Accounts Receivable Risk Management Practices and Growth of SMEs in Kakamega County, Kenya

Abstract

Accounts receivable risk management is a structured approach to managing uncertainties through risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources (Gakure et al., 2012) Although there has been a considerable interest by government to promote SMEs by encouraging owners to take up government tenders, in Kenya the number of SMEs capable of sustaining themselves is still low. Studies show credit risk as an important variable affecting firms. Nonetheless, these risks’ influence on SMEs has not received as much attention as it should. This study’s main objective was to examine the influence of credit risk assessment practices on growth of SMEs. The objective of the study was to evaluate the effect of credit risk assessment practices on growth of SMEs in Kakamega County, in Kenya. Causal research design was applied to show the influence of credit risk assessment practice on growth. Using the sampling technique of purposive stratified random, a sample size of 359 out of 5401 SMEs was used from Kakamega Central Sub-County that had been in operation between 2013 and 2015. Secondary data was acquired from the Kakamega County Revenue Department, for the period under study. The hypotheses that form the premises for a regression model using analysis techniques like homoscedasticity and autocorrelation. Ordinary Least Square method was utilized to establish the relationship of cause-effect between variables while hypothesis was tested at 5% significance level. The overall model was discovered to be significant considering the F=14.918 and p-value (0.00 < 0.05). The findings revealed that good credit risk assessment practices when adopted by SMEs lead to growth. The study recommended that owners and managers should be trained and made to understand the various techniques risk management to well manage them so as to increase growth. The findings would form a basis for government and policy makers to formulate credit risk assessment strategies that would help minimize risk of bad and delinquent debt. The study also forms a basis for further research and adds to the existing body of knowledge. Keywords: Credit risk assessment, SME Growth, Accounts Receivable Management