Financial literacy has been identified as one of the key competencies required for the establishment, management and thriving of SMEs. However, the exact effect financial literacy has on the financial performance of SMEs has not been fully established by the past literature thus the need for further research in this area. This study sought to establish the influence of financial literacy on the financial performance of SMEs in Ruiru sub county, Kiambu County, the specific objectives emanating from this study were; to identify the influence of personal saving skills, entrepreneurship skills, book keeping skills and skills on access to banking services on the financial performance of small and medium enterprises in Ruiru Sub County. A descriptive survey design was adopted in conducting the study. The study population entailed the 334 owners of registered SMEs in Ruiru Sub County and who have undergone some financial literacy training. The target population of this study was 334 SMEs operating in Ruiru town. A sample of 100 respondents was selected out of the total population using stratified sampling to get the sample of respondents and with the aid of the Yamanes’ formula. The study used primary data which was collected using questionnaire which comprised of both open ended and close ended questions each addressing the study's objectives. The data collected was analyzed using SPSS and the significance of the results tested using inferential statistics such as analysis of variance. The results of the multiple regressions revealed that there is significant strong positive relationship between financial literacy; personal savings skills, entrepreneurship skills, access to banking services skills and book keeping skills on financial performance of SMEs; growth in profitability, sales revenue turnover and return on equity. From the results, the study concluded that high levels of financial literacy among SME owners led to higher financial performance of SMEs. The study recommended that awareness be created to the SMEs on the importance of being financially literate by encouraging the SME owners to participate in financial literacy training programmes. Secondly, trainers should consider including information technology skills related modules as one of units on which participants will be trained on, this is because information technology helps an entrepreneur do business on line hence increase his competitive edge.

Background to the Study 
Financial literacy has attracted increasing attention in both the developed and developing world due to its role in financial decision. For example, in January 2008, the United States government set up a president’s advisory council on financial literacy tasked to improve financial education at all levels of the economy. Developing economies have also not been left behind; countries like Indonesia and Ghana have set up programs that are aimed at increasing financial literacy. Financial literacy encompasses the knowledge and skill required by individual to function effectively in the money economy and make informed judgments in respect to their own and their family circumstances. The need for financial literacy among entrepreneurs and business owners has henceforth become a subject of interest in both developed and developing economies (Hilgert & Hogath, 2003). Though it might not be an absolute state, it enables individuals to be able to respond effectively to ever changing personal, social and economic circumstances. Financial literacy is hypothesized to be a major determinant of the firm’s success or failure. It is for this reason, many countries have created task forces to study and evaluate the level of the financial literacy of their citizens (Alessie, Van &Lusardi, 2011). 

Past literature depicts correlation between financial literacy and financial performance trend of Small and Medium Enterprises (SMEs) although the direction of causality is unclear (Hilgert& Hogarth, 2003). For instance, according to Bosma and Harding (2006), many SMEs firms fail because they lack financial literacy, insufficient business acuity, as well as poor financial literacy, undermines entrepreneurial activity. Most scholars agree that entrepreneurs, regardless of their age, consistently engaged in decision-making activities concerning resource procurement, allocation and utilization. Such activities almost and always have financial consequences and thus, in order to be effective, entrepreneurs must be imparted with financial knowledge (Oseifuah, 2010). Drexler, Fischer, and Schoar (2014) posited that entrepreneurs usually suffer from insufficient financial literacy to make the complex financial decisions they face. This is unfortunate, since according to Oseifuah (2010), financial literacy among youth entrepreneur contributes meaningfully to their entrepreneurship skills. Entrepreneurs who want to grow, need to have confident of their finances, as well be adequately informed (Kotzè&Smit, 2008). If the owners or managers of SMEs are illiterate concerning their organizational finances, the financial knowledge of their firms will also be lacking and this will lead to reduction in innovation that can transform into competitive capability, unable to access different sources of financing provision due to non-awareness and this attitude will lead to possible failures of SMEs (Kotzè&Smit, 2008). In conclusion entrepreneurs suffer from lack of financial literacy and such deficiency undermines the probability of accessing different sources of financing that can result into competitive capability and firm superior performance. 

Financial literacy refers to the knowledge of money and financial products that people can apply to financial choices in order to make informed decisions about how to handle their finances (Basu, 2005). It includes the ability to make informed judgments and to take effective decision regarding financial matters (Worthington, 2005). OECD (2005) argued that financial literacy must involve not only the investors but also the customers, both having the knowledge of financial products and concepts and their ability to consider financial risks in their decision making and to make other effective actions to improve their financial levels. Financial literacy is essential in helping individuals to identify vital financial issues and behaviors that support effective management of financial resources (Hilgert & Hogath, 2003). It enables one to have the knowledge of critical financial concepts for instance, types of interests, risks and returns of investments, diversification of investments, among others. Hence it equips the ability to understand important financial products needed in life including various bank products, basic investments, ideas and saving plans. It advances how individuals are able to examine and appreciate money and financial issues. This aids greatly in making effective financial decisions regarding financial managements (Greenspan, 2001). 

Financial literacy not only enables one make decisions while confident and sure, but also assists individuals to respond competently to changes that affect their everyday financial wellbeing including events in the general economy like collapse of financial markets, rising unemployment and the threat of rapid inflation (Hilgert&Hogath, 2003). Hereafter for any financial system to be effective, financial literacy is required in order to avoid pitfalls and to take appropriate actions to improve the firm's present and future conditions (OCED, 2009). Having the numeracy and capacity to do calculations, understanding the financial systems and understanding the risks of financial decisions are some of the fundamental concepts about financial literacy. Common measures of financial literacy being money basic knowledge, financial management, debt, savings, insurance and investment literacy (Rooij, Lusardi, &Alessie, 2007). As argued by Mandell (2008), there should be more emphasis on rising up the level of financial literacy as this would help in achieving many objectives of organizations. 

Financial performance refers to the total economic results of activities undertaken by an organization, whether directly or indirectly (Lusch & Laczniak, 1989). It is the efficiency and effectiveness of the organization (Letting, 2009). Specifically, financial performance of a firm determines how well the business is doing in wealth creation and acquiring of resources (Komppula, 2004). Daft (1997) attributes performance to the competency of an organization to transform the resources within the firm in an efficient and effective manner to achieve organization goals. To measure financial performance, varied proxies have been adopted by various researchers including sales revenue, profits, return on investment/ equity (Wijewardena, Zoysa, Fonseka&Perera, 2004). The measures include, return on sales, combination of ROI and ROS (Pegels& Yang, 2000) and by its liquidity which is the amount of cash a company can put its hands on quickly to settle its debts as adopted by Gill (1990). Colvin (1991) provide various financial measures which include sales level, sales growth rate, cash flow, return on shareholder equity, gross profit margin, net profit from operations, and ability to fund business growth from profits. 

Financial performance majorly influences the firm's growth. The enterprise growth is the unification of quantity and quality. Growth is often closely associated with firm overall success and survival (Johannisson, 1993). Hence growth is a measure of performance (Ochieng, 2012). Schayek (2011) argues that most SME owners or managers are very sensitive about disclosing information relating to their firm financial performance. In addition Watson (2007) suggests that because most SMEs are not required to report and publish their financial records, it is difficult to obtain, directly, the financial figures on sales and profitability of most SMEs. Therefore, most research studies such as Lechner, Dowling and Welpe (2006) and Watson (2007) have developed the use of a five point Likert scale which measures sales growth and profitability growth as financial performance measures. A similar technique is used by Sawyerr et al. (2003), Thrikawala (2011) and Watson (2011). This approach is implemented as it avoids the direct approach of asking for sales or profitability figures but infers the performance, indirectly, through the responses on the level of satisfaction with sales and profitability growth of the firm. However, it is important to note that sales and profitability growth should not be viewed in isolation as profits and sales may increase as a result of some underlying factor such as price increases or sales promotions, respectively, and not due to the improved performance of the firm or its products. 

There are diversified definitions for SMEs depending on the country of location but there is no universal definition to suit the SMEs in Kenya. This according to the micro and small enterprise Act of 2012. However, an SME is a business that has sales of between Kshs.1, 000,000 and Kshs.5, 000,000 in a year, or has 10-50 people employed. Small and Medium Enterprises (SMEs) play a major role in economic growth and development in both established and growing economies in the world (Stanworth & Gray 1993). In particular, SMEs globally participate in creating employment opportunities to millions of people especially youth and women and as a source of technological innovation to create new products and eradication of poverty (Wolff & Pett 2006). 

Several countries in the world are promoting financial literacy amongst SMEs proprietors as a tool of fighting poverty (UN, 2003), some of the countries involved are Egypt, Uganda, Ghana, South Africa, Tanzania, Kenya (African Development Bank, 2007). In Kenya, key efforts have been made by the government through Financial Sector Deepening (FSD), which educates people to enhance financial freedom. The central bank has direct interest in financial literacy and ensures that commercial banks show the public their charges so as to enable persons to compare and make decisions. Commercial banks involvement has been mainly relying on their marketing activities e.g. market activations. Further financial institutions such as Equity Bank and KCB has made deliberate effort to educate Kenyans on finance. Equity Group Foundation (EGF) has partnered with The master card foundation while KCB has partnered with visa international to provide financial literacy programs that are aimed to equipping Kenyan SME owners on opportunities to learn how to effectively manage their finances.

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Item Type: Kenyan Topic  |  Size: 65 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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