Nyabwanga et al 2013

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European Journal of Business and Management www.iiste.org

ISSN 2222-1905 !aper" ISSN 2222-2#$9 %nline"

&ol.5' No.#' 201$

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An Empirical Analysis of the Liquidity, Solvency and FinancialHealth of Small and Medium Sized Enterprises in Kisii Municipality,

Kenya

N(a)wanga' *o)ert N(amao+1,r. %era' !atri/1!,"' %tieno Sime(o2and N(a/undi inla( N(an(u/i$

1.

Sool of Business and Eonomis' Maseno ni3ersit( !.%. Bo4 $$$ Maseno' en(a.

2. Sool of Business and Eonomis' Jaramogi %ginga %dinga ni3ersit( !.%. Bo4 210 - 60701 Bondo' en(a.

$.

ault( of 8ommere' isii ni3ersit( 8ollege. !.o.Bo4' 60#-60200' isii. en(a.

+E-mail of te orresponding autor n(amaon(a)wanga:gmail.om

Abstract

*esear findings a3e sown tat te li;uidit(' profita)ilit( and sol3en( position of most Small and Medium

Eenterprises SMEs" are in a3erage position wit te ausal fators )eind tis position )eing unsound finanial

management' inade;uate wor/ing apital' slow on3ersion of reei3a)les and in3entor( into as' lower position of

sales and iger amount of de)t.


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Small and medium enterprises are generall( regarded as te dri3ing fore of eonomi growt' o) reation' andpo3ert( redution in de3eloping ountries.


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grow to large enterprises. ltman @-sore model.

!"(

Hypothesis of the study

i.

HOa: SMEs in Kisii Municipality do not always exhibit a healthy inancial position.

H!a: SMEs in Kisii Municipality always exhibit a healthy inancial position

ii.

H"b: Liquidity position has no i#pact on $%oitability.

H!b: Liquidity position has a si&niicant i#pact on $%oitability.

iii.

H"c: Solvency position has no i#pact on $%oitability.

H!c: Solvency position has a si&niicant i#pact on $%oitability

% )evie of )elated Empirical Literature

Kasim F *ami= 2011" indiate te fat tat li;uidit( refers to te a3aila)le as for te near future' after ta/ing into

aount te finanial o)ligations orresponding to tat period. Ci;uidit( ris/ onsist in te pro)a)ilit( tat te

organi=ation sould not )e a)le to ma/e its pa(ments to reditors' as a result of te anges in te proportion of long

term redits and sort term redits and te unorrelation wit te struture of organi=ationLs lia)ilities. urter'

Ka=im and *ami= 2011"posit tat li;uidit( management is 3er( important for e3er( organi=ation tat means to pa(

urrent o)ligations on )usiness tat inlude operating and finanial e4penses tat are sort term.

Ci;uidit( is partiularl( important to sareolders' long-term lenders and reditors' as it pro3ides information a)out a

partiular )usinessLs safet( margins afforded to reditors and its a)ilit( to repa( loans.


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assets in te ase of li;uidation Ditman' 199H".

Ci;uidit( ratios measure a )usinessL a)ilit( to meet te pa(ment o)ligations )( omparing te as and near-as

wit te pa(ment o)ligations. If te o3erage of te latter )( te former is insuffiient' it indiates tat te )usiness

migt fae diffiulties in meeting its immediate finanial o)ligations.


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*eill( and Brown 2005" stated tat finanial statement anal(sis see/s to e3aluate managerial performane in se3eral

important areas inluding profita)ilit(' effiien( and ris/. ra)ia. sing orrelation and regression anal(sis' te result onfirmed

a signifiant negati3e relationsip )etween te firmLs profita)ilit( and its li;uidit( le3el' as measured )( urrent ratio.


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! " # ! "

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It measures te perentage of ea sales re3enue remaining after meeting firmLs e4penses on its goods. ig ratio of gross profit to sales is a s(m)ol of

good management wereas a relati3el( low gross profit margin is learl( a danger signal for te firm. owe3er' a 3er(

ig and rising gross profit ratio ma( also )e te result of te unwarranted 3aluation of opening and losing

sto/in3entories. > firm sould a3e a reasona)le gross profit ratio to ensure ade;uate o3erage for operating

e4penses of te enterprise and suffiient return to te owners

7et profit mar*in/


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to onor teir o)ligations to te suppliers of redit' ser3ies and goods and tis ould result in losses on aount of

non-a3aila)ilit( of supplies. >lso' te ina)ilit( to meet te sort term lia)ilities ould affet te )usinessLs operationsand in man( ases it ma( affet its reputation as well. owe3er' as indiated )( Na=rul and Samem 2012" te

low urrent ratios ma( )e a sign of in3entor( turn o3er )eing mu more rapid tan te aounts pa(a)le )eoming

due.

4.1.2 Liquidity Position Based On Quick Ratio


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4.1.3 Liquidity Position Based On Absolute Liquid Ratio


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of te ompanies is indiated )( tis ratio. s a onse;uene' )ot reditors and in3estors are interested in e3aluating earning

power or profita)ilit(. >nal(sts fre;uentl( use profita)ilit( as te ultimate test of management?s operating

effeti3eness

ssets *%>". It is a useful indiator of ow

profita)le a )usiness is relati3e to its total assets. It also gi3es an idea as to ow well te )usiness is a)le to use teir

assets to generate earnings. 8alulated )( di3iding a )usiness?s annual earnings wit it?s total assets. *%> is

displa(ed as a perentage. figure gi3es in3estors an idea as to ow effeti3el( te )usiness is on3erting

te mone( tat te( a3e in3ested into net inome. figure te )etter it is seen as te )usiness is

earning more mone( on less in3ested apital. Mo/tar et al.2005" states tat return on asset must )e positi3e and te

standard figure of *%> is 10-12.


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'able -: )nalysis o the p%oitability o the SMEs

)E39)7 &7 ASSE3S -)&A. 6ross $rofit Mar*in : 7et $rofit mar*in:

F#)M ! F#)M

%

F#)M

(

&+E)ALL F#)M

!

F#)M

%

F#)M

(

&+E)ALL F#)M

!

F#)M

%

F#)M

(

&+E)ALL

2009 -0.## 1.1$ 1.09 0.65 20 6H.1 $9.$ $5.5 2.5 2.2 1.6 2.0

2010 1.61 $.$5 2.$7 2.$H 22.# 62.2 $H.6 $6.1 $.6 5.5 6.# 6.7

2011 1.9$ 5.11 $.59 $.56 $H.2 66.H $#.6 60.1 $ $.# $.1 $.$

ME>N 0.#2 $.20 2.$5 2.12 27.H 66.H $#.6 $7.7 $.0 $.# $.1 $.$

Ss sown in was )elow te standard a3erage impl(ing tat te( are not 3er( good in using teir assets to generate sales.

on aggregate inreased from 0.65 in 2009 to $.56 in 2011.


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'able : SMEs/ )lt#an 0 1alues

Business Num)er @? Sore' 2009 @? Sore' 2010 @? Sore' 2011 @? Sore' Mean

I*M1 0.9H 1.057 0.9$$ 0.9#7

I*M2 2.#02 $.1$2 2.9H# 2.9H1

I*M$ 0.9#H 1.$76 1.659 1.2H0

%&E*>CC 1.5#7 1.#51 1.H90 1.H62

or firm 1' te mean >ltman?s @-sore 3alue of 0.9#7 indiates tat te SME is 3er( unealt( and it is li/el( to go

into )an/rupt(A for firm 2' te mean >ltman?s @-sore 3alue of 2.9H1 indiates tat te SME is finaniall( sound

sine te 3alue is greater tan 2.90. or irm $' te mean >ltman?s @-sore 3alue of 1.2H sows tat te SME is inte gre( area sine it lies )etween 1.2$ and 2.90.


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H): SMEs in Kisii Municipality always exhibit a healthy inancial position.

C* 2.1$H 2 0.02H 0.#H756 0.2#$1 1.H651

*%> 0.H7# 2 0.1#9 $5.H69#5 -5.067# 110.2$6

Sine pT0.05' meaning tat te t-test 3alue is signifiant at 0.05' we reet te null (potesis and onlude tat tere

is a signiffiant differene in profita)ilit( for different le3els of li;uidit( as measured )( 8*' K* and >C*.


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relationsip )etween te finanial ealt of firms and li;uidit( positions )( ma/ing use of time series anal(sis

teni;ues.)eferences

>ltman' E.I. 197#". inanial *atios' ,isriminant >nal(sis and te !redition of 8orporate Ban/rupt(' 2ou%nal

o Finance, 3(.

Banos-8a)allero' S' Daria-..' ar=ana' N. and *aman' M.>. 2009". inanial ,iagnosis of te inanial nstitutions of Banglades

> 8omparati3e Stud( on I!,8' I,C8 and I8B'$%i#e @nive%sity 2ou%nal, 1ol. (, Ao. !, pp. (3. 2012". inanial diagnosis of seleted listed parmaeutial ompanies in Banglades.

Eu%opean 2ou%nal o business and #ana&e#ent

N(a)wanga *.' N.' %era' !.' Cumum)a' M' %dondo' >.' Sime(o' %.2012". Effet of wor/ing apital management

praties on finanial performane > stud( of small sale enterprises in isii Sout ,istrit' en(a. )%ican

2ou%nal o 4usiness Mana&e#ent 1ol. >!9?, pp. -9"8. F Nasr' M. 200H". or/ing apital management and profita)ilit( G ase of !a/istani firms.

nte%national eview o 4usiness esea%ch $ape%s, 1ol. ( Ao. !. pp. 38;


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Nyabwanga et al 2013