Strategic Management Accounting and Financial Performance of Small and Medium Manufacturing Enterprises in Nairobi City County, Kenya

Abstract

Previous studies acknowledge that small and medium-sized enterprises (SMEs) are key drivers to Kenya's economic development. Many of these SMEs face persistent constraints and do not realize their full potential, with many failing within their first three years of operation. A possible cause for the high failure rate is poor financial performance. Existing literature highlights one remedy as the use of strategic management accounting practices. This paper investigated the influence of strategic management accounting practices (SMAPs) on the financial performance of small and medium manufacturing enterprises (SMMEs) in Nairobi City County, Kenya. The study used self-reporting opinion questions on Return on Investments (ROI), Return on Assets (ROA), operating profit and net profit margin as financial measures. A descriptive research design was used. Target population was 693 SMMEs in Nairobi City County. Data was collected through a self-administered cross-sectional survey. Survey questionnaires were administered to a representative sample of 254 SMMEs with 156 usable responses. Data was analyzed using structural equation modelling to explain the relationships among multiple variables for SMAPs and financial performance. Results of hypothesis testing revealed that SMAPs significantly influence financial performance (chi-square (χ2) = 612.82, DF = 171, p-value = 0.000, CMIN/DF (x2 /df = 3.584, RMSEA = 0.114, IFI= 0.857, CFI= 0.856, NFI= 0.819, GFI =0.806, AGFI=0.751), where the model explains 43.7% in the variations on financial performance of SMMEs. Results suggest that the financial performance of SMMEs can be improved by deploying SMAPs. The study recommends that SMMEs should be encouraged to adopt SMAPs through policy and practice.