Effect of Budgeting Practices on Financial Performance of Manufacturing Small and Medium Enterprises in Nairobi County, Kenya

Abstract

Prior studies have asserted that small and medium-sized enterprises (SMEs) have grown and represented most businesses in Kenya. However, these studies continue to establish that 70% of Small-to-Medium sized enterprises (SMEs) in Kenya fail within their first three years of existence. One weakness postulated as a possible cause for this failure rate is poor financial performance. Existing literature has highlighted management accounting practices deployment, including budgeting, costing, and strategic management accounting practices. This is one possible remedy from an array of interventions.  This paper, therefore, aims to investigate the effect of budgeting practices, including planning for cash flows (BP), controlling cash flows (BC), resources allocation (BRA), activity coordination (AC), and   monitoring financial position (MFP) on Financial Performance (FPM) of Manufacturing Small and Medium Enterprises in Nairobi County, Kenya. This research adopted a descriptive research design that used data collected using a self-administered cross-sectional survey. A questionnaire from a randomly selected sample of 156 manufacturing SMEs in the City of Nairobi data was analyzed through structural equation modelling. The results revealed that budgeting practices positively and significantly influence manufacturing SME's financial performance. The findings of this study suggest that the financial performance of a manufacturing SME can be improved by deploying strategic action in budgeting practices in the form of planning for cash flows (BP), controlling cash flows (BC), resources allocation (BRA), activity coordination (AC) and   monitoring financial position (MFP).