Financial Control Practices and Financial Performance of Msmes in Nairobi County: A Case of Eastleigh Business District Association

Abstract

Micro-Small and Medium Enterprises (MSMEs) have a crucial impact on promoting economic growth, social development, stimulating innovation, generating job opportunities, and reducing poverty in developing countries. MSMEs, despite their vital role in Kenya's economy, struggle to achieve sustainable financial performance. However, financial control is challenging in a business due to the need to balance accurate budgeting, cash flow management, and resource allocation while adapting to changing market conditions and unforeseen expenses. This is majorly attributed to inadequate financial planning and control practices which hinder their ability to manage resources efficiently, control costs, and improve profitability, thus contributing to low returns on assets and investments. The purpose of the study was to determine the effect of financial control practices on the financial performance in Nairobi County. To achieve this, the study was guided by three objectives namely, to assess the financial control practices applied by MSMEs, evaluate MSMEs financial performance and determine the effect of financial control practices on their financial performance. The study was underpinned by finance distress theory, balance score model and Modigliani theory. The anchor theory was finance distress theory because this theory is directly connected to the firm’s financial health. The study used descriptive correlational research design, with sample size of 359 MSMEs registered under Eastleigh Business District Association. The respondents were two individuals from each selected MSMEs forming a total of 718 respondents. The sample was selected using applied stratified sampling technique. Primary data was collected using structured questionnaire. Pearson correlation analysis was used for data analysis. Result revealed that there was a positive relationship between financial control practices and financial performance of the MSMEs registered under Eastleigh Business District Association. Further, it was revealed that the three financial control practices that include budget control, internal audit and financial reporting were key determinants of the financial performance since they depicted a positive influence on the financial performance. On the other hand, governed policy depicted a negative influence on the financial performance of the MSMEs. The study recommended that, for firms to increase their performance they should focus on Internal Audit by providing ongoing training to audit staff and implementing more rigorous audit procedures. Also, financial reporting should be up to date by organizations prioritizing the accuracy, transparency, and timeliness of their financial reports. Lastly, organizations should reassess their budget control processes to identify potential weaknesses.