Financial literacy and financial performance of small and medium-scale enterprises in Kajiado county, Kenya

Abstract

This study investigates the relationship between financial literacy and the financial performance of small and medium-sized enterprises (SMEs) in Kajiado County, Kenya. The study identifies financial performance challenges such as inadequate bookkeeping, poor debt management, and informal business operations as critical issues undermining SME growth. Guided by the Human Capital Theory, Trade-Off Theory, and Behavioural Finance Theory, the research highlights the role of financial skill acquisition, debt optimization, and behavioural awareness in improving financial outcomes for SME owners. A mixed-methods approach was employed, with data collected from a target population of 350 registered SMEs in Kajiado County. Stratified random sampling yielded a sample of 207 respondents. The methodology included a pilot study to test reliability and validity of the research instruments, structured questionnaires for data collection, and multiple linear regression and simple linear regression analysis for data interpretation. Tests for regression assumptions—normality, multicollinearity, autocorrelation, and sampling adequacy—were conducted to ensure the robustness of the model. Descriptive statistics provided insights into central tendencies and variability, while inferential statistics identified relationships between variables. The results reveal that bookkeeping skills significantly enhance profitability, while debt management practices and formal business operations also contribute positively, though to a lesser extent. Specifically, simple linear regression showed a strong correlation (R = 0.798) between financial literacy and financial performance, with 63.7% of variance (R² = 0.637) in financial performance explained by the study variables. Conclusions emphasize that enhanced financial literacy drives improved profitability and business sustainability. Recommendations advocate for targeted training in bookkeeping, debt management, and business formalization to strengthen SME financial practices. Policymakers and SME support programs should prioritize tailored financial literacy initiatives to foster sustainable economic growth in Kajiado County.