determining the extent of financial planning and

International Journal of Finance, Accounting and Economics

(IJFAE) ISSN: 2617-135X Vol. 1 (3) 18-29, October, 2018

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18 | P a g e

Nyamache and Moturi (2018) www.oircjournals.org

Determining the extent of Financial Planning and Performance of Small Scale Enterprises (SSEs) in Kisii Town, Kenya

1Tom Mokweri Nyamache & 2Moses Arisa Moturi 1 School of Business and Economics Turkana University College

2School of Business and Economics Mount Kenya University

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How to Cite this Paper:

Nyamache, M. T., and Moturi M. A., (2018). Determining the extent of Financial

Planning and Performance of Small Scale Enterprises (SSEs) in Kisii Town,

Kenya. International Journal of Finance, Accounting and Economics (IJFAE) 1 (3), 18-29.

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Determining the extent of Financial Planning and Performance of Small Scale Enterprises (SSEs) in Kisii

Town, Kenya

1Tom Mokweri Nyamache & 2Moses Arisa Moturi 1 School of Business and Economics Turkana University College

2School of Business and Economics Mount Kenya University

Abstract Small Scale Enterprises (SSEs) are very important in the

business environment of any country in terms of

employment creation, poverty reduction and contribution

to economic growth. In Kenya, they employ over 80% of

the unemployed population which is largely women and

the youth and contribute up to 18.4 % of the country’s

Gross Domestic Product (GDP). Despite their

importance, they are faced with the threat of failure with

past statistics indicating that 60% fail within the first few

months of operation. Proper financial planning is vital in

any business enterprise. The extent to which financial

planning determines performance of SMEs has not been

clearly understood. This study aimed at determining the

extent to which financial planning affects the performance of small scale enterprises in Kisii town. The study used a

descriptive survey research design where the respondents were selected through stratified and purposive random

sampling techniques. A sample size of 93 out of 1224 target population, respondents was used. Data was collected

by use of a questionnaire, edited, summarized and coded for ease of classification and analyzed using computer

software. Descriptive statistics especially, frequencies and percentages were applied to make it easier for the

researcher to understand and interpret implications of the findings. Presentation and reporting was in form of

frequency tables, pie charts and bar graphs. A Pearson’s correlation coefficient was used to establish the

relationship between financial planning and financial performance. It was revealed that there is a strong positive

relationship between Financial planning and business Performance at Pearson correlation coefficient r=0.894. It

was recommended that the Central government through the Ministry of Trade Commerce and Industry in

collaboration with the County government of Kisii provide training programs, through seminars and workshops, in

financial planning for Small Scale Enterprises to improve the extent of use of financial planning in their businesses.

Introduction

Financial planning (FP) is a process of setting

objectives, assessing assets and resources, estimating

future financial needs, and making plans to achieve

monetary goals (smith, 2010). Financial Panning (FP)

is one of the several functional areas of management

that is crucial to the success of any small scale

enterprise (SSE). Businesses typically prepare a wide

array of plans and budgets. Some of which include

sales plan, production plan, cost plan and expense

budget and budgeted income statement and balance

sheet. These budgets are very important to anticipate

the future in advance. This will in turn help to

minimize risks and because of the trade-off between

risk and return, profitability increases. Therefore,

preparing detailed financial plan or budgets will have

a positive effect on profitability of the firm

(Horngreen, Datar & Foster, 2006). Small businesses

must therefore do financial planning in order for their

business operations to achieve the desired goals.

ARTICLE INFO

Received on 8th July, 2018

Received in Revised Form 10th September,

2018

Accepted 18th September, 2018

Published online 21st September, 2018

Keywords: Financial, Performance, Measurement,

Planning, Jua Kali, Small Scale Enterprise






20 | P a g e


Statement of the Problem

Lack of proper financial planning has been touted as

the major setback in the performance, growth and

development of the SSEs. This is despite assertions

that proper financial planning does enhance

performance and competitiveness of the SSEs. It is

upon this background that this study embarked on

investigating the extent of financial planning on

performance of SSEs in Kisii town.

Study Objective

The following was the objectives of the study:

i. To determine the extent to which financial

planning is practiced by small scale

enterprises in Kisii town.

Research Question

This study will sought to answer the following

question:

i. To what extent is financial planning being

practiced by small scale enterprises in Kisii

town?

Scope of the Study

The study was carried out among SSEs in Kisii town,

Kisii County, Kenya. It was conducted between

March and April 2016.

Significance of the Study

i. This study is meant to enlighten those

entrepreneurs on Financial Planning.

ii. The study also is of use to policy makers in

the Ministries of Trade, Commerce and

Industry in formulating policies and re-

adjusting the existing ones on FP of business

institutions.

iii. The findings of the study is of great

significance to the business owners, the

government, management consultants,

academicians and researchers.

Limitations of the Study.

This study focused on FP of SSEs within Kisii town.

The major limitation was on accessing information

from the various enterprise owners and or managers.

Some respondents were reluctant to provide data

regarding their business performance. They would

have not been honest and therefore would have

withheld some vital data. However, this was

minimized through the assurance of confidentiality

and anonymity of the data provided by them.

Literature Review

According to Groppeli & Nikbakht (2002), financial

planning (FP) is the process in which one calculates

how much financing is necessary to give continuity

to the operations of an organization, how one decides

how much and how the necessary funds will be

financed. One can suppose that without a reliable

procedure to estimate the necessary resources, an

organization may not have enough resources to

honour its assumed commitments, such as obligations

and operational consumptions.

According to Campsey (2010), financial performance

is the understanding of numbers that comprise your

business and then recognizing what is happening and

knowing how to influence the results that are being

achieved. Once numbers are understood business

managers begin to identify areas to improve

efficiency whilst building effectiveness and client

value. Financial performance greatly depends and is

determined by liquidity, efficiency, profitability,

capital structure and low business risks. This is

beneficial in a way that, the stronger the FM the

greater the opportunity to maximize profits in the

short term and to grow capital value in the long term.

The stronger the FM the easier it is to raise finance,

and probably at a lower cost. Obviously banks prefer

to work with business owners who can control their

finances well (World Bank Report, 2012).

According to the European Commission (2008), it is

recognized that appropriate accounting information is

important for a successful management of any

business entity, whether small or large. It is crucial

therefore that the accounting practices of SSEs

supply complete and relevant financial information

needed to improve economic decisions made by

entrepreneurs. The success of enterprises is judged by

their financial performance, hence the choice to study

if SSEs measure financial performance.

According to International Monetary Fund (IMF,

2012), the level of WC is decided by management in

accordance with its policy of profit planning and

control. Adequate profit assists in the generation of

cash. It makes it possible for management to plough

back a part of earnings into the business and

substantially build up internal financial resources

(IMF, 2012). Funds of creditors and owners are

invested in various assets to generate sales and profit.






21 | P a g e


The better management of assets, the larger the

amount of sales. Activity ratios are employed to

evaluate the efficiency with which the firm manages

and utilizes the assets. A proper balance between

sales and assets generally reflects that assets are

managed well; several activity ratios can be

calculated to judge the collectiveness of assets

utilization, (Pandey, 2001).

According to Hull (2011), the choice of performance

measures is one of the most critical challenges facing

business organizations. In fact, performance

measurement systems play a key role in developing

strategic plans, evaluating the achievement of firms’

objectives and rewarding managers.

Theoretical Framework

Financial economics is the branch

of economics studying the interrelation of

financial variables, such as prices, interest rates and

shares, as opposed to those concerning the real

economy. Financial economics concentrates on

influences of real economic variables on financial

ones, in contrast to pure finance. It centres on

managing risk in the context of the financial markets,

and the resultant economic and financial models. It

essentially explores how rational investors would

apply risk and return to the problem of

an investment policy. Here, the twin assumptions

of rationality and market efficiency lead to modern

portfolio theory, the Capital asset pricing model

(CAPM), and to the Black–Scholes theory for option

valuation; it further studies phenomena and models

where these assumptions do not hold, or are

extended. "Financial economics", at least formally,

also considers investment under "certainty" (Fisher

separation theorem, "theory of investment

value", Modigliani-Miller theorem) and hence also

contributes to corporate finance theory. Financial

econometrics is the branch of financial economics

that uses econometric techniques to parameterize the

relationships suggested. Although closely related, the

disciplines of economics and finance are distinctive.

The economy” is a social institution that organizes a

society’s production, distribution, and consumption

of goods and services,” all of which must be

financed.

Economists make a number of abstract assumptions

for purposes of their analyses and predictions. They

generally regard financial markets that function for

the financial system as an efficient mechanism

(Efficient-market hypothesis). Instead, financial

markets are subject to human error and emotion. New

research discloses the mischaracterization of

investment safety and measures of financial products

and markets so complex that their effects, especially

under conditions of uncertainty, are impossible to

predict. The study of finance is subsumed under

economics as financial economics, but the scope,

speed, power relations and practices of the financial

system can uplift or cripple whole economies and the

well-being of households, businesses and governing

bodies within them—sometimes in a single day.

Financial Mathematics Theory

Financial mathematics is a field of applied

mathematics, concerned with financial markets. The

subject has a close relationship with the discipline of

financial economics, which is concerned with much

of the underlying theory that is involved in financial

mathematics. Generally, mathematical finance will

derive, and extend,

the mathematical or numerical models suggested by

financial economics. In terms of practice,

mathematical finance also overlaps heavily with the

field of computational finance (also known

as financial engineering). Arguably, these are largely

synonymous, although the latter focuses on

application, while the former focuses on modeling

and derivation. The field is largely focused on the

modelling of derivatives, although other important

subfields include insurance mathematics and

quantitative portfolio problems.

Experimental Finance Theory

Experimental finance aims to establish different

market settings and environments to observe

experimentally and provide a lens through which

science can analyze agents' behavior and the resulting

characteristics of trading flows, information diffusion

and aggregation, price setting mechanisms, and

returns processes. Researchers in experimental

finance can study to what extent existing financial

economics theory makes valid predictions and

therefore prove them, and attempt to discover new

principles on which such theory can be extended and

be applied to future financial decisions. Research

may proceed by conducting trading simulations or by

establishing and studying the behavior, and the way

that these people act or react, of people in artificial

competitive market-like settings.



http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Variable_(mathematics)

http://en.wikipedia.org/wiki/Price

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Real_vs._nominal_in_economics

http://en.wikipedia.org/wiki/Financial_market

http://en.wikipedia.org/wiki/Economic_model

http://en.wikipedia.org/wiki/Financial_model

http://en.wikipedia.org/wiki/Homo_economicus

http://en.wikipedia.org/wiki/Investment

http://en.wikipedia.org/wiki/Rational_pricing

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

http://en.wikipedia.org/wiki/Modern_portfolio_theory

http://en.wikipedia.org/wiki/Modern_portfolio_theory

http://en.wikipedia.org/wiki/Capital_asset_pricing_model

http://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

http://en.wikipedia.org/wiki/Valuation_of_options

http://en.wikipedia.org/wiki/Valuation_of_options

http://en.wikipedia.org/wiki/Certainty

http://en.wikipedia.org/wiki/Fisher_separation_theorem

http://en.wikipedia.org/wiki/Fisher_separation_theorem

http://en.wikipedia.org/wiki/The_Theory_of_Investment_Value

http://en.wikipedia.org/wiki/The_Theory_of_Investment_Value

http://en.wikipedia.org/wiki/Modigliani-Miller_theorem

http://en.wikipedia.org/wiki/Financial_econometrics

http://en.wikipedia.org/wiki/Financial_econometrics

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

http://en.wikipedia.org/wiki/Applied_mathematics

http://en.wikipedia.org/wiki/Applied_mathematics

http://en.wikipedia.org/wiki/Financial_market

http://en.wikipedia.org/wiki/Mathematical_finance

http://en.wikipedia.org/wiki/Mathematical_model

http://en.wikipedia.org/wiki/Numerical_analysis

http://en.wikipedia.org/wiki/Computational_finance

http://en.wikipedia.org/wiki/Financial_engineering

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Actuarial_science

http://en.wikipedia.org/wiki/Portfolio_(finance)

http://en.wikipedia.org/wiki/Experimental_finance




22 | P a g e


Conceptual Framework

It was conceptualized that, the extent of proper FP is

expected to cause an effect on the level of financial

performance of SSEs. Where effective FPs are in

place and extensively applied, the level of financial

performance of SSEs was likely to be enhanced and

vice versa. The diagram below represents the

conceptual framework of this study. It shows how the

dependent and independent variables are related.

Financial planning is the independent variable while

business performance is the dependent variable.

Independent Variables Intervening Variables Dependent

Variable

Source: Reasearcher, 2016

Research Methodology

The researchers focused on the methods that were

used in carrying out the research. The researcher

collected valid and reliable data on SSEs in Kisii

town. It describes the research design, the target

population, sample size and sampling procedures,

research instruments, pretesting of the research

instruments, reliability and validity of the research

instruments, data collection procedures and data

analysis techniques as well as ethical considerations.

Research Design

A research design is a systematic plan for collection

of data in order to provide answers to research

questions. It is a framework intended to guide the

researcher to achieve research objectives, (Fraenkel,

Schiffman, & Kanuk, 2009). This study used

descriptive survey design and the study was

quantitative in nature. The objective was systematic

or description of facts and characteristics of a given

population or sample of the population or area of

interest factually and accurately (Kothari, 2007). In

this survey data at a particular point was gathered in

time with the intention of describing the nature of the

existing conditions, identifying the standards against

which existing conditions are compared and

determining the relationship that exists between

specific events (Orodho, 2005). Survey research

design was used because the population under study

was too large to observe directly and this enabled the

researcher to use questionnaires as a method of data

collection. The survey was quantitative and therefore

had an advantage of the ability to using a smaller

group of people to make inferences about larger

Financial planning

Budgeting

Authorization of expenditure

Accountability of funds

Performance of SSEs

Growth in Profits

Growth in Sales

Growth in total Assets

Government policy

Purchasing power

Natural catastrophes

Technological change






23 | P a g e


groups that would have been prohibitively expensive

to study.

Results and Discussions

Background Information of Respondents

The purpose of this section was to gather the

background information of respondents with the aim

of establishing the nature of the respondents and what

influence their behaviour regarding their business

operations. This was in relationship to gender, age,

level of education, position in business management

and also the length business has been in operation.

Gathering this data helped to determine what

segments or subgroups existed in the overall target

population. This also assisted to create a clear and

broad picture of the characteristics of a typical

member of each of the segments.

Gender

Figure 1 Gender of Respondents 1

Source: Researcher 2016

From figure 1 above, it shows that a majority of the respondents were male comprising of 61.29% while 38.71%

were female. The results suggest that, most SSEs traders in Kisii town are male but it also implies that both male and

female are actively involved in SSEs in Kisii town






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Age of Respondents

Age of Respondents 1


The figure above, it could be observed that respondents in the age bracket of 30-40 years were the majority

comprising of 32.4% while respondents in the age bracket of Below 20 years were the minority comprising of 12%.

It can be inferred that a majority of the managers and business owners fell within 20-40 year age bracket. Clearly,

most SSEs in Kisii town are owned and mainly run by people in their 20s and 30s.

Highest Level of Education

Highest Level of Education 1







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From figure 3 above, it is clear that a majority of the

respondents had a certificate as their highest level of

education 29.0%, followed by diploma holders

(26.9%), degree holders (17.2%), postgraduate

(15.1%), while those without any level of formal

education comprised of 11.8%. This shows that the

majority of the respondents had not attained a

university qualification. The lack of graduate level

qualifications or upwards shows that most of the

SSEs in Kisii town owners and or managers were

lowly qualified and lacked the expertise in business

management which were necessary for the better

performance of their businesses. Generally it can be

inferred that SSEs in Kisii town are dominated by

people with relatively low levels of education

Position in the Business

Position in Business 1


From figure 4 above, owner/manager were the majority (33.33%), followed by managers (30.11%), then owners

(29.03%) and lastly others who comprised of 7.53%

5 Length of Operation






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Length of Operation 1


From figure 5 above, it is observed that the

businesses that were sampled, 37.6% had been in

operation for a period between 6-10 years, 29.0% 1-5

years, 23.7% below 1 year and lastly 9.7% that have

been in operation for above 11 years. The data shows

that most of the businesses (90.3%) in existence were

less than ten years old.

Extent of Financial Planning

The purpose of this section was to gather information

on businesses’ level of involvement in financial

planning. This was in relationship to budget

preparation, finance accountability, recording of

finance and expenditure in books of accounts as well

as expenditure authorization.

Extent of Budget Preparation in the Business

Table 1. Budget Preparation

Frequency Percent Valid Percent Cumulative

Percent

Strongly Agree 9 9.7 9.7 9.7

Agree 8 8.6 8.6 18.3

Not sure 1 1.1 1.1 19.4

Disagree 34 36.6 36.6 55.9

Strongly Disagree 41 44.1 44.1 100.0

Total 93 100.0 100.0


On whether budgets are always prepared in the

business, 9.7% of the respondents strongly agreed,

8.6% agreed, 1.1% not sure, 36.6% disagreed and

44.1% strongly disagreed. Generally, the results

showed that budget preparation practice among SSEs

in Kisii town is inadequate (80.7%) and this may

negatively influence the business performance.



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Budgeting Process

Table 2 Budgeting process


Percent


Agree 13 14.0 14.0 21.5

Not sure 2 2.2 2.2 23.7

Disagree 38 40.9 40.9 64.5


Total 93 100.0 100.0


On whether the budgeting process is participatory,

7.5% of the respondents strongly agreed, 14%

agreed, 2.2% were not sure, 40.9% disagreed, and


showed that budget preparation of SSEs in Kisii town

is not participatory and this may negatively influence

on the implementation of the budgets leading to poor

business performance

Accountability of Finance by Employees

Table 3: Accountability by Employees

Frequency Percent Valid

Percent

Cumulative

Percent


Agree 34 36.6 36.6 86.0

Not sure 1 1.1 1.1 87.1

Disagree 7 7.5 7.5 94.6


Total 93 100.0 100.0


On whether employees are accountable to finance entrusted to them, 49.5% strongly agree, 36.6% agree, 1.1% are

not sure, 7.5% disagree and 5.4% strongly disagree. Generally majority of respondents agreed that employees

present accountabilities of funds entrusted with them which will reduce overall expenditure and hence improve on

profitability.

Recording of finance in the books of accounts

Table 4 Recording of Finance


Percent


Agree 4 4.3 4.3 8.6

Not sure 2 2.2 2.2 10.8

Disagree 44 47.3 47.3 58.1


Total 93 100.0 100.0


On whether all the finance collected is recorded in

the books of accounts, 4.3% of the respondents

strongly agreed, 4.3% agreed, 2.2% not sure, 47.3%

disagreed, and 41.9% strongly disagreed. Generally,

the results showed that the finance collected among

the SSEs in Kisii town is not effectively recorded in

the books of accounts and this may negatively affect

the measurement of financial performance.




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Authorization of expenditure

Table 5 Authorization of Expenditure


Percent

Cumulative

Percent


Agree 8 8.6 8.6 17.2

Not sure 3 3.2 3.2 20.4

Disagree 36 38.7 38.7 59.1


Total 93 100.0 100.0


On whether all expenditure is authorized before it is

incurred, 8.6% of the respondents strongly agreed,

8.6% agreed, 3.2% are not sure, 38.7% disagreed and

40.9% strongly disagreed. Generally majority of

respondents disagreed that all expenditure is

authorized before it is incurred. This may increase

total expenses which may subsequently have a

negative impact on profitability of SSEs in Kisii

town.

Recording of Expenditure

Table 6 Recording of Expenditure


Percent

Cumulative

Percent


Agree 12 12.9 12.9 18.3

Not sure 1 1.1 1.1 19.4

Disagree 39 41.9 41.9 61.3


Total 93 100.0 100.0


On whether all expenditure is recorded in the books

of accounts, 5.4% of the respondents strongly agreed,

12.9% agreed, 1.1% not sure, 41.9% disagreed, and


showed that the expenditure incurred among the

SSEs in Kisii town is not effectively recorded in the

books of accounts and this may negatively affect the

measurement of financial performance. Therefore, it

is hard to determine the true financial performance of

the enterprises

Summary, Conclusions and Recommendations

Summary

Findings of the study on the extent to which financial

planning is practiced by SSEs revealed that budgeting

is inadequate and non-participatory; finance collected

and expenditures incurred are not effectively

recorded in the books of accounts. It was also

revealed that not all expenditures of SSEs are

authorized before they are incurred. It was also noted

that employees are accountable to the funds entrusted

to them.

Conclusions

In order to determine the extent to which small scale

enterprises practice financial planning it was found

out that, currently the business environment is

complex and dynamic, requiring a greater emphasis

on financial planning if businesses want to be

competitive and therefore lead to business survival.

The findings also conclude that budget preparation

process should be all inclusive so that all employees

will be supportive during the implementation in order

to improve financial performance of the business.

Recommendations.

From the above conclusion, since financial planning

has a significant influence on the performance of

SSEs, it is therefore recommended that, the Central

government through the Ministry of Trade






29 | P a g e


Commerce and Industry in collaboration with the

County government of Kisii provides training

programs, through seminars and workshops, in

financial planning for Small Scale Enterprises to

improve the extent of use of financial planning in

their businesses. Symposiums, conferences, and open

forums can also be used. This will help to equip small

scale business owners and or managers with

necessary financial planning skills to help them in

financial decisions that will positively influence their

business continuity and performance. Also there is

need for the owners and or managers of the small

scale enterprises to embrace proper and effective

financial planning practices in order to be successful

in their financial performance.

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