
percentage 45% 55 100

4.5.1 Fairness to Employees

The study sought to find out whether SMEs owners are fair to their employees and of the
40 respondents 52.5% agreed while 47.5% of the respondents disagreed as presented in
Figure 4.16.

60
52.5
50 47.5

40

30 Sum of frequency

21 Sum of percentage
19
20

10

0
no yes

Figure 4.16: Fairness to Employees

42
4.5.2 Fair Renumeration

As shown in Figure 4.17 the study sought to find out whether SMEs have fair
remuneration and out of the 40 respondents 62.5% agreed while 37.5% of the
respondents disagreed.

70
62.5
60

50
37.5
40 Sum of frequency
30 25 Sum of percentage

20 15

10

0
no yes

Figure 4.17: Fair Remuneration

4.5.3 Salaries Paid On Time

The study also sought to find out whether SMEs paid salaries on time and out of the 40
respondents only 47.5% agreed while the majority at 52.5% of the respondents disagreed
as presented in Figure 4.18.

60
52.5
50 47.5

40

30 Sum of frequency
21 Sum of percentage
19
20

10

0
no yes

Figure 4.18: Salaries Paid On Time

43
4.5.4 Suppliers Paid on Time

As seen in Figure 4.19, the study also sought to find out whether SMEs paid suppliers on
time and out of the 40 respondents, the majority accounting for 65% agreed while only
35% of the respondents disagreed.

70 65

60

50

40 35
Sum of frequency
30 26 Sum of percentage

20 14

10

0
no yes

Figure 4.19: Suppliers Paid on Time

4.5.5 Credit Facilities Paid on Time

The study further sought to find out whether SMEs paid credit facilities on time. As
presented in Figure 4.20 out of the 40 respondents only 42.5% of them agreed while the
majority 57.5% disagreed.

70

60 57.5

50
42.5
40
Sum of frequency
30 Sum of percentage
23
20 17

10

0
no yes

Figure 4.20: Credit Facilities Paid on Time

44
4.5.6 Correlation of variables of SMES Owners Belief and Ethical Perception

The study sought to determine if there was a relationship between SME owners practices
on working capital management and its various variables. From the result in the
correlation Table 4.8 there was a positive correlation that was statistically significant
between the SME owner fair treatment to his employees and fair renumerations (0.814,
pvalue = 0.000); The owner paying salaries on time (0.860, pvalue = 0.000); The owner
paying suppliers by agreed date (0.814, pvalue = 0.000); and if the firms make timely
payments for the credit facilities (0.777, pvalue = 0.000).

Table 4.8: Correlation of SMES Owners Belief and Ethical Perception

Employee Timely Pay For Timely

Fairness pay Salaries Supplier Credit
Fairness to Pearson
1 .814** .860** .814** .777**
employees Correlation
Sig. (2-tailed) .000 .000 .000 .000
Fair Pearson
.814** 1 .701** 1.000** .632**
remuneration Correlation
Sig. (2-tailed) .000 .000 .000 .000
Timely salaries Pearson
.860** .701** 1 .701** .903**
Correlation
Sig. (2-tailed) .000 .000 .000 .000
Timely supplier Pearson
.814** 1.000** .701** 1 .632**
payment Correlation
Sig. (2-tailed) .000 .000 .000 .000
Timely credit Pearson
.777** .632** .903** .632** 1
facility payment Correlation
Sig. (2-tailed) .000 .000 .000 .000

4.6 Descriptive Statistic

Table 4.8 presents the descriptive statics and the distribution of the variables considered
in this research: funding sources, working capital (WC) management practices and the
SME owner ethical practices (EP). The descriptive statistic considered were minimum
value, maximum value, mean, standard deviation, skewness and kurtosis. From Table 4.9,
funding sources had a mean of 0.225 and standard deviation of 0.157. That is, funding

45
proposal on average affects 22.5% management of working capital. However, the value
went as high as 73% and as low as 1%. Working capital management practices were on
average .2130, that is, 21.3% of effective management of working capital was accounted
for by the working capital management practices. In addition, there was variation of
between a high of 48% and a low of 45%. The mean value of SME owner ethical
practices was 0.1597; this indicated that 15.97% of effective working capital management
practices were explained by SME owner ethical practices. The value however was high as
19.7% and as low as -38%.

The standard deviation calculated in the analysis indicated the spread of the data from the
average response. Skewness on the other hand measures a dataset’s symmetry or
asymmetry. Both funding sources and SME owner’s ethical practices were positively
skewed.

Table 4.9: Descriptive Statistics

Min Max Mean Std. Skewness Kurtosis

Dev Statistic Std. Statistic Std.
Error
Error

Funding sources .01 .73 .2250 .1575 .900 .289 .787 .570

WC management .45 .48 .2130 .6011 -1.492 .289 2.105 .570

SME owner EP -.38 0.197 .1597 .3609 2.520 .304 10.109 .599

4.7 Regression and Correlation Coefficients

Regression analysis was utilized to investigate the relationship between the variables.
These included an error term, whereby a dependent variable was expressed as a
combination of independent variables. The unknown parameters in the model were
estimated, using observed values of the dependent and independent variables.

4.7.1 Correlation Analysis

The correlation between funding sources, working capital management practices, and
SME owner’s ethical practices is shown in Table 4.10. A Pearson correlation was used to
measure the degree of association between variables under consideration i.e. independent
variables and the dependent variables. Pearson correlation coefficients range from -1 to
46
+1. Negative values indicate negative correlation and positive values indicate positive
correlation.

Table 4.10: Correlation Coefficients

Funding WC management SME owners EP

sources practices
Funding sources 1 0.631* 0.551*
P value 0.000 0.000
WC management practices 0.631 1 0.451*
P value 0.000
SME owners EP 0.551* 0.451* 1
P value 0.000 0.000
Effective WC management 0.124 0.268 0.051
P value 0.092 0.086 0.112

* Correlation is significant at the 0.05 level (1-tailed).

The analysis shows that the variable funding sources has the strongest positive Pearson
correlation on working capital management practices (0.631; P value 0.000). In addition,
funding sources had a significant and positive correlation with SME owners ethical
practices (Pearson correlation coefficient = 0.551). The study established that funding
sources have a positive and significant correlation on effective management of working
capital. The variable working capital management practices was also noted to have a
positive, strong and significant correlation with SME owner ethical practices (Pearson
correlation coefficient = 0.451).

The correlation matrix implies that the independent variables: funding sources, working
capital management practices and SME owners ethical practices are significantly
correlated and that there is no autocorrelation between the independent variables taken
into account.

The study also found a positive and low relationship between the dependent variable
effective management of working capital and funding sources (0.124). A closely similar
correlation was noted between effective management of working capital and working
capital management practices (0.268). Further, there was a correlation matrix of 0.051
between SME owners’ ethical practices and effective management of working capital.

47
These findings depict that effective management of working capital has potentially
positive correlation with its determinants (funding sources, working capital management
practices and SME owners’ ethical practices).

4.7.2: Regression Analysis

The study used multiple linear regression analysis models below to determine the
relationship between the determinants (funding sources, working capital management
practices, and SME owners’ ethical practices) and effective management of working
capital, generally given by:-

Y=β0 +β1X1+β2X2+β3X3+ ε , where:

Y = working capital management

X1 = funding sources

X2 = working capital management practices

X3 = SME owners’ ethical practices

β0 = regression constant

β1 to β3 = regression coefficients

ε = error term.

Table 4.11 as follows shows the results of the regression coefficients required to form the
multiple regression models and appear as;

Y = 0.903+ 0.058X1+ 0.056X2+ 0.0498X3 +0.123

The multiple linear regression model indicate that all the independent variables have
positive coefficient. The regression results above reveal that there is a positive
relationship between dependent variable (effective management of working capital) and
independent variables (funding sources, working capital management practices and SME
owners’ ethical practices). From the findings, one unit change in funding sources results
in 0.056 units increase in working capital management. One unit change in working
capital management practices results in 0.058 increase in effective working capital
management and for every unit increase in SME owners ethical practices working capital

48
management increases by 0.036 units. However all the variables had a p value greater
than 0.05 and therefore not significant.

Table 4.11: Regression Coefficients

Unstandardized Standardized
Coefficients Coefficients

Std.
Model B Error Beta t Sig.
1 (Constant) 0.903 0.123 7.367 0.000

Funding sources 0.056 0.028 0.158 2.021 0.045

WC management 0.058 0.027 0.101 1.157 0.210

practices

SME owners’ ethical 0.036 0.030 0.105 1.194 0.234

practices

a. Dependent Variable: effective management of working capital

b. Predictors: (Constant), funding sources, working capital management practices and
SME owners’ ethical practices

4.7.2.1: Model Summary

Analysis in table 4.12 shows the coefficient of determination (the percentage variation in
the dependent variable being explained by the changes in the independent variables).
Adjusted R Square equals 0.805. This means that funding sources, working capital
management practices and SME owners’ ethical practices explains 80.5 % of observed
change in effective management of working capital. The P- value of 0.000 (Less than
0.05) implies that the regression model is significant at the 95% significance level.

Table 4.12: Model Summary

Std. Change Statistics
Adjusted Error of R
Model R R R the Square F Sig. F
Square Square Estimate Change Change df1 df2 Change
1 .918(a) 0.843 0.805 0.51038 0.843 1.242 4 96 0.000
Predictors: (Constant), funding sources, working capital management practices and SME
owners’ ethical practices
Dependent Variable: Effective management of working capital

49
4.7.2.2: Analysis of Variance (ANOVA)

The researcher sought to compare means using analysis of variance. ANOVA findings (P-
value of 0.00) in table 4.12 show that there is correlation between the predictors’
variables (funding sources, working capital management practices, and SME owners’
ethical practices) and the response variable (effective management of working capital).

Table 4.13: Analysis of Variance (ANOVA)

Sum of Df Mean F Sig.

Squares Square
Regression .852 4 .213 1.242 .000
Residual 20.35 119 .171
Total 22.64 123
Predictors: (Constant), funding sources, working capital management practices and
SME owners’ ethical practices
Dependent Variable: effective management of working capital

4.8 Chapter Summary

The purpose of the study was to determine the challenges faced by SMEs in Nairobi’s
CBD in managing working capital. On analyzing the objectives, it was revealed that
funding sources affects 22.5% of the management of working capital. Working capital
management practices on the other hand affected 21.3% of effective management of
working capital while SME owner ethical practices affected 15.97% of effective working
capital management practices. The variable “funding sources” has the strongest positive
influence on working capital management practices with a Pearson correlation coefficient
of 0.631 and P-value 0.000. In addition, funding sources has a significant and positive
correlation with SME owners ethical practices (Pearson correlation coefficient = 0.551).
The study also established that funding sources has a positive and significant correlation
on effective management of working capital. The variable “working capital management
practices” was also noted to have a positive, strong and significant correlation with SME
owner ethical practices (Pearson correlation coefficient = 0.451). In chapter five the
conclusion, discussion and recommendations as per the objectives of this study are
presented.

50
 CHAPTER FIVE

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter is a synthesis of the entire study, and contains summary of research findings,
exposition of the findings commensurate with the objectives, conclusions, and
recommendations on the findings in chapter four.

5.2 Summary

The main objective of the study was to investigate the challenges faced by SMEs in
Nairobi Central Business District (CBD) in managing working capital. The specific
objectives of the study were to establish the effect of funding sources on working capital
management, to determine the effect of SME management on the management of
working capital, and to assess the effect of ethical perceptions and beliefs of the owners
of SMEs on working capital management.

The target population comprised of 54 companies listed in 2014’s top 100 SMEs located
in the Nairobi CBD from which a simple random sample of forty eight (48) was selected
for the study. Only forty SMES responded representing an 83% response rate and this
was used for this study. Primary data was collected and used to facilitate the realization of
the study objectives. To collect the primary data, a structured questionnaire based on
specific objectives was administered to the respondents through “drop- and-pick-later”
method where the respondents filled the questionnaires and the researcher picked them
later. Data analysis was done by using Regression analysis to investigate the relationship
between the variables. Pearson correlation was used to measure the degree of association
between the independent variables and the dependent variables. The results were then
presented in form of tables and figures.

On analysis of the effects of lack of funding on working capital management in SMES the
findings revealed that majority of the SME (77.5%) have a bank account while only
45% bank their daily cash proceeds. The study also revealed that SMEs with access to
credit accounted for 65% of the responses, and 57.5% of them do not get all funds
requested. Further, 72.5% of the respondents do not have adequate security for loans
applied for.

51
To analyze the effects of SME management practices on working capital management the
findings indicated that 52.5% of the respondents make sales on credit and 62.5%
undertake formal credit investigation. About 47.5% of the respondents experience large
piles up of raw material or goods for resale and 65% of the respondents keep record of
raw materials and goods for resale. The findings also revealed that only 45% undertake
regular stock taking while 65% of the respondents have an existing reorder level policy.

To establish the effects of owners of SMES belief and ethical perception on working
capital management, the findings revealed that 52.5% of SME owners are fair to their
employees and in addition, 62.5 % give fair remuneration. The findings also revealed that
only 47.5% of SME owners pay salaries on time. Further, 65% of the respondents were
found to pay suppliers by the agreed date. The research also established that only 45%
make timely payments for credit facilities. To analyze the relationship between funding
sources, working capital management practices and SME owners’ ethical practices the
adjusted R Square was found to equal 0.805 meaning that 80.5 % of observed change in
effective management of working capital could be explained by the changes in funding
sources, working capital management practices and SME owners’ ethical practices. The
P- value of 0.000 (Less than 0.05) implied that the regression model was significant at the
95% significance level.

5.3 Discussion

5.3.1: The Effects of Funding Sources on Working Capital Management

The findings of the study established that funding sources affects management of working
capital to the extent of 22.5%. This agrees with Agyei-Mensah (2012) who found out that
access to finance was a major challenge to SMEs in Ghana and Memba et al. (2012)
shared this view in her study on Kenyan SMEs.

The findings revealed that majority of the SMES have a bank accounts and this
represented 77.5% of the response. Similar results have been presented in various studies
and according to Berger, Goulding and Rice (2013) research to deternine if small
businesses prefer community banks it was established that banks were the most critical
source of funding for most of the small firms and provided for sixty percent of their debt
financing. The study also revealed that those SMES who have access to credit accounted
for 65% of the response. Bhattacharya (2001) established that bank lending has been
categorized, as a crucial source of external financing for SME in the developed nations

52
and their alternative for funds are large firms. He concluded that it was due to SMEs
having very limited alternatives to accessing capital markets.

To determine if firms received all funds requested from the banks as debt funds, the
results showed that majority, accounting for 57.5% of the response did not get all the
funds requested. These findings concur with those of Sunday (2011) where he
established that the challenges in accessing financial resources was largely attributed to
the fact that SMEs do not have adequate assets to act as collateral for loans as compared
to large firms. Sunday (2011) adds that few financial institutions such as banks and
microfinance institutions that give credit to SME’s set high price for credit facilities to
compensate for the high risk they face.

The study also sought to determine if respondents did have adequate security for loans
applied for and the findings revealed that 72.5% did not have the necessary security.
Similarly, Ackah and Vuvor (2011) study to analyse the challenges faced by small and
medium enterprises in obtaining credit in Ghana concluded that financial institutions were
willing to issue funds to SMEs. However, the SMEs were incapable of meeting the
requirements such as collateral, high interest rates and the short repayment periods made
it very difficult for SMEs to undertake any developmental projects.

5.3.2 The Effect of Working capital Management Practices on Management of SMEs

According to the research findings, sound financial management was found to lead to the
survival and growth of every business. From the study, it was found that 21.3% of the
respondents agreed that working capital management had an effect on working capital
management. It was also found out that a correlation existed between working capital
management and effective management of working capital and working capital
management practices.

The study established that SMEs made sales on credit and a majority (52.5%) made credit
sales while only 47.5% do not. A similar study by Appah (2011) established that over
eighty percent of the SMEs in the Sekondi-Takoradi Metropolis sold some off their
materials on credit and this was seen as a way of increasing sales. This study was also set
to establish if firms undertook due diligence in credit investigation. It was found that
62.5% of the respondents investigate their customers’ credit worthiness; this is done with
the intention of reducing risks of losses associated with account receivables. Appah
(2011) has recorded similar findings. In another study to analyze the current asset

53
management practices in selected small enterprises in Nairobi, Onyango (2014)
established that half of the enterprises sell their wares on credit and the average collection
period was estimated to vary at about 30 days, although issues related to credit defaults
makes SMEs not to sell their goods and services on credit.

The study revealed that inventory management affect working capital management
practice in SMEs in Nairobi. The findings established that 47.5% of the respondents
experience large piles up of raw material or goods for resale. This is in concurrence with
Ndagijima (2014), whose study established that majority of SMEs in Nairobi lacked
inventory management tools necessary in the reduction of pile up of raw materials. The
study on SMES revealed that a majority (65%) of the respondents keep record of raw
materials and goods for resale. This enables them maintain the items of their materials
and stock levels and aids in making reorder when necessary. A similar study by Appah
(2011) in Sekondi Takoradi Metropolis established that majority of SMEs (77%) kept
records of their goods and materials.

The findings of the research indicated that only 45% of SMEs undertake regular
stocktaking. This contradicts a study by Misoi (2015) on inventory management practices
in SMEs in Kapsabet town where it was established that majority of SMEs had internal
controls of goods and maintained proper documentation procedures. She also found out
that most of the SMES understood the importance of stock taking exercise and undertook
regular training of responsible officials to take charge. The study finding also established
that 65% of the SMEs have an existing reorder level policy. Pieterson (2012) recorded
similar results when he sought to determine the working capital management practices of
small enterprises in Ghana. His findings established that most of the entrepreneurs
instituted inventory control policies in their firms in order to minimize raw material
wastage.

5.3.3 The Effect of Owners’ Ethical Practices on Working Capital Management

According to the research findings, 15.97 % of the respondents agreed that SME owner
ethical practices effect working capital management practices. It was also found out that
a positive correlation existed between SME owners’ ethical practices and effective
management of working capital. According to the findings, 52.5% of SME owners are
fair to the employees while only 47.55% were found to be unfair. Similar sentiments were
expressed in Workplace Employment Relations Survey (WERS, 2004) which showed that

54
employees in small firms were more satisfied than those in larger ones. As such, these
employees tend to have a higher job commitment to their job (Forth et al, 2006).
However, there were claims that small establishments in the UK are more prone to cases
of unfair dismissal claims since the 1980s. Because of this trend, the UK saw the creation
of statutory employment rights in the late 1990s (Kersley et al, 2006). In addition, 62.5 %
of SMES were found to have in place a fair remuneration policy and about 47.5% of
owner paid salaries on time. According to Klos (2006) the level of organizational
remuneration is a factor that has been greatly discussed. The extent of employee
remuneration according to various researches varies between firms of different size, age
and category (Khalique, Isa, Shaari & Ageel, 2011). Employee wages are also determined
by their productivity and is entirely dependent on the employee’s knowledge, experience,
and nature of the job (Misoi, 2015). In addition, all types of incentives have been found
to influence employees’ motivation to work harder and thus increase a firm’s
productivity.

Despite many of the firms not paying the workers on time, the study established that 65%
of the SMEs paid their suppliers by the agreed date. According to Lewis (2009),
undertaking prompt payment is not only good for the supplier but also earns the business
respect. It also makes suppliers more comfortable towards giving small firm credit. He
added that this also enabled the firms to negotiate for better discount and these improved
trading relationships. The findings in this research also established that only 45% make
timely payments for the credit facilities. The results are in line with Ackah and Vuvor
(2011) where it was established that 75% of the SMEs in the Accra and Tama metropolis
of Ghana faced many challenges in their operations and the main one was lack of access
to finance.

5.4 Conclusion

The conclusions drawn from this study follow

5.4.1: The Effects of Funding Sources on Management of Working Capital

The study concluded that most SMES rely on banks as a means of securing their savings
and this was because of the majority having a bank account. However, due to the daily
operational activities, there was a high need for cash and this explains why only a few of
them bank their daily collections. In addition, while majority of the firms have access to
credit they were limited on the amount of funds requested as loans from the banks. This

55
may be attributed to the fact that a huge number of them lack the adequate security for
loans applied.

5.4.2 The Effect of Working Capital Management Practices in SME

Majority of the firms were found to make credit sales and this was with an aim of
increasing the sales volume. In addition, many of the institutions were keen in
undertaking formal credit investigation on the customers before engaging them in debt.
This was seen as a good strategy for minimizing credit risk. In addition, few of the firms
have experienced large piles up of raw material or goods for resale in order to ensure that
customers can conveniently get the products. In addition, firms were found to keep good
record of raw materials and goods for resale and this enabled them organize their stock
levels. However, the firms still have a challenge in undertaking regular stocktaking.

5.4.3 The Effect of SME Owners’ ethical practices on Management of Working

Capital

The change in effective management of working capital are affected by the changes in
funding sources, working capital management practices, and SME owners’ ethical
practices. In addition, SME owners know the importance of employees and as such, the
firms treat their employees fairly and offer good remuneration to maintain them.
However, from the study it is apparent that the firms have a challenge in cash flow
management; hence they experience a challenge of paying salaries on time. Despite this
challenge, the firms strive to maintain a good relationship with the suppliers by making
timely payments.
5.5 Recommendations

5.5.1 Recommendation for Improvement

5.5.1.1 The Effects of Funding Sources on Management of Working Capital

The findings show that a majority of the firms had a bank account, and access to credit
although only 42.5% get all the funds requested. This is attributed to SMEs being ranked
as high-risk ventures. To mitigate this, it is recommended that institutions (SMES)
seeking favorable credit terms provide adequate security for loans applied or sought from
other financial institutions (not necessarily banks).

5.5.1.2 Effect of Working Capital Management Practices

56
It is further recommended that effective working capital management should be used to
set targets for cash management and undertake initiatives to effectively improve cash
flows. This will acts as a drumbeat to ensure change in practice is implemented.

5.5.1.3 The Effect of SME Owners’ Ethical Practices on Management of Working

Capital

Ethics demands that employees should be fairly treated and offered fair and timely
remunerations. It is therefore recommended that SMEs should treat their employees fairly
and pay them commensurate and competitive remuneration to minimize cases of theft and
work stoppage in the firms. SMEs should also pay other stakeholders like suppliers in a
timely manner as per the agreed dates to ensure that there is a constant supply of the
goods and services and therefore constant sales.

5.5.2 Recommendations for Future Research

This research identified that there is a pressing need for further empirical studies to be
undertaken on working capital management, particularly in the area of working capital
practices. This can be achieved by extending the sample size so that an industry-wide
analysis uncover the other factors that influence working capital management. This would
assist policy-makers and educators to identify the requirements of, and specific problems
faced by small and medium enterprises in Kenya. Additionally, due to many of the firms
issuing stock on credit there is need to determine the procedures to mitigate risks
associated with this practice.

57
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 Appendix: Data Collection Instrument

SECTION A: GENERAL INFORMATION

1) What is the nature of the Enterprise?

a. Sole proprietorship ( ) b. Partnership ( ) c. Limited Liability Company ( )
d. Other ( ) (please specify …………………………………….
2) Where is the enterprise located?
a. Downtown CBD ( ) b. Suburb ( ) c. Open market ( ) d. Rural ( ) e. Other
(please specify) ………………………
3) Age of the respondent in years ………………………………………
4) Sex of the respondent
a. Male ( ) b. Female ( )
5) Marital status of the respondent
a. Married ( ) b. Single ( ) c. Divorced ( ) d. Widow ( )
6) What is your highest level of Education?
a. Primary school ( ) b. Secondary school ( ) c. university ( ) d. Other ( )
(please specify) ……………………………
7) How many employees does the enterprise have?.............................................

SECTION B: FUNDING SOURCES

1) Does the enterprise have a Bank account?

a. Yes ( ) b. No ( )
2) If the enterprise has a bank account, does it bank its daily proceeds?
a. Yes ( ) b. No ( )
3) Does the enterprise have access to credit facilities from their Bank?
a. Yes ( ) b. No ( )
4) If no to 3 above, does the enterprise have access to credit facilities elsewhere?
a. Yes ( ) b. No ( )
5) If yes to 4, please specify where the credit facilities are held.
…………………………………………….
6) How do you fund your working capital requirements?
a. Bank debt ( ) b. Internally generated resources by the enterprise ( ) c.
resources pumped in by the owner ( ) d. debt from other financial institutions
( ) e. from government set funds ( ) f. from NGOs ( )

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7) If working capital is funded through debt, does the enterprise usually get all the
funds it requests?
a. Yes ( ) b. No ( )
8) Do you have tangible security to act as collateral when borrowing?
a. Yes ( ) b. No ( )
9) If yes to no. 8, does the Bank find the security to be adequate for the borrowing
applied for?
a. Yes ( ) b. No ( )
10) If No to no 8 above, how does it affect your ability to borrow?
……………………………………

SECTION C: MANAGEMENT PRACTICES

1) Do you sometimes sell on credit?

a. Yes ( ) b. No ( )
2) If yes to 1 above? How much time in days do you allow before payment is
made against the sell? (Please specify) ………………………
3) If No to 1 above, please give reasons why
……………………………………………………..
4) Do you undertake formal credit investigation before granting credit to your
customers?
a. Yes ( ) b. No ( )
5) What evidence exists for a customer’s indebtedness to you firm?
a. Signing of a delivery note or other receipt documents ( )
b. Signing of a formal IOU document ( )
c. Other (please specify) ……………………..
6) What are the sources of raw material used in you production process?
a. Local ( ) b. foreign ( ) c. Both ( )
7) If a trading firm, what is the source of your goods for resale?
a. Local ( ) b. foreign ( ) c. Both ( )

8) Do you experience large pile ups of raw materials or of goods for resale
a. Yes ( ) b. No ( )
9) Do you keep a record of your goods for resale or the raw materials?
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 a. Yes ( ) b. No ( )
10) Do you undertake regular stocktaking?
a. Yes ( ) b. No ( )
11) If yes to 10 above, how often do you do it?
a. Daily ( ) b. monthly ( ) c. yearly ( ) d. other (please specify)
12) Do you have a re-order level policy for requesting for goods for resale or for
the raw material input?
a. Yes ( ) b. No ( )

SECTION D: SME OWNERS ETHICAL PRACTICES

1) Is the SME owner fair to his employees?

a. Yes ( ) b. No ( )
2) Does the SME owner remunerate fairly?
a. Yes ( ) b. No ( )
3) Does the owner pay salaries on time?
a. Yes ( ) b. No ( )
4) Does the owner pay suppliers by the agreed date?
a. Yes ( ) b. No ( )
5) If No to 4 above, how does this affect future
supplies?..................................................
6) Does the firm make timely payments for the credit facilities?
a. Yes ( ) b. No ( )
7) If No to 6 above, how does this affect future borrowings?
………………………….
8) How does the firm tender for work?
a. Applies for the tender formerly ( )
b. Applies for the tender formerly and pays an amount to facilitate winning
the tender ( )
9) If the response to No 8 above is b., how does this affect the firm?
………………………

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