International Academic Journal of Economics and Finance | Volume 3, Issue 2, pp.

117-132

INVENTORY MANAGEMENT PRACTICES AND

FINANCIAL PERFORMANCE OF SMALL AND MEDIUM
SCALE ENTERPRISES IN LAIKIPIA COUNTY, KENYA

Jeremiah Nyaga Wanjira

Department of Accounting and Finance, Kenyatta University, Kenya
Dr. John Mungai Njagiru
Department of Accounting and Finance, Kenyatta University, Kenya

©2018
International Academic Journal of Economics and Finance (IAJEF) | ISSN 2518-2366

Received: 25th August 2018

Accepted: 9th September 2018

Full Length Research

Available Online at:

http://www.iajournals.org/articles/iajef_v3_i2_117_132.pdf

Citation: Wanjira, J. N. & Njagiru, J. M. (2018). Inventory management practices and

financial performance of small and medium scale enterprises in Laikipia County, Kenya.
International Academic Journal of Economics and Finance, 3(2), 117-132

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ABSTRACT for validity and reliability using

pretesting, seeking expert opinion and
Despite the instrumental role that they using Cronbach’s Alpha Reliability test.
play in the economy, most SMEs fail Secondary data was gathered from the
within their first tears of operation. Poor SMEs books of accounts, management
working inventory management practices reports and other available resources. The
is identified underlined as among the researcher made use of the Statistical
principal causes of SMEs failure. This is Package for Social Scientists (SPSS) for
particularly so for the lack a formal analysis. The study used both descriptive
inventory management system, as they, in and inferential statistics generated using
most cases rely on subjective inventory bivariate and multivariate analysis to test
management decisions. Most researchers the hypothesis. The results indicated that
and theorists postulate that the manner by SMEs’ financial performance as indicated
which inventory is managed considerably by the profitability metrics namely return
impacts on profitability and risk of firms. on assets and net profit margins was
The study focused on the effect of considerably low. As explained by R
inventory management practices on Square, the Coefficient of Determination,
financial performance SMEs in Laikipia 75.50% of the variation in the Financial
County, Kenya. The period considered Performance (the dependent variable) is
was between financial years 2013/2014 explained by variability in inventory
and 2015/2016. The study specifically management. To that effect, only 24.50%
assessed the effect of inventory of variation in the financial performance
management on financial performance. was explained by other predictors not
Performance was indicated through included in the model. Regression
profitability indicators i.e. return on analysis results demonstrated that
investment (ROI) and profitability in inventory management had positive
relation to turnover (Net Profit Margin). effects on performance. The Pearson
The study relied on a target population of Correlation Analysis results indicated
765 SMEs with operations in Laikipia positive and statistically significant
County as gathered from the National association between inventory
Chamber of Commerce and Industry management and financial performance.
(2017). A combination of proportionate The study recommended pursuit of
random sampling technique and measures to improve the model of
purposive sampling was employed to inventory management implemented by
attain at a sample size of 100 business small scale firms.
owners from 100 SMEs selected. The
study used primary and secondary data. Key Words: inventory management
Primary data was collected using practices, financial performance, small
questionnaires managed by the drop and and medium scale enterprises, Laikipia
pick method. The instruments were tested County, Kenya

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INTRODUCTION

SMEs play a critical role to global, regional and local economies. World over, SMEs have
continued to support billions of lives through direct and indirect employment especially in the
developing nations. As reported by World Bank (2015), formal SMEs contribute up to 60%
of total employment. They also back up to 40% of national income in developing economies,
a number that further increases significantly when informal SMEs are included. The report
underlines the growing importance of the SMEs sector in aiding match to job creations
especially in Sub-Saharan Africa. Regionally, as Africa hits the billionth person mark, a
similar case is highlighted with SMEs expected to play a critical role to growth of economies
to support growing populations (Sanders, 2011).

According to a report by the Kenya Private Sector Alliance (2017), notwithstanding their
great significance to the Kenyan economy contributing over three quarters of the GDP, about
half of the total workforce and roughly a quarter of all business enterprises, Small and
Medium Scale Enterprises (MSMEs) continue to grapple with a mountain of challenges
which has continued to hurt their financial performance. Bowen, Morara and Mureithi (2009)
reports that three out of five SMEs fail in their first years of operation. A report by the Kenya
National Bureau of Statistics (2016) also indicates that about half a million small enterprises
in Kenya die annually with a total of 2.2 million MSMEs subsiding for the period between
2012 and 2016. This demonstrates the magnitude of the challenges bedevilling this class of
business organisations. Agyei-Mensah (2010) lists poor inventory management practices as
among the principal causes of MSMEs failure observing that most SMEs lack a formal
working capital management system, therefore relying on subjective working capital
management decisions (Howorth and Westhead, 2003).

According to Bhattacharya (2004), working capital management is concerned with

maintenance of efficient levels of current assets and current liabilities. According to Bhalla
(2010), management of working capital is critical as it plays a critical role in the
determination of an organization’s performance direction. Mathew (2007) observes that
greater investment in current assets leads to lower risk in settling short term obligations but
on the same time leads to lower profitability.

As a guiding premise, WCM essentially involve a tradeoff between profitability and risk. As
such, investment decisions seeking to boost profitability would be expected to also increase
risk levels. On the converse, risk reduction choices would also reduce prospective
profitability of firms. Singh (2008) observes that organizations that build a stable working
capital framework are able to boost their earning potential. Preve and Sarria-Allende (2010)
adds that a prudent WCM system helps in boosting not only liquidity but also earning
capabilities of firms.

Performance of Small and Medium Scale Enterprises

Performance is a broad concept in corporate discussions that refers to the extent to which a
firm meets its objectives, goals, targets or the level to which it gears itself towards the

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organisational vision. Financial performance is concerned efficiency in asset utilisations to

generate revenue. At the epicentre of the concept of financial performance is the objective to
ensure a firm's overall financial health to boost the going concern status (Penman & Penman,
2007).

Scholars and Practitioners alike have argued a case in support of financial ratios in
measurement of financial health or wellbeing of corporate entities. The ratios have been
classified into many categories which include profitability ratios, efficiency ratios, gearing
ratios, liquidity ratios and solvency ratios. With regard to profitability which is the main
focus of the study ratios such as Earnings per Share (EPS), Net Profit Margin, Gross Profit
Margin, Return on Equity (ROE), Return on Capital Employed (ROCE), Return on Assets
(ROA) or Return on Investment (ROI) and Tobin’s Q have been used. The computation and
interpretation of financial ratios require a thorough and objective analysis of financial
statements and notes. The study at hand will utilise the Return on Investment (ROI) and Net
Profit Margin as profitability measures to explain financial performance.

According to Ayyagari et al., (2007), the SMEs sector in Kenya makes up 98 percent of all
businesses in the country and absorbs 50 per cent of new employment seekers annually. The
MSMEs sector contributes over three quarters of the Gross Domestic Product (GDP)
according to the Kenya Private Sector Alliance (2017). The sector therefore plays an
indispensable role towards the realization of Kenya’s Vision 2030. The Kenyan Government
has in its official development policies recognized the SMEs sector as a key player to
national development and has as and has put forth an elaborate and strictly monitored
framework to foster its growth (Ronge, Ndirangu, & Nyangito, 2002).

Inventory Management Practices

Involves control of stock levels and standards which includes control of ordering, storage,
loss prevention and control of transaction costs (Zipkin, 2000). Inventory Management is an
important corporate function as it’s essential to the successful operation in the organizations.
This is majorly due to the fact that the amount of money invested in inventory is significant
and also that inventories do have a great impact on daily operations of an organization. A
viable inventory management system seeks to meet anticipated demand, smoothen production
requirements, hedge against price increases, or to take advantage of quantity discounts,
decouple components of the production, protect against stock outs, take advantage of order
cycles and permit operations.

Laikipia County

Laikipia County is one of the devolved units of governance established by the Constitution of
Kenya (2010). It is located on the Equator in the defunct Rift Valley Province of Kenya. It is
a largely cosmopolitan county consisting of two major urban centres: Nanyuki to the
southeast, and Nyahururu to the southwest with its capital located at Rumuruti. The major
economic activities in the county are tourism and agriculture. Laikipia enjoys an industrious
and blossoming economy and is home to a total of seven hundred and sixty five (765) small

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and medium scale enterprises (SMEs) as gathered from Kenya National Chamber of
Commerce and Industry, Laikipia County (2016).

STATEMENT OF THE PROBLEM

According to the Kenya Private Sector Alliance (2017), notwithstanding their great
significance to the Kenyan economy contributing over three quarters of the GDP, about half
of the total workforce and roughly a quarter of all business enterprises, Small and Medium
Scale Enterprises (MSMEs) continue to grapple with a mountain of challenges which has
continued to hurt their financial performance. Bowen et al., (2009) reports that three out of
five SMEs fail in their first years of operation. A report by the Kenya National Bureau of
Statistics (2016) also indicates that about half a million small enterprises in Kenya die
annually with a total of 2.2 million MSMEs subsiding for the period between 2012 and 2016.
This demonstrates the magnitude of the challenges bedevilling this class of business
organisations. Agyei-Mensah (2010) lists poor working capital management practices as
among the principal causes of MSMEs failure observing that most SMEs lack a formal
working capital management system, therefore relying on subjective working capital
management decisions (Howorth & Westhead, 2003). While studies had been done on this
area, key gaps remained unresolved which included contextual, empirical, conceptual and
methodological gaps. Ndagijimana (2014) examined Working Capital Management for SMEs
in Nairobi, Kenya. The study results indicated that accounts payable management, accounts
receivable management and cash management were the profound WCM practices
implemented by SMEs. Empirical gaps were unveiled on the need to extend the assessment to
consider the association between those WCM and financial performance. Njeru, Njeru and
Tirimba (2015) studied on Cash Management practices and Financial Performance of
SACCOs. The study established that cash management practices positively influence the
financial performance of SACCOs. Empirical gaps were unveiled on the need to expand the
framework of working capital management variables considered other than cash
management. Kiprotich, Wanjare, Joab, and Oluoch (2013) assessed working capital
management practices and financial performance. The study targeted sugar cane out grower
firms. Findings established poor financial performance of out-grower companies and related
the same to weak working capital management framework adopted by the out-grower
companies. The study presented methodological gaps on the need to consider more
dimensions of financial performance such as profitability indicators. Contextual gaps were
also presented on the need to undertake a local study. To address stakeholders concerns and
fill the unresolved gaps on the subject, the current study determined the effect of inventory
management on financial performance of SMEs in Laikipia County, Kenya.

GENERAL OBJECTIVE

The general objective of the study was to analyze the effect of inventory management on
financial performance of Small and Medium Scale enterprises in Laikipia County, Kenya.

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HYPOTHESIS OF THE STUDY

H0: Inventory management has no statistically significant effect on financial performance

of small and medium scale enterprises in Lakipia County, Kenya.

THEORETICAL REVIEW

Operating Cycle Theory

The Operating Cycle theory was first developed by Richards and Laughlin (1980) and
concerns guidelines on prudent management of working capital in business concerns. The
theory is founded on the fundamental proposition that static ratios are inadequate and, at
times, may be ambiguous in the assessment of a business's liquidity position. An operating
cycle represents the amount of time a firm consumes in acquiring inventory, selling that
inventory, and receiving cash from customers in exchange (Hill, 2013). Bhattacharya (2014)
contends that the length of a company's operating cycle is dependent on the payment terms
extended to clients by the company as well as those extended to the company by its suppliers.
As such, if an enterprise has more time to pay its suppliers for inventory, it can shorten its
operating cycle by delaying the outlay of cash. Conversely, if the firm’s clients are given
more time to pay for goods received, the firm’s operating cycle is extended. This is
principally because the company will have to wait longer to obtain its cash. A shorter
operating cycle essentially demonstrates that a firm's cash is held up for a shorter period of
time, which according to Ross, Westerfield, and Jordan (2008) is considered more ideal from
a cash flow perspective.

Proponents of the theory argue that though receivable and inventory turnover indicators of an
operating cycle concept positions users to the essential facet of financial flows, the analysis is
incomplete on the fact that the analysis does not consider all relevant financial flows. The
payables turnover ratio is thus included in the analysis giving more detailed insights into the
study of working capital management and liquidity (Nobanee, 2009).The extension of the
analysis of static balance sheet leads to the development of liquidity flow concept. The
concept identifies the capability of liquidation coverage of the value including measures of
income statement of the operating activity of a business. Clearly, the incorporation of
measures of the inventory turnover and accounts receivables into the concept of
operating cycle gives a more clear-cut insight of management of liquidity than would
be established through solvency indicators such as current and acid taste ratio (Bhattacharya,
2014). The theory was helpful in the assessment of cash management, inventory
management, accounts receivables management and accounts payables management and their
individual and collective effect on performance of SMEs.

Transaction Cost Economics

The theory was advanced by Williamson (1989) with basic reference to the transaction as
the fundamental unit of evaluation. The theory holds that the understanding of controlling
transaction costs is key in the examination of business entities. A basic prescriptive is

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therefore given that both external transactions between firms and their suppliers and
customers as well as internal transactions should be addressed in order to build a viable
working capital framework. Methods and systems should be established in the firm to ensure
optimal levels of inventory so as to cut the costs involved which would include ordering costs
and holding or carrying costs (Tadelis & Williamson, 2012). Ordering costs are costs
incurred in the purchase of inventory. Ordering costs may include outlays in preparation of a
purchase form, reception, examination and registering the merchandises accepted. The
holding cost is essentially the cost of maintaining the stock or inventory in the store.
Associated costs include the cost of storing inventory and other opportunity costs. The
transaction economics theorists hold that in order to build their competitive advantage, firms
should work on strategies to reduce their working capital related costs through application
of systems for maintenance of the ordering, holding and opportunity costs of inventory at a
lowest levels possible (Emery & Marques, 2011). The theory was very useful in the
assessment of working capital management issues and specifically inventory management,
accounts payables management, accounts receivables management, and cash management in
assessing whether the organisation had well laid strategies to ensure the associated costs are
controlled.

Trade-Off Theory of Liquidity

The theory was first developed by Campbell and Kelly (1994) and is built on the basic
proposition that organizations aim at an ideal level of liquidity as they seek a trade-off
between the advantages and detriments of holding cash. The costs associated with tying too
much cash in a firm include low rates of return (Dudley, 2007). Conversely, the merits of
holding cash include savings on transaction costs incurred in raising funds for day to day
operations and obligations (Lipson & Mortal, 2009). As such, holding cash would be
beneficial because firms would have the opportunity to use liquid assets to finance their
investments opportunities and operations if other sources of funding are unavailable or
extremely costly. The theory principally helped in the assessment of cash management,
inventory management, accounts payables management and accounts receivables
management as the firms strike a trade-off between the detriment and advantage of holding
cash.

EMPIRICAL LITERATURE REVIEW

Juan García-Teruel and Martinez-Solano (2007) analysed working capital management

practices and profitability of SMEs. The study adopted a panel study approach and covered a
sample of 8,872 SMEs. The span between 1996 and 2002 was considered for analysis. Study
results indicated an inverse link between the inventories holding period and performance.
Therefore, inventory management practices do influence performance of firms.

Vahid et al. (2012) assessed WCM and performance through an empirical study of Iranian
firms. The study specifically targeted 50 firms Listed in Tehran Stock Exchange (TSE). The
Net Operating Profitability was used to assess firms’ performance. The multiple regression

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analysis was used as the main inferential tool guiding the conclusions. Inventory management
was found to be a significant predictor of profitability of the firms.

Deloof (2003) undertook a study on working capital management and performance of

Belgian Ian firms. The study relied on a sample of 1,009 large Belgian non-financial firms.
Profitability was evaluated for the period between 1992 and 1996. The study considered the
Inventory policy and management as one of the key variables considered. It was established
that holding as less inventories as possible (Optimal level) serves to enhance corporate
profitability.

RESEARCH METHODOLOGY

Research Design

According to Bulmberg, Cooper, and Schindler (2011), a research design refers to a statement
of the essential components of a study and entails the framework proposed for the collection,
measurement and analysis of data. A descriptive survey research design was utilized for
purposes of the study at hand. A descriptive research therefore involves the discovery of
existing interactions with regard to certain variables without any attempt to alter anything in
the environment. Kothari (2011) asserts that the design is suitable where distribution and
relationships between or among variables are already manifested and cannot be manipulated.
For purposes of the study, the design was justified by the fact that, the phenomena under
study could not be altered as it involved an already existing situation. In other words, the
current study was only concerned with explaining already existing relationships between
inventory management and SMEs’ performance.

Target Population

Target population has been described as any group of individuals or elements which bear one
or more features in common that are of interest to the researcher (Ott & Longnecker, 2015).
The study population was made up of 765 SMEs with operations in Lakipia County, Kenya
as gathered from the National Chamber of Commerce and Industry Laikipia County (2017).

Sampling Technique and Sampling Size

Orodho and Kombo (2002) described sampling as the process by which researchers select
units; for instance elements, people, or organisations from a population to use them in study
and in making generalisations to the entire population. The need for sampling is informed by
the need to overcome the difficulties associated with studying the entire population. A sample
is therefore composed of a set of representative elements drawn from the target population.
The study employed proportionate stratified random sampling procedure to select a sample of
100 SMEs from 18 strata in which the SMEs Lakipia County fall. According to Lavrakas
(2008), with proportionate stratified sampling, the sample size of each stratum is
proportionate to the population size of the stratum. The sample size of each stratum is
determined by the formula; nh= (Nh / N ) * n where nh is the sample size for stratum h, Nh is
the population size for stratum h, N is total population size, and n is total sample size (Ott &

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Longnecker, 2015). The study then used purposive sampling to select the business owners as
the choice respondents since they are the ones well versed with information sought. The
sampling frame was made up of the 765 SMEs operating in Laikipia County, Kenya.
According to Bryman and Bell (2015), the process of sample size determination involves the
process of selecting the number of elements or replicates to include in a statistical sample.
The sample size is a key feature of any empirical study which aims at making inferences
about a population from a sample. The combination of proportionate stratified random
sampling and purposive sampling methods led to a sample size of 100 respondents
comprising of the business owners of the 100 SMEs selected. The number of participants met
and surpassed the threshold of 30 as recommended by Mugenda & Mugenda (2003) and
Kothari & Warner (2004) as a rule of thumb to ensure normal approximations.

Data Collection Instruments

Both primary and secondary data collection methods were employed for purposes of the
study proposed. The researcher collected primary data by way of questionnaires. The
questionnaire was organized in a manner that covers all the research objectives. Mugenda and
Mugenda (2003) observes that questionnaires are ideal in providing detailed answers to
complex problems. Questionnaires are also considered easy and cost-effective to construct
and administer which also make the instruments popular. Further, according to Bryman and
Bell (2015), questionnaires give a relatively objective data and therefore are recommended
as the most effective instruments in data collection. Secondary data was obtained from the
business records and other important books of account of the SMEs.

Data Collection Procedure

The current study adopted the drop and pick method in distributing the questionnaires. The
questionnaires was administered within a span of two to three weeks during which the study
participants were allowed time to respond to the items. The drop and pick method of
questionnaire administration was justified by the fact that business owners as targeted by the
study are a busy category of organisational staff with numerous duties and commitments. It
would therefore not be ideal to seek private sessions with each of these participants as it
would be technically difficult. Secondary data was obtained from business records,
management reports and other important books of account of the SMEs.

Data Analysis and Presentation

Data was cleaned and then categorised in line with the objectives of the study and then coded
into the SPSS software. The data was then subjected to data screening to identify and correct
any inconsistencies in the data sets. Both bivariate and multivariate analysis were conducted
using SPSS. The researcher utilised both descriptive statistics and inferential statistics in
fulfilling the research objectives. Regression and correlation analysis were employed. This
was be key in explaining the status, direction and magnitude of relationships unveiled. A
regression model of the type given below was generated using SPSS software. The model
was been adopted from (Kutner, Nachtsheim, & Neter, 2004).

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Yij = β0 + β1X1 + Ԑ

Where: Yij = SMEs Financial Performance (ROI and Net Profit Margin); X1 = Inventory
Management; β0 is the intercept; Β1 represents the slope of the regression line
influenced by the independent variable & Ԑ is the error term.

Data was presented by way of tables, equations and figures and will include frequencies,
percentages, means, modes and standard deviations used to give the characteristics of the
data. The researcher conducted diagnostic tests to ascertain that the data collected meets the
basic assumptions for utilisation of key analysis techniques to be used including the
regression analysis. The study used SPSS utilities to assess the collinearity status of the data
set. This was achieved through SPSS generated collinearity diagnostic statistics which give
Tolerance and Variation of Inflation (VIF) output for assessing the multi collinearity status.
According to Montgomery, Peck and Vining (2015), multicollinearity test assesses the
likelihood that two or more explanatory variables in a multiple regression model are highly
linearly related. Tolerance represents the proportion of variation in the explanatory variable
that cannot be accounted for by other predictors included in the model. Extremely small
values of Tolerance (less than 0.10) would mean that a predictor is redundant. On the other
hand, the Variance of Inflation Factors (VIF) represents the reciprocal of tolerance; i.e. (1 /
tolerance). Variables whose Variance of Inflation Factor (VIF) values are greater than 10 may
warrant further investigation suffer from the multi collinearity problem (Liu, Kuang, Gong, &
Hou, 2003). The Shapiro-Wilk normality test was used to assess the normality status of the
data sets. According to Yazici and Yolacan (2007), the test for normality seeks to establish
the degree to which data follows a normal distribution and establishes how likely it is for a
random variable underlying the data set to be normally distributed. The null-hypothesis for
the Shapiro- Wilk test is taken to be normally distributed. This implies that if the p-value is
less than the chosen alpha level (in this case 0.05 or 5%), then the null hypothesis would be
rejected. An assumption would then be made to that extent that the data tested are not from a
normally distributed population. Conversely, should the p-value be greater than the chosen
alpha level (5% or 0.05), then the null hypothesis would not be rejected. An assumption
would then follow that the data comes from a normally distributed population (Shapiro &
Wilk, 1965). The study employed Test Glejser to test the data for heteroscedasticity.
According to Long and Ervin (2000), the test for heteroskedasticity seeks to examine the
likelihood of there being significant differences in the residual variance of the observations
over time. Using the Test Glejser for heteroskedasticity, should the value p values be greater
than 0.05 (5%); Sig. > 0.05, then there would be no heteroscedasticity problem in the data set.
Conversely, should the p value be less that 0.05 (5%); then the data set would be associated
with the heteroscedasticity problem.

RESEARCH RESULTS

The study was interested with determination of the effect of inventory management on
financial performance of SMEs in Laikipia County, Kenya. Financial performance was
indicated by the net profit margin and return on assets (profitability indicators). On financial
performance, the SMEs profitability as indicated by the return on assets and net profit

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margins was considerably low and also showed wide variations in profitability of SMEs in
the county. As explained by R Square, the Coefficient of Determination, more than three
quarters of the variation in financial performance was explained by variability in inventory
management. Results further indicated that the SMEs were largely effective in managing the
flow and timing of their purchases and payments to the firm’s optima advantage. The results
further indicated that SMEs to a great extent paid attention to the control of transaction costs
in purchases and regularly reviewed their inventory levels and planned for merchandise
orders. Close to two third of SMEs used managers experience in management of inventories.
Other notable methods included historical data and EOQ computations. Regression analysis
results indicate that inventory management has a positive influence on financial performance
of SMEs. The Pearson Correlation Analysis results indicated a very strong positive
relationship between inventory management and financial performance of SMEs.

REGRESSION ANALYSIS

Regression analysis was done to determine the effect of working capital management on
financial performance of SMEs. Table 1 provides statistical output of the F test.

Table 1: F- Test on ANOVA

Model Sum of Squares Df Mean Square F Sig.

1 Regression 223.548 4 55.887 106.007 .001
Residual 17.399 75 .232
Total 240.947 79
a. Predictors: (Constant), Inventory Management
b. Dependent Variable: Financial Performance

At the 5% level of significance, there was evidence to conclude that the gradient of the
regression line was not zero. This is since the p value of 0.002 is within the 5% significance
boundary. As such, inventory management was a useful predictor of SME financial
performance. The findings support earlier indications by Juan García-Teruel and Martinez-
Solano (2007), Vahid et al. (2012) and Deloof (2003) who indicated that inventory
management influences financial performance.

The regression model summary, a key output of the regression analysis, was useful in
explaining the usefulness of the model in predicting financial performance of SMEs. Table 2
presents the regression model summary.

Table 2: Regression Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson

a
1 .869 .755 .738 .21501 2.331
a. Predictors: (Constant), Inventory Management
b. Dependent Variable: Financial Performance

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As explained by R Square, the Coefficient of Determination, 75.50% of the variation in the

Financial Performance (the dependent variable) is explained by variability in working capital
management variables i.e. cash management, accounts receivables management, accounts
payables management, and inventory management. To that effect, only 24.50% of variation
in the financial performance was explained by other predictors not included in the model. As
such, guided by Draper, Smith, & Pownell (1966) and Seber and Lee (2012), a conclusion
was reached that inventory management was a statistically significant predictor of financial
performance.

Table 3 captures the multiple linear regression coefficients. Financial performance was
analysed as the dependent variable while inventory management formed the independent
variable.

Table 3: Regression Model Coefficients generated using SPSS

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 3.007 .087 1.809 .017
Inventory Management 1.067 .484 .455 3.968 .005

From the regression analysis results, the coefficients for inventory management (1.067) has
an associated p–value of 0.005 which is within the 0.05 significance threshold. As such,
inventory management is significant determinant of financial performance. A unit increase in
inventory management would lead to a 1.067 unit improvement in financial performance of
SMEs. The results agree with Juan García-Teruel and Martinez-Solano (2007) and Vahid et
al. (2012) who indicated that inventory management positively influences financial
performance. The study concludes that working capital management and its components;
cash management, receivables management, payables management and inventory
management are all useful predictors of performance.

Financial Performance = 3.007 + 1.067 (Inventory Management).

PEARSON CORRELATION ANALYSIS

The Pearson Correlation analysis was applied to further explain the nature, strength and
direction of relationship between inventory management and financial performance. Table 4
presents the Pearson correlation output.

Table 4: Pearson Correlation Analysis

Financial Performance
Inventory Management Pearson Correlation .803**
Sig. (2-tailed) .031
N 79
**. Correlation is significant at the 0.01 level (2-tailed).

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The Pearson Correlation Coefficients for inventory management (0.803) shows a very strong
and positive relationship with financial performance. The relationship is statistically
significant since the p-value (0.031) is below the 5% level of significance. The results agree
with Juan García-Teruel and Martinez-Solano (2007) and Vahid et al. (2012) who indicated a
positive relationship between inventory management and financial performance. The Pearson
Correlation Analysis results confirm that there is a significant positive relationship between
financial performance and inventory management. The findings agreed with Mwangi, Muathe
and Kosimbei (2014), Mwangi, Muathe and Kosimbei (2014), Abuzayed (2012), and
Mengesha (2014) but differed with Bhatia and Srivastava (2016) who established a negative
relationship between the inventory management as a component of working capital
management and firm performance.

CONCLUSIONS

From the inferential statistics that allow generalisations or inferences to the larger population,
a number of conclusions are made. The study concludes that SMEs’ financial performance as
indicated by the profitability metrics namely return on assets and net profit margins was
considerably low informing need to address this situation. From the regression analysis
results, the study concludes that inventory management has a positive effect on financial
performance of SMEs. The Pearson Correlation Analysis results informed a conclusion on
existence of a very strong positive relationship between inventory management and financial
performance of SMEs.

RECOMMENDATIONS

Key policy recommendations are made based on the unique findings of the study. The study
indicated that the performance of SMEs was generally wanting but indicated that working
capital management could help in improving the level of performance. A recommendation is
made on need to pursue strategies towards improving the framework of inventory
management in the organisations. On inventory management, a recommendation is made on
need to control the flow and timing of purchases and payments to the firm’s optimal
advantage. A keen focus should also be given to the control of transaction costs which have a
far reaching implication to firm performance.

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