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

Abstract

Research findings have shown that the liquidity, profitability and solvency position of most Small and Medium Eenterprises (SMEs) are in average position with the causal factors behind this position being unsound financial management, inadequate working capital, slow conversion of receivables and inventory into cash, lower position of sales and higher amount of debt. Therefore, the purpose of this paper was to carry out a Financial diagnosis of the SMEs financial performance by focusing on their  liquidity, solvency and profitability positions using ratio analysis. Data for the study covered the period 2009-2011 and was obtained from the financial statements of three SMEs which were purposively sampled from the SMEs operating in Kisii Municipality. The sampled SMEs were those which had financial statements for the years under consideration. Data collected through the analysis of key ratios were analyzed using the mean, standard deviation, coeffifient of variation, Student-t test and through the use of the Altman’s Z-score model. The findings of the study showed that the liquidity position of the SMEs was on average low; their solvency was low and their financial Health was on average not good.  Further,the results show that there is a significant impact of current ratio, quick ratio and Debt to Total Assets ratio on Return on Assets (ROA). The results of the study demonstrate that the liquidity position of the SMEs was  well below the acceptable global norm of 2 for current ratio and 1 for quick ratio. Further, the results indicated that the financial health of the SMEs needed to be improved hence the recommendation that SMEs make liquidity, solvency management and financial stability an integral driver of their policy frameworks.

Key words: Liquidity, Solvency and Financial Health