Effects of Book Keeping On Financial Performance of Small Medium Enterprises in Embu County, Kenya

Abstract

The purpose of this study was to investigate the effects of bookkeeping on financial performance of Small Medium Enterprises in Embu County in Kenya. This study was guided by the following three research questions: how does cashbook affect financial performance of SME(s)? How do ledgers affect the financial performance of SME(s)? how does maintaining proper bank reconciliation statements enhance financial performance of SME(s)? The research design was causal in nature focusing on SME(s). Data was analyzed using Statistical Package for Social Sciences (SPSS) and results presented in tables. The research design for this study was casual studies whereby it aided in showing how the independent variables affect the dependent variable of financial performance of SME(s). Cluster sampling technique was used to select the sample in which at least one hundred ninety-eight (198) respondents or more would be chosen according to Yamane’s formulae. Information was collected and administered using a questionnaire developed by the researcher. The study established that there was a positive significant relationship between financial performance of SMEs in Embu County and usage of cashbooks. The study also established that majority of the respondents were in agreement that only valid cash payments are made (94%), all cash payments that are incurred are recorded (87%), cash payments are charged to the correct accounts (93%), cash payments posted to correct payable accounts and to the general ledger (79%), cash payments are recorded in the correct accounting period (94%).

The study further established that there was a positive significant relationship between financial performance of SMEs in Embu County and usage of ledgers. The study further established that majority of the respondents were in agreement that all the business income are recorded in revenue account (79%), all expenditures are recorded in the expense account (81%), purchases ledger shows all the unpaid dues of the business (74%), purchases ledger shows all purchases returns of the business (79%), sales ledger shows all the amounts owed to the business (94%), sales ledger shows all returns to the business (73%). The study also established that there was a positive significant relationship between financial performance of SMEs in Embu County and maintenance of bank reconciliation. The study further established that, majority of the respondents were in agreement that maintaining bank accounts improves the businesses’ chance of being given a loan (90%), bank reconciliations have a positive effect on the financial performance of SME(s) (80%), bank statements are prioritized in making major financial decisions (84%), maintaining bank reconciliations attracts investors and eligibility for contracts (99%). Finally the study established that that there was a positive significant relationship between financial performance and maintenance of cashbooks (r=0.431), Ledgers (r=0.504) and bank reconciliation (r=0.491).

The study recommends the need for SMEs to continue using cash books in their accounting so as to enhance their financial performance. In addition, the study recommends the need for SMEs to ensure their work force especially those in the finance department should be undergo periodic trainings on how to handle cash book entries. This will enhance their capacity while at the same time enhancing the financial performance of their respective organizations. The study recommends the need for SMEs that are yet to adopt the usage of ledgers in their accounting procedures to ensure they do so as this will go a long way in enhancing their financial performance. In addition, it is important for SMEs to put in place or purchase technology that will help in managing financial systems that will go a long way in enhancing financial performance. The study recommends the need for SMEs to capitalize on the maintain bank reconciliation as a key aspect in enhancing financial performance. This is because maintain bank reconciliation is a practice that has been seen to have a positive effect on the financial performance of SMEs and therefore additional support from the SME owners in terms of facilitations and training will be an essential input to enhance financial performance.