MODERATING ROLE OF FINANCIAL LITERACY ON THE RELATIONSHIP BETWEEN CASH MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF MICRO, SMALL AND MEDIUM ENTERPRISES IN ELDORET TOWN, KENYA.

Abstract

Micro, Small and Medium Enterprises (MSMEs) drive economic growth in developing and developed nations. Despite their contributions to economic growth through employment creation, alleviation of poverty, handling the problem of food insecurity and contribution to the Gross Domestic Product in Kenya, they are affected by a series of challenges. These include poor cash management practices, lack of capital, financial illiteracy and technological problems leading to their collapse within a few years of operations. As a result, it was necessary to examine the moderating role of financial literacy on the relationship between cash management practices and the financial performance of MSMEs in Eldoret Town, Kenya. The specific objectives of the study were to determine the influence of; accounting practices, budgeting practices, cash flow management, and financial literacy on financial performance. Finally, the study examined the moderating role of financial literacy on the relationship between; accounting practices and financial performance, Budgeting practices and financial performance, Cash flow management and financial performance. The research was guided by the Decision Usefulness theory, Miller Orr cash management model and Dual processing of financial literacy theory. The study utilized an explanatory research design to explain the cause-effect relationship between the variables. The target population of the study was 72,557 MSMES. The research employed simple random sampling techniques in collecting data from 398 managers/owners of MSMEs using self-administered questionnaires. In addition, factor analysis and Cronbach alpha were applied to test validity and reliability respectively. Using SPSS version 23, a hierarchical regression model was employed in data analysis and testing of the hypotheses. The study revealed that firm age (β=.241, p=0.06) significantly influenced financial performance, while firm size (β=0.090, p=.467) was found to be insignificant. The control variables explain 6.1% of the variance in financial performance, as indicated by R2=.061. The study shows that accounting practices (β=.379, p=.000), budgeting practices (β=.230, p=.000), and cashflow management (β=.181, p=.002) significantly influenced financial performance. These variables explained 41.6% of the variance in financial performance, as shown by R2=.416. Additionally, results reveal that financial literacy directly influenced financial performance (β=.107, p=.046, R2 =.484, ΔR2=.007). Finally, financial literacy was found to have a moderating influence on the link between; accounting practices and financial performance (β=.054, p=.002, R2=.501, ΔR2 =.017), budgeting practices and financial performance (β=.081, p=.032, R2 =.509, ΔR2 =.008) and cashflow management and financial performance (β=.106, p=.003, R2 =.524, ΔR2 =.015). These findings add some new knowledge to the financial literature. The research aimed to benefit scholars by enhancing their knowledge by using theories, models, and results for future studies. The outcome of this research further provides prudent information to managers, owners, and employees of MSMEs in implementing cash management policies and practices in their operations. The study focused on benefiting policymakers who formulate policies concerning MSMEs' growth, development, and survival. The study recommends that the policy makers should develop training programs that could equip owners/ managers of MSMEs with relevant skills and knowledge in accounting, budgeting and cashflow management, which could enable their businesses to have good financial performance.