The relationship between financial management information ...

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THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT

INFORMATION SYSTEM AND FINANCIAL PERFORMANCE OF

SMALL AND MEDIUM ENTERPRISES IN NAIROBI COUNTY, KENYA

BY

MALUKI PAUL KILONZO

A MANAGEMENT RESEARCH PROJECT SUBMITTED IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE

DEGREE OF MASTER OF BUSINESS ADMINISTRATION,

DEPARTMENT OF BUSINESS ADMINISTRATION, SCHOOL OF

BUSINESS, UNIVERSITY OF NAIROBI

NOVEMBER, 2012

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DECLARATION

This research project is my original work and has not been presented to any other institution or

university.

Signed _________________ Date ________________

Maluki Paul Kilonzo

D61/P/7565/2005

This research project has been submitted for examination with our approval as the university

supervisors.

Sign_________________ Date _______________

James Ng’ang’a

Department of Accounting and Finance,

School of Business,

University of Nairobi

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ACKNOWLEDGEMENTS

From the formative stages to the final draft of this Master of Business Administration project, I

owe an immense debt of gratitude to my supervisor, James Ng’ang’a for his invaluable support

towards this project. Their constructive criticism, careful guidance and patience enabled me to

complete the project in time.

Special thanks go to the proposal presentation panel and colleagues who were present during the

presentation of this project proposal.

Finally, but most importantly, I sincerely thank our Almighty God for giving me the strength and

providing means to undertake this study. To each of the above, I extend my deepest appreciation

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DEDICATION I dedicate this research project to my family for their great source of inspiration and joy in my

daily endeavors to better my best.

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ABSTRACT Financial Management Information System role is to connect, accumulate, process, and then

provide information to all parties in the budget system on a continuous basis. All participants in

the system, therefore, need to be able to access the system, and to derive the specific information

they require to carry out their different functions. The interest in the study has been inspired by

the existing knowledge in addition to the current literature, creating further a gap in emerging

economies and their unique needs. Mixed and inconclusive findings suggesting that a more in

depth analysis is required, therefore the study seek to answer the question; what is the

relationship between financial management information system and firms’ financial performance

of small and medium enterprises in Nairobi County in Kenya.

The research design that was used in this study were both cross sectional and descriptive survey

method aimed at establishing the relationship between financial management information system

and firms’ performance of small medium enterprises in Kenya. The target population in this

study was the SME’s who are operating within the Nairobi Central Business District along Moi

Avenue. A total of 135 interviews with business owners and managers, distributed

proportionately was carried out for this survey.

From the findings the study concluded that there is the relationship between financial

management information system and financial performance of small and medium enterprises in

Nairobi county.

The study recommended that the SMEs should put in place proper financial systems to enhance

financial performance and generation of usable output by employees. On motivation the study

recommends that management for SMEs responsible for FMIS integration should improve

reward system because it has positive effects on staff morale and enhances performance

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TABLE OF CONTENTS

DECLARATION ............................................................................................................................ ii

ACKNOWLEDGEMENTS ........................................................................................................... iii

DEDICATION ............................................................................................................................... iv

ABSTRACT .................................................................................................................................... v

LIST OF TABLES ....................................................................................................................... viii

LIST OF ABBREVIATION .......................................................................................................... ix

CHAPTER ONE ........................................................................................................................... 1

INTRODUCTION......................................................................................................................... 1

1.1 Background of the Study .......................................................................................................... 1

1.1.1 Financial Management Information System ...................................................................... 3

1.1.2 Financial Performance........................................................................................................ 4

1.1.3 Small and Medium Enterprises .......................................................................................... 6

1.2. Research Problem .................................................................................................................... 7

1.3 Research Objective ................................................................................................................... 8

1.4 Value of the Study .................................................................................................................... 9

CHAPTER TWO ........................................................................................................................ 10

LITERATURE REVIEW .......................................................................................................... 10

2.1 Introduction ............................................................................................................................. 10

2.2 Theoretical Review ................................................................................................................. 10

2.2.1 Management Theory ........................................................................................................ 10

2.3 Information System in SMEs .................................................................................................. 11

2.4 Impact of Financial Information System on Firms’ Performance .......................................... 14

2.5 Empirical Review.................................................................................................................... 16

2.6 Summary of Literature Review ............................................................................................... 18

CHAPTER THREE .................................................................................................................... 19

RESEARCH METHODOLOGY .............................................................................................. 19

3.1 Introduction ............................................................................................................................. 19

3.2 Research Design...................................................................................................................... 19

3.3 Population of Study................................................................................................................. 19

3.4 Sampling Design ..................................................................................................................... 20

3.5 Data Collection ....................................................................................................................... 21

3.6 Econometric model specification ............................................................................................ 21

3.7 Estimable model...................................................................................................................... 22

3.8 Validity and Reliability of the instruments ............................................................................. 22

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CHAPTER FOUR ....................................................................................................................... 23

DATA ANALYSIS AND INTERPRETATION ....................................................................... 24

4.1 Introduction ............................................................................................................................. 24

4.2 financial performance using Return on investment ................................................................ 24

4.3 Value, Quality and Use of Performance Measures ................................................................. 25

4.3.1 Importance to SMEs in Managing FMIS ......................................................................... 27

4.4 FMIS Applications Support .................................................................................................... 27

4.5 Design Issues and FMIS Influence on SMEs Financial Performance ................................ 29

4.6 Efficient utilization of FMIS ............................................................................................... 30

4.7 Econometric Model Specification........................................................................................... 32

4.7.2 Interpretation of results ........................................................................................................ 33

4.7.2.1 Multiple R .................................................................................................................. 33

4.7.2.2 R-squared ................................................................................................................... 34

4.7.2.3 Adjusted R-squared ................................................................................................... 34

4.5.2.4 F value (calculated) ................................................................................................... 34

4.6 Intercept (α) ..................................................................................................................... 35

4.8 Design Issues (β1) ............................................................................................................ 35

4.9 Efficient Utilization (β2) .................................................................................................. 35

4.10 Application of FMIS (β 3) .............................................................................................. 36

CHAPTER FIVE ........................................................................................................................ 36

CONCLUSIONS, DISCUSSIONS AND POLICY RECOMMENDATIONS……………..36

5.1 Introduction ............................................................................................................................. 37

5.2 Summary of Findings .............................................................................................................. 37

5.3 Conclusion .............................................................................................................................. 38

5.3 Recommendations ................................................................................................................... 39

5.4 Areas of further research ......................................................................................................... 40

REFERENCES ............................................................................................................................. 41

ANNEX: RESEARCH INSTRUMENT ....................................................................................... 47

QUESTIONNAIRE ...................................................................................................................... 47

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LIST OF TABLES

Table 4.1 Financial Performance Assessment…………………………………………………...25

Table 4.2: Mean scores and analysis of Information Use on FMIS .............................................. 25

Table 4.3: SMEs need to ensure that FMIS used for measuring performance ............................. 26

Table 4.4 Probe into Essence for SMEs to Manage FMIS ........................................................... 27

Table 4.5 FMIS Applications Support .......................................................................................... 27

Table 4.6 Design Issues and FMIS Influence ............................................................................... 29

Table 4.7 Factors affecting the effective utilization of FMIS ....................................................... 30

Table 4.8 Mean Scores and Standard Deviations on Effective utilization of FMIS ..................... 30

Table 4.9 FMIS and government control respondent approval .................................................... 31

Table 4.10: Essence of FMIS Tallies ............................................................................................ 31

Table 11 : Empirical results .......................................................................................................... 32

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LIST OF ABBREVIATION

AIS: Accounting Information System

CEO: Chief Executive Officer

FMIS: Financial Management Information System

HRS: Human Resource System

ICP: Inventory Control Packages

ICT: Information Communication Technology

IT: Information Technology

ITS: Information and Technology Systems

MRP: Manufacturing Resource Planning System

OA: Organizational Assessment

PFM: Public Financial Management

SMEs: Small and Medium Enterprises

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Over the past decade, developing, countries have increasingly embarked on efforts to

computerize their government operations, particularly with respect to public financial

management (PFM). In most developing countries, budget execution and accounting processes

were or are either manual or supported by very old and inadequately maintained software

applications. Therefore, the growth of computer technology in 1950s had initiated increasing

development in information storing and processing (Rashid, Hossain, & Patrick, 2001).

Computer technologies increase the use of information due to its capabilities of analysing

massive amount of data and in producing accurate and timely reports. These unique features of

computer capabilities have led to the introduction of various information systems such

accounting information system (AIS), manufacturing resource planning system (MRP) and

human resource system (HRM). Information system technology has definitely changed the way

businesses are being operated (Elliot, 1992). Firms that are responsive to these changes are

perceived to be able to gain competitive advantage (Porter, 1980; Fisher and Kenny, 2000).

Based on theoretical literature on management strategy, unique resources in a firm played role

for competition (Huang, Chen and Lin, 2006). Financial management information system can be

accepted as a unique resource in a firm in the ends of the 20th century and 21th century.

According to Grant, IT- based resources can be classified as: tangible resources that comprising

the physical IT infrastructure components, human IT resources that comprising the technical and

managerial IT skills, and intangible IT resources, such as knowledge assets, customer orientation

and synergy. The long term survival of firms is closely related to their ability to successfully

managed information technologies (IT) in today’s harsh and rapidly changing business

environment. IT is the fastest growing sector in the economy, with 68 percent increase in output

growth rate projected between 2002 and 2012 (Callahan, Gabriel and Smith, 2009). And

corporations have invested billions of dollars in information technology (IT) over the last 20

years.

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Accounting literature argues that strategic success is considered an outcome of Accounting

Information System’s (AIS) design (Langfield-Smith, 1997). Several, studies have analyzed the

role of AIS in strategic management, examining the attributes of AIS under different strategic

priorities (Ittner and Larcker, 2008; Bouwens and Abernethy, 2000). It has also been analyzing

the effect on performance of the interaction between certain types of strategies and different

design of AIS (e.g. different techniques and information). The appropriate design of AIS

supports business strategies in ways that increasing the organizational performance (Chenhall,

2003). Increasing AIS investment will be the leverage for achieving a stronger, more flexible

corporate culture to face persistent changes in the environment. Innovation is the incentive with

which a virtuous circle will be put in place, leading to better firm performance and a reduction in

the financial and organizational obstacles, while making it possible to access capital markets.

Computer revolutions have greatly affected many organisation processes and procedures, in

particular the accounting process (Ismail, Abdullah, & Tayib, 2003). In the early 1960s, many

organizations have started utilizing Inventory Control Packages (ICP) technology to integrate

and automate their inventory control system (Mobegi, 2009). This system has contributed to

increases in business productions and transactions as now firms are able to produce more

products due to the more systematic order schedule plan offered by the system. Thus, this

enhances business activities. More businesses and transactions implied that there will be more

accounting data needed to be recorded and updated. Prior traditional accounting method of

manually inputting and recording daily transactions has becoming inefficient. Errors such as

wrong data entry, inefficient tasks performance and massive utilization of paper products have

create many problems to business.

In light of the above, conceivably it is not surprising that many developing countries have

pressed for, or have been pressed into adopting financial management information system

projects to strengthen their public expenditure management systems. The establishment of an

FMIS has consequently become an important benchmark for the country’s budget reform

agenda, often regarded as a precondition for achieving effective management of the budgetary

resources. Although it is not a magic potion, the benefits of an FMIS could be argued to be

profound. (Marie Chene, 2009).

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Secondly, an FMIS strengthens financial controls, facilitating a full and updated picture of

commitments and expenditure on a continuous basis. Once a commitment is made, the system

should be able to trace all the stages of the transaction processing from budget releases,

commitment, purchase, payment request, reconciliation of bank statements, and accounting of

expenditure. This allows a comprehensive picture of budget execution (Marie Chene, 2009).

Thirdly, it provides the information to ensure improved efficiency and effectiveness of

government financial management. Generally, increased availability of comprehensive financial

information on current and past performance assists budgetary control and improved economic

forecasting, planning, and budgeting. (Marie Chene, Transparency International 2009) .In our

current day competitive world, technology is continuously innovated in order to improve

processes. For public service business to operate effectively and efficiently, information needs to

be easily retrievable and accurate. With manual systems it is a cumbersome procedure to obtain

necessary data when it's really required. A financial management information system, or

integrated financial management information system (FMIS), is an information system that

tracks financial events and summarizes financial information. In its basic form, an FMIS is little

more than an accounting system configured to operate according to the needs and specifications

of the environment in which it is installed.

1.1.1 Financial Management Information System

The (FMIS) refers to computerization of expenditure management processes including budget

formulation, budget execution, and accounting with the help of a fully integrated system for

financial management (Hopelain, 1984). The full system should also secure integration and

communication with other relevant information systems.

According to Miranda and Keefe, (1998) as the name implies, there are three guiding

characteristics for a well-designed FMIS: When developing an FMIS it is important that it cater

to management needs not just those of the central agencies, but also line agencies. Moreover, as

a management tools it should support the management of change. It must be viewed as an

integral part of budget system reform hence not designed just to meet present requirements, but

also to support those needs that are likely to arise as parallel budget reforms are implemented.

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As a tool of management it should provide the information required for decision making

(Chenhall, 2003). For this purpose it is anchored in the accounting system, and should be

designed to perform all necessary accounting functions as well as generate custom reports for

internal and external use. However, this does not mean that it should exclusively concentrate on

financial information. Managers will require other nonfinancial information. For example,

personnel information such as numbers of employees, their grade within the organizational

structure and rates of remuneration. For performance-based budgets, performance information

will be important to managers, such as the identification of programs, the objectives or outcomes

of programs, the types of goods and services produced, as well as indicators by which to judge

the efficiency and effectiveness of programs (Callahan, Gabriel & Smith, 2009).

According to Callahan, Gabriel & Smith, (2009), Financial Management Information System

role is to connect, accumulate, process, and then provide information to all parties in the budget

system on a continuous basis. All participants in the system, therefore, need to be able to access

the system, and to derive the specific information they require to carry out their different

functions. The converse is also true, if the FMIS does not provide the required information that

is, has not the right functionality it will not be used, and will cease to fulfill its central function as

a system.

1.1.2 Financial Performance

A subjective measure of how well a firm can use assets from its primary mode of business and

generate revenues. This term is also used as a general measure of a firm's overall financial health

over a given period of time, and can be used to compare similar firms across the same industry or

to compare industries or sectors in aggregation (Bernardin and Russel, 2009). There are many

different ways to measure financial performance, but all measures should be taken in

aggregation. Line items such as revenue from operations, operating income or cash flow from

operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish

to look deeper into financial statements and seek out margin growth rates or any declining debt.

Ultimately the universal measure of business performance is money and the ultimate forms of

this measurement are the final accounts of the company. Money has the advantage that it can be

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used to measure the effectiveness and efficiency not only of different business functions

(marketing, engineering, production etc.) but also of different businesses (from manufacturing

companies to retailers and from hotels to garages).

According to Richard (2009), organizational performance encompasses three specific areas of

firm outcomes financial performance (profits, return on assets, return on investment, etc.;

product market performance (sales, market share, etc.); and shareholder return (total shareholder

return, economic value added, etc.). In a survey on the quality, uses and perceived importance of

various financial and non-financial measures, Lingle and Schiemann (2006) report wider

disparities between the perceived quality and importance of non-financial measures as compared

to financial measures. Perceived inadequacies in a traditional performance measurement system

that focuses on financial measures have led many organizations to switch to and put greater

emphasis on forward-looking non-financial measures such as customer satisfaction, employee

learning and innovation (Ittner and Larcker, 2008).

Most organizations view their performance in terms of "effectiveness" in achieving their mission,

purpose or goals (Guralnik and David, 2004). Most SMEs, for example, would tend to link the

larger notion of organizational performance to the results of their particular programs to improve

the lives of a target group (e.g. the poor). At the same time, a majority of organizations also see

their performance in terms of their "efficiency" in deploying resources. This relates to the

optimal use of resources to obtain the results desired. Finally, in order for an organization to

remain viable over time, it must be both “financially viable” and "relevant" to its stakeholders

and their changing needs. In the OA framework, these four aspects of performance are the key

dimensions to organizational performance. Despite the growing interest in incorporating non-

financial measures in an organization’s performance measurement system, it is important to note

that performance measurement and performance management are not the same. Each segment in

a large organization may develop highly specific performance measurement information for its

own operations and this will allow that segment to operate effectively. However, while each

manager strives to optimize the performance of his division, the overall performance of the

organization may be sub-optimized (Missroon, 2000). Only a performance management system

engenders strategic evolution and ensures goal congruence. As the balanced scorecard provides a

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comprehensive, top-down view of organizational performance with a strong focus on vision and

strategy, performance management can be greatly facilitated through its use (Missroon, 2000).

According to Guralnik and David (2004), financial performance is achievement which is often

used to show the ability or “the show” which is commonly used to show up the performance or it

also means “doing the task that shows someone’s action in working. On the other hand,

Bernardin and Russel (2009) define that financial performance is the record of the result which is

gained from the function of certain work or certain activities in the certain period of time.

Performance commonly used to evaluate the strategy. There are some obstacles in implementing

the strategy that can be overcame by implementing the components of management strategy

(Kaplan and Norton, 2001). In the perspective of management strategy, environment is the

important and contextual factor which has the effect to the performance of the company (Child,

2000). The concept of modern management shows that the industry which is conducting an

economic activity does not stand independently, but it is in the business environment which is

affected each other. Generally, the company is in the centre of business environment that consists

of government, people, customers, distributors, employees and the same industry which also

being the competitor.

1.1.3 Small and Medium Enterprises

The small and medium enterprises (SMEs) play an important role in the Kenyan Economy.

According to the Economic Survey (2006), the sector contributed over 50 percent of new jobs

created in the year 2005. Despite their significance, past statistics indicate that three out of five

businesses fail within the first few months of operation (Kenya National Bureau of Statistics,

2007). According to Amyx (2005), one of the most significant challenges is the negative

perception towards SMEs. Potential clients perceive small businesses as lacking the ability to

provide quality services and are unable to satisfy more than one critical project simultaneously.

Often larger companies are selected and given business for their clout in the industry and name

recognition alone.

Over the past two decades, Kenya has emphasized micro and small-scale enterprises in its

development agenda. This is important since many Kenyans lack formal employment. They

therefore depend on informal employment in SME’s. SMEs also create job opportunities,

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promote national productivity, provide materials and components to other industries, promote

rural development, reduce rural-urban migration and supply goods and services to customers at

reasonable prices (Momsen, 2009). Furthermore, they use simple technologies that are labor

intensive, which generate employment and income. They save money that would have been used

to import products and encourage savings among the lower income groups. Similarly, they can

be established to supply small segments of the market in remote areas with little developed

infrastructure as well as reduce income inequalities and train indigenous entrepreneurs for future

manufacturing industry employment

1.2. Research Problem

Accounting Information Systems are a tool which, when incorporated into the field of

Information and Technology systems (ITS), were designed to help in the management and

control of topics related to firms’ economic-financial area. But the stunning advance in

technology has opened up the possibility of generating and using accounting information from a

strategic viewpoint. Since this is important for all firms, it is more important even for medium-

sized and small ones which need this information to deal with a higher degree of uncertainty in

the competitive market (El Louadi, 1998). Thus, they need to improve their systems and data

processing capacity to match their information needs (Van de Ven and Drazin, 1985). Investing

in staff training, improving the quality of products and internal processes and increasing AIS

investment will be the leverage for achieving a stronger, more flexible corporate culture to face

continual changes in the environment. Innovation is the incentive with which a virtuous circle

will be put in place, leading to better firm performance and a reduction in the financial and

organizational obstacles, while making it possible to access capital markets.

SMEs accounting information system implementation and success have been extensively

researched. Recent research development focuses on the relationship between firms strategies

alignment with information system (Tan, 1996; Li and Ye, 1999). These studies suggested that

there are positive relationship between strategy and strategic information technology. A study

conducted by Shin (2001) discovered that IT investments will be more efficient if the systems

implementation is aligned with the firms’ strategy. This argument is supported by Cragg et al.

(2002) asserting that IT implementation which is aligned with business strategy prove to have

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positive impact on firms’ performance. In addition, Davenport (1998) highlighted the importance

of having a good fit between firms’ requirement and technology capabilities. The mismatch

between what is needed by the firms and service offered by the new technology will yield poor

performance. Nevertheless, HyvÖnen (2007) also added that sophisticated information

technology aligned with ineffective performance measure will yield lower performance outcome.

This raises the need for careful planning and strong justification process to be undertaken before

firm reaches the decision to implement an information system. This issue is more profound

within SMEs due to their limited resources and experience in IT field (Mitchell, Reid, & Smith,

2000).

Local studies have been done on financial management information system. For instance,

Mobegi (2009) did a study on the extent of implementation of integrated financial management

information system (IFMIS) as a tool for sustainable financial management in government and

the study mainly focused on government. Wanyungu (2001) on the other hand did another on

financial management practices of micro and small enterprises in Kenya. The case of Kibera.

Study showed that firms’ that acquire extensive IT resources are able to create competitive

advantage. No known study has been done on the relationship between financial management

information system and firms’ performance of small medium enterprises in Kenya. Nevertheless,

prior researches have difficulty providing evidence on positive relationship between FMIS and

firms’ performance. The interest in the study has been inspired by the existing knowledge in

addition to the current literature, creating further a gap in emerging economies and their unique

needs. Mixed and inconclusive findings suggesting that a more in depth analysis is required,

therefore the study seek to answer the question; what is the relationship between financial

management information system and firms’ financial performance of small and medium

enterprises in Nairobi County in Kenya?

1.3 Research Objective

To investigate the relationship between financial management information system and firms’

financial performance of small and medium enterprises in Nairobi county in Kenya

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1.4 Value of the Study

Findings of the study will particularly be useful in providing additional knowledge to existing

and future institutions on the relationship between financial management information system and

firms’ performance of small medium enterprises in Kenya and provide information to potential

and current scholars on financial management information system and firms’ performance

theories and practice in Kenya. This will expand their knowledge on financial management

information system and firms’ performance in small medium enterprises in Kenya and also

identify areas of further study. The study will be a source of reference material for future

researchers on other related topics; it will also help other academicians who undertake the same

topic in their studies.

The findings of this study will help in enlightening the key decision makers in small medium

enterprises in Kenya and the government on policies formulation and on factors influencing

performance of small medium enterprises and how they could purpose to mitigate the challenges

facing it. The study will in addition to the above, be useful to stakeholders, financiers, and

investors in formulating and planning areas of intervention and support.

Finally, the study is important not only to small medium enterprises in Kenya in Kenya but also

to other managers in other sectors. It would help them understand the relationship between

financial management information system and firms’ performance of small medium enterprises

in Kenya; it helps different firms achieve success better than others.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents the literature review, specifically the literature review focuses on the

variables of the study, and the discussion includes FMIS influencing factors, theories and

empirical market reviews

2.2 Theoretical Review

2.2.1 Management Theory

In its simplest conceptualization, a theory is a systematic grouping of related principles.

Management theory therefore serves as a means of classifying pertinent management knowledge.

According to Nwachukwu (1992), management theory “is a synthesis of the concepts and

principles of management. Management theory attempts to present in a concerted manner those

facts about human behavior in organization.” Management theory is scientific in nature relying

on observation of events, and analysis of facts to generate hypotheses. A hypothesis represents a

general statement of logical or systematic relationship embracing a set of observations. Tested

and validated hypotheses are called principles.

Management theory increases managerial efficiency by providing the guidelines to help the

managers solve problems in the organization. The theory also helps in crystallizing the nature of

management in terms of analyzing management job and the training of managers. Management

theory formulation brings about improvement in research and management practice, leading

logically to the attainment of social goals and human development. Porth and Mccall (2001)

note that management theories emphasize the importance of an organization’s ability to acquire

and leverage knowledge that produces meaningful change and innovation.

A related concept to management theory that needs clarification for our purpose is organization

theory. Organization theory as a discipline studies the structure and design of organization. It

explains, “how organizations are actually designed and suggests the appropriate structural design

to improve organizational effectiveness” (Robbins, 1983).

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2.3 Information System in SMEs

It is common knowledge that the main objective of a business is to maximise profit either in

terms of increases in business productivity or by achieving rapid expansion in market shares

domination. To achieve this goal, businesses need to be responsive to the changes in the

environments, in particular to the information technology revolution. Nowadays, information

technology is a must in many businesses. It is difficult to gain competitive advantage and survive

without some adoption or implementation of this advancement in technological products.

Studies has shown that the most widely use information system is accounting information

system, specifically in financial reporting aspects (Marriot and Marriot, 2000; Riemenschneider

and Mykytyn Jr, 2000; and Ismail, 2007). Romney and Steinbart (2000) define an accounting

information system as ‘a system that processes data and transactions to provide users with

information they need to plan, control and operate their businesses. Here, accounting information

systems are viewed as a system that helps management in planning and controlling processes by

providing relevant and reliable information for decision making. It suggests that accounting

information system functions are not solely for the purpose of producing financial reports. It role

goes beyond this traditional perspective. Accounting information system should be utilized to

include planning and managing business activities. It could also be used as a controlling

mechanism such as budgeting. Therefore, full adoption of the system is essential to fully attain

the system’s benefits.

In general, financial accounting data has been commonly defined as information prepared for

external users such as creditors, investors and suppliers. Nevertheless, its functions could also be

extended to include providing managers with useful data for making informed decisions or

commonly known as management accounting (Romney and Steinbart, 2000). Both information,

financial and management accounting information come from the same sources of data; the only

difference is in the way these data are presented. In management accounting, information is

gathered, collate and presented in a way uniquely requested by management. This will allow

managers to immediately locate the information that is useful for them. Alternatively, in

financial accounting, reports are prepared in accordance to the regulators’ guidelines.

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Traditionally, accounting information systems have been perceived as a means of providing

financial information to organization (Mia, 1993). There has been considerable evidence that

within SME financial accounting has remained the principle source of information for managers

(Holmes and Nichols, 1988, McMahon and Davies, 1994, Nayak and Greenfield, 1994, Mairead,

1977). These studies have also found out that SMEs are still having ineffective information

management, poor system control, and most decision making is on ad hoc basis despite having

adopted accounting information system. Mauldin and Ruchala (1999) reason that this situation

could be attributed to the initial objectives of information technology (IT) adoption. The

accounting system original role of replacing manual accounting process (Mauldin & Ruchala,

1999) has hindered further usage and exploration on the system benefits. Marriot and Marriot

(2000) further concluded that financial awareness among SMEs’ managers varies considerably

and the use of computers for the preparation of management accounting information is not at its

full potential.

However, Perrent and Grant (2000) suggested that SMEs do implement effective information

and control through informal means and that decision making process can be more sophisticated

than anticipated. They argued that these contradiction stems largely from the researchers’

paradigm rather than any real contradiction. In addition, Ismail and King (2005) found that some

SME managers are capable of using IT strategically rather than focusing on administrative

efficiency suggesting that the use of IT has expand towards management accounting context.

Adoption of ICT is a qualitative variable which takes discrete values, and specifically it is a

binary variable since we can have two outcomes, either a firm has adopted ICT in its operations

or not. The problem is to determine the factors that influence the probability of a firm adopting

ICT in its operations. This problem can be analyzed using discrete choice models, primarily the

probit, logit or their ordered variants if choice is considered some natural ranking. In the lines of

Pindyck and Rubinfeld (1991) we consider a theoretical variable iZ , which is not observable, and

is determined by a set of explanatory variables iX :

)1.........(......................................................................1

ij

k

j

iji XZ

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Further, let Y represent a dummy variable which takes the value 1 if a firm adopts ICT in its

operations, and 0, otherwise the threshold that determines whether a firm adopts ICT or not is as

follows:

1Y if ii ZZ*

0Y if )2(..........................................................................................*ii ZZ

Assuming iZ*

is a normally distributed random variable, then we can define a probit model

where the probability iP of Y is obtained using the standardized cumulative normal probability

function represented by F : that is, iii XFZFP )( , or a logit model which is based on

cumulative logistic probability function expressed as

)3..(............................................................

1

1)(

iXiii

e

XFZFP

The two models use a similar approach, but the logistic model is appealing since we can easily

compute the odds of an event occurring. We use the logit model in the analysis. The model is

solved using the maximum likelihood methods to obtain the parameter estimates of . (Pindyck

and Rubinfeld, 1991). The estimated parameter estimates of the maximum likelihood estimation

are both asymptotically consistent, efficient, and normally distributed. From Equation 1, we

define the determinants of the response variable as:

)4......(..............................Re 54321 iiii HgLocagewsizeZ

Where size is the size of the SME expressed as number of workers, agew is the average age of

workers, Locs is the location of the firm(location can either be in commercial area, residential or

Juakali i.e. an open shed for doing informal business), and gRe a dummy variable to capture the

registration status of the firm, H is human capital of the Manager (highest level of education),

and i a random error term. Using the maximum likelihood methods, this study estimates the

parameters , and the vector which most explain the probability of an SME adopting ICT in its

operations.

14

2.4 Impact of Financial Information System on Firms’ Performance

Existing literature offers scant evidence of the relationship between these AIS and performance

measures; though it is important to highlight the study made by Ismail and King (2005) which

discovered a positive association between AIS alignment and SME strategy and performance

measures. In the Spanish case, Naranjo-Gil (2004) posits an indirect relationship between AIS

and firms’ performance via the varying strategies that may be adopted by companies. Thanks to

investment in AIS, the scope for action is expanded, thus providing time saving in trips to and

dealings with banks, the Administration, etc. This reduces firms’ costs. Productivity increases

when these innovations are properly used. Insofar as a firm’s culture is open to the introduction

of new accounting information systems this will lead to a more holistic view of it and make for

greater flexibility and dynamism in organizational search for improved results.

Despite of some authors who postulate that the direction of the cause-effect relationship is only

that companies achieve a high performance when they can afford the implementation of certain

technological developments (Damanpour and Gopalakrishnan, 2001). Others indicate that firm

performance drops just after the implementation, taking several years to realize the benefits from

IT adoptions (Wah, 2000). There are several research works, which, in the widest sense, have

studied relationships between performance indicators and IT, and how IT impact on firm

performance achieving inconclusive results.

There are studies which obtain a positive relationship between investment in IT and economic

profitability, financial profitability and value added (Menachemi et al., 2006; Huang and Liu,

2005). Other research shows that no clear relationship exists between this type of investment and

the performance indicators (Dibrell et al., 2008). Their authors argue that, currently, IT are

readily available and using them gives no competitive advantage for achieving improved results

(Powell and Dent-Micallef, 1997).

Similarly, they maintain that many firms have invested in IT but they do not succeed in attaining

the established performance goals. Although research on the IT-performance ratio is more

abundant in large-sized firms, the analysis of the impact on smaller-sized ones becomes

particularly important because investment in these technologies may give them a competitive

15

advantage and the chance to position themselves to achieve better results since they are more

flexible and have better response capability (Pérez et al., 2010; Tanabe and Watanbe, 2005;

Izushi, 2003; Larsen and Lomi, 2002).

The relationship between inputs and output of SME can be expressed using a production

function. In our model we assume that firms are competitive and combine labour and capital to

produce a nearly homogenous output or service over time. Subject to the law of diminishing

marginal productivity and the firms technology is represented by a production function, and w , is

the price of labour r , the rental price of capital, then the problem of the SME can theoretically be

expressed as:

)5..(................................................................................)(),,(,

rKLwLKpfMaxLK

The above production function may also be generalized for more factors of production, that is,

we may write )( ixfQ , ni ,...2,1 where x is a set of inputs. ICT is a type of technology which

may augment either labour or capital or both. In our analysis, labour is defined at the number of

workers employed in a firm; while capital is measured by the log of amount spend on capital by

the firm. We may assume ICT augments both capital and labour which means that we can

explicitly model it. If we assume the SMEs technology can be represented using a Cobb-Douglas

production function, then we can have:

)6(..............................................................................................................1 LATKQ

Where A represents total factor productivity or a residual, and )1( TT is an exogenous ICT

index for technology. We could also model ICT as a dummy as shown below. Further, to obtain

the estimates of the impact of ICT adoption on SME output, we will estimate the following log-

linear model which includes capital, labour, ICT technology, and other control variables:

)7......(............................................................4

321

j

m

j

j

E XTLKLnQ

16

Where E

Q is SME output and jX is a set of control variables such as location, registration status

of the firm, among others, to help explain variation in output and is a random error term. This

model can be estimated using the OLS method. This analysis presupposes that SMEs which have

adopted ICT are more efficient and productive. Hence, the average enterprise output of such

enterprises is expected to be higher, which means that we expect that 03 .

2.5 Empirical Review

This empirical study is based on a survey carried out among small and medium-sized firms to

ascertain the extent to which development and implementation of accounting information systems

had taken place. Subsequently an analysis was made as to how much this introduction may impact on

improvement in outcome indicators and productivity. Once the survey had been prepared it was

revised and validated at the conceptual level, by a group of experts in the subject and compared by

having personal interviews with seven managers belonging to sample firms.

In a recent study in Kenya, Opiyo and K’Akumu (2006) not only examine how SMEs are poorly

provided with ICT, but also look at how the available ICT facilities are located vis-à-vis other

SME activities within the Kariokor Market cluster in Nairobi. Furthermore, the study attempts to

find out how ICT are utilized by SME in mitigating the problems of lack of information and

marketing problems, in order to gauge their potentiality as business development tools. The

study also identifies the ICT planning challenges and ICT requirements in the Kariokor informal

sector cluster, suggests an appropriate mix of ICT needed by the SME sector and seeks ways of

designing a SME cluster with adequate ICT which can be used as an ideal spatial and locational

strategy for ICT within the informal sector cluster. However, the study did not focus on

determinants of ICT adoption choice by SME type. Further, there is limited understanding of

patterns of ICT access and use by SMEs as well as determinants of adoption and non-adoption in

Kenya.

Bruque (2007) and Riemenschneider et.al, (2003) investigated factors that influence the adoption

of information technology in SMEs. Both authors generally agreed that SMEs adoption of

information technology were mainly influenced by the perceived benefits of implementing the

17

systems and stems from the pressures received from competitors, customers, and suppliers to

ensure business continuity and survival in the increasingly competitive environment. Many firms

invest in advanced information technology aiming at collecting more information to assist

decision making performance which will eventually lead to improve efficiency and firms’

profitability. Study showed that firms’ that acquire extensive IT resources are able to create

competitive advantage. Nevertheless, prior researches have difficulty providing evidence on

positive relationship between IT investments and firms’ performance. Mixed and inclosclusive

findings suggesting that a more in depth analysis is required.

A big advantage of computer-based financial information systems is that they automate and

streamline reporting. The introduction of new Financial Management Information System

(FMIS) was to transfer manual accounting transaction to an integrated and automated FMIS

across the whole government. Numerous processing and efficiency benefits were to be realized

through this new system like Improvements in government accounting processing efficiencies

through automation resulting to improved service delivery and high productivity, hence fostering

accurate and timely financial management reports. Initially, from the global perspective

management information systems were predominantly developed “in-house” as legacy systems.

Such solutions were difficult to develop and expensive to maintain.

Bui et al. (2003) argue that technology and societal changes are moving the global market

rapidly towards a new economic order rooted in e-Commerce. They investigate some factors

including macro economy, ability to invest, access to skilled workforce, cost of living and

pricing. The authors also state that many organisations face a chronic shortage of resources

(including funding). Management should be aware that e-Business is part of the complex and

general economic structure and the success of organisations depend on that structure as well as

the optimum allocation of resources.

Dykman (2003) notes that financial information systems normally represent a significant

investment for many organisations. Managers need to know that the decision made to spend

money on IS should be analysed like any other major purchase. She argues that general

management often gives in to the expert power of the technologists, both internal and external to

18

the organisation. The return on investment on an IS acquisition may not be quite as simple or

straightforward as other capital expenditure. She states that it is still possible to do the financial

analysis.

Kearns (2004) states that financial information systems investment has the potential of providing

competitive advantage, actual returns on such investment vary widely and a majority of CEO’s

rank past IT investment disappointing. There are many methods for investment evaluation, but

traditional methods do not adequately account for the intangible benefits that characterises

strategic investments. They also lack other features of portfolio selection. He describes a model

based on the analytic hierarchy process that could possibly overcome the deficiencies associated

with traditional approaches to economic evaluation of IT investment. This approach reflects both

on tangible and intangible methods and links IT investment to business strategies.

2.6 Summary of Literature Review

The study reviews the Management theory which is a systematic grouping of related principles.

Management theory therefore serves as a means of classifying pertinent management knowledge

and this theory attempts to present in a concerted manner those facts about human behavior in

organization as well as an empirical review.

This empirical study is based on a survey carried out among small and medium-sized firms to

ascertain the extent to which development and implementation of financial management

information systems had taken place. Subsequently an analysis was made as to how much this

introduction may impact on improvement in outcome indicators and productivity financial

management information systems have been perceived as a means of providing financial

information to organization. There has been considerable evidence that within SME financial

accounting has remained the principle source of information for managers. Literature reviews

that financial awareness among SMEs’ managers varies considerably and the use of computers

for the preparation of management accounting information is not at its full potential. Many firms

invest in advanced information technology aiming at collecting more information to assist

decision making performance which will eventually lead to improved efficiency and firms’

profitability

19

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter outlines the methods that will be adopted by the study in obtaining information on

the relationship between financial management information system and firms’ performance of

small medium enterprises in Kenya. The chapter also describes and explains the research

instrument that will be used in the study. The chapter is thus structured into research design,

target population, sample and sampling techniques, data collection and data analysis techniques.

3.2 Research Design

The research design that was used in this study were both cross sectional and descriptive survey

method aimed at establishing the relationship between financial management information system

and firms’ performance of small medium enterprises in Kenya. These methods was preferred

because it allows for prudent comparison of the research findings. A cross sectional and

descriptive survey attempts to describe or define a subject often by creating a profile of a group

of problems, people or events through the collection of data and tabulation of the frequencies on

research variables or their interaction as indicated.

3.3 Population of Study

The target population in this study was the SME’s who are operating within the Nairobi Central

Business District along Moi Avenue. This target group has been chosen, because this is a

homogenous group having diverse preferences, yet are operating under similar conditions, who

can be identified and who bear similar characteristics in their marketing gimmicks. They are also

more likely to have tried and experimented with all manner of marketing strategies and plans and

would therefore be in a better position of giving valid results. In this study therefore, the SME’s

will be grouped according to the sector that the industry is operating in, more specifically in the

following sectors; Manufacturing, Agriculture and other service industry

20

3.4 Sampling Design

The research employed stratified random sampling in selecting respondents. The population was

segregated into several mutually exclusive subpopulations or strata herein referred to as business

categories. The research will apply proportionate stratification which will be based on the

stratum’s share of the total population to come up with the sample in each stratum. The actual

Businesses to be interviewed arrived at by using simple random procedures to draw the Sample

from each stratum. A total of 135 interviews with business owners and managers, distributed

proportionately was carried out for this survey.

The goal of stratified random sampling is to achieve the desired representation from various sub-

groups in the population. Mugenda and Mugenda (2003), states that a sample of 10% is

considered representative for a population above 500. The sample size is justified by 10% since

it will minimize the duplicity and redundancy of the data to be obtained and the size is large

enough to ensure collection of comprehensive data

In this study therefore, the SME’s was grouped according to the sector that the industry is

operating in, more specifically in the following sectors; Manufacturing, Agriculture, Services,

and the Finance sector, technology.

3.1 Sample Size table

Categories Target population Percentage (%) Size

Manufacturing 20 10 2

Transport 100 10 10

Agriculture 10 10 1

ICT 200 10 20

Health 20 10 2

Clothing’s and beauty shops 900 10 90

Finance sector 200 10 20

Total 1350 10 135

Source: Researcher (2012)

21

3.5 Data Collection

The data collection instrument to use in this study was a semi-structured questionnaire which

will be used to collect primary data by way of interviews in the month of September 2012. The

respondents will be business owners or those involved in the start-up and day to day running of

these businesses. The data gathered will be analyzed and presented using descriptive statistics.

Primary data will be captured using Microsoft Excel and computed as statistics.

The questionnaire was capturing the degree of relationship between financial management

information system and firms’ performance of small medium enterprises in Kenya. The

questionnaire will be chosen because it will be easier to administer for a qualitative research. The

research used of five research assistants to complete the work in one day. They will assist in

administering the questionnaires. The research assistants will be used in the study because they

will assist in gathering enough data for analysis due to short period available for the research.

3.6 Econometric model specification

The study uses an econometric model with FMIS as the dependent variable. The explanatory

variables will be econometrically regressed. The resultant model will be a multiple regression

model of the following form:

Y = α + β1X1 + β2X2 +β 3X3+ εt

Where:

α= regression constant

Y= SME Financial Performance quotient in Nairobi

X1= FMIS Design Issues

X2= Efficient Utilization of FMIS

X3= Applications of FMIS

α= Constant

β= Coefficient

ε= Error Term

22

The process of data analysis involved several stages; the completed questionnaires were edited

for completeness and consistency, check for errors and omissions and then coded. A content

analysis and descriptive analysis will be employed. Quantitative method of data analysis will be

used. Data was coded and thereafter analyzed using Statistical Package for Social Sciences

(SPSS) program and presented using tables and pie charts to give a clear picture of the research

findings at a glance.

Results were presented in tables and charts. Correlation and regression analysis was used to

establish the association and effect of independent variables and the dependent variable

3.7 Estimable model

The model parameters will be estimated using ordinary least squares method (OLS). It will be

assumed that:

The error term is a random variable

The mean of the error term is zero

The variance of the error term is constant

The error term is normally distributed

There is no covariance between error terms

There is no covariance between error terms and the explanatory variables

The explanatory variables are measured without error.

From the data analysis, the model to be estimated will be of the following form:-

3.8 Validity and Reliability of the instruments

According to Saunder et al (2003), four threats to reliability exist, “subject or participant error,

subject or participant bias, observer bias and observer error”. Subject or participant bias: this

arises from lack of knowledge or experience of respondent. To avoid this, the respondents were

first asked if they are familiar with both brands, only those familiar with both brands were given

the questionnaires to answer, although this might have some effect on their responses.

Subject or participant error: this arises from respondents feelings such as physical condition,

mental and stress at the time of answering the question. This can lead to low response,

respondent guessing answers or unable to read and understand the question. As a result of this,

23

we tried to make the questions few and easy to read since English is not our respondents’ first

language.

Observer’s bias: according to Saunder et al (2003), observer’s bias poses the most serious threat

to reliability and can have effect on the result if constructed according to our interpretation. It

might reflect a different meaning to the respondent. A pretest was conducted in order to increase

the reliability of our questionnaires and we found out the most of them actually misunderstood

our questions.

24

CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter presents the data analysis and interpretation from data that was collected on a

relationship between financial management information system and financial performance of

small and medium enterprises in nairobi county

The research was conducted on a sample of 135 respondents from different business to which

questionnaires were administered. Out of the issued questionnaires, only 135 were returned duly

filled in making a response rate of 100% which is an adequate response rate for statistical

reporting. Mugenda & Mugenda (1999) stated that a response rate of 50% and above is a good

response rate.

4.2 financial performance using Return on investment

The mean rate is 0.24 which is commendable as it has kept rising since 2007 and oscillates

between 0.15 and 0.35 (15%-35%). Our standard deviation in this case is a measure of the

volatility of the investment, and is much low, below 1% as analyzed herein after (0.090). The

SMEs’ FMIS initiatives are therefore a less volatile investment and an appropriate SMEs

indulgence.

25

Table 4.1 Financial Performance Assessment

Year Return on investment

2011 0.35

2010 0.15

2009 0.21

2008 0.33

2007 0.18

Mean 0.24

Source: survey instrument

As the diagram below shows, the trend is upward and an incentive to new FMIS concept entrants

to indulge and policy advisers to focus more on the pros as opposed to the cons of the initiative.

The mean ROI is at 0.24 with a low standard deviation of 0.0904, low enough to make our mean

statistics reliable.

4.3 Value, Quality and Use of Performance Measures

Table 4.2: Mean scores and analysis of Information Use on FMIS

Source: survey instrument

The observations captured as below on the essence of performance measures indicate that there

is high prevalence, mean of 2.59 of 5 being the lowest and highs of 3.87, for organizations in the

observations

Least

extent

Low

extent Neutral

Moderat

e extent

Great

extent Total

Standard

deviation

Sample

mean

Information is highly

valued 12 15 19 43 46 135 0.70672 3.71

Willing to bet job on

quality of the information 21 22 12 32 48 135 0.67865 3.47

Measures are reported for

external users 36 13 32 33 21 135 0.34093 2.93

Measures used for regular

management reviews 31 21 29 31 23 135 0.31105 2.96

Measures are used for

resource allocation 12 11 20 32 60 135 0.87725 3.87

Measures are used to drive

organization change 14 11 22 41 47 135 0.71229 3.71

Measures are linked to

compensation 31 35 41 14 14 135 0.24914 2.59

26

SMEs category who prefer FMIS utilization for various purposes including and not limited to

reporting to external users, willingness to bet job on quality, resource allocation, driving

organizational change and compensation.

The mean for those who believe that there is high value in sharing the information on

performance measures is at 3.72 indicating moderate extent and hence above average score for

the variable that information is highly valued. For resource allocation, the mean score for the

weights is 3.87, the highest of the rankings by respondents on the instrument variables.

Compensation to mean that information is used and linked to compensation procedures is at 2.59,

indicating a low familiarity rate with the respondents, and hence calling for a policy

recommendation, hereinafter.

Table 4.3: SMEs need to ensure that FMIS used for measuring performance

Observation Frequency weight scores

Mean for weighted

scores

Strong Disagree 6 1 6 0.044444444

Disagree 9 2 18 0.133333333

Neutral 21 3 63 0.466666667

Agree 45 4 180 1.333333333

Strongly Agree 54 5 270 2.000000000

n=n 135 3.977777778

Source: survey instrument analysis

The raw data indicates the respective frequencies of vote on each variable but to make the tallies

relevant, we add the weights that make them relevant meaningful on interpretation. This is

described in the mean and standard deviations here showing that the variance from the mean is

below one (1) hence small and showing that our mean dispersion is minimal and within a small

range. This is relevant statistic in that we are able to tell to what extent to rely on the mean

values. With the above table for our scores and weights, we obtain our sample standard deviation

as get the 3.98 and a good rationale for positive conclusion on SMEs. The use of FMIS in

27

assessing financial performance of SMEs is highly recognized with 99 to 135 acknowledging

that it is a substantial ground and tool for the financial assessment. With a mean of 3.978, the

score is above average to show that majority of SMEs’ respondents approve the FMIS as a viable

form of assessing their general financial conduct and performance

4.3.1 Importance to SMEs in Managing FMIS

Table 4.4 Probe into Essence for SMEs to Manage FMIS

Vote Frequency Proportion

Yes 112 0.82963

No 23 0.17037

Total 135 1.00


Majority of respondents gave affirmation that SMEs are needed to manage FMIS that they are

exposed to. A record 82.96% believes and perceives it necessary for the SMEs to manage their

FMIS undertakings as individual responsibilities regardless of the collective nature of the

applications across the board or sparse locations and diverse sectoral differences, if any, thereof,

in the SMEs category.

4.4 FMIS Applications Support

Table 4.5 FMIS Applications Support

observations To a very

large

extent

To a large

extent

Fairly

large

extent

Fairly

Low

extent

Not at

all

Mean of weighed scores

Std.

Deviation

View suppliers 51 42 21 12 9 3.844444 0.77692

Funds enquiry 49 52 22 11 1 4.014815 0.822999

28

Purchase orders 52 49 23 5 6 4.007407 0.847629

Purchase order

summary

55 44 23 6 7 3.992593 0.856275

Quotations 54 51 19 6 5 4.059259 0.890994

Requisitions 59 41 12 12 11 3.925926 0.905205

Receiving

transactions

58 51 13 11 2 4.125926 0.949155

Supplier merge 52 52 21 7 3 4.059259 0.868415

Employees

/suppliers creations

44 45 25 12 9 3.762963 0.697528

Bank account

attachment

55 49 18 9 4 4.051852 0.887771

Invoice batches 56 51 24 3 1 4.17037 0.921048

Invoices 35 44 48 6 2 3.77037 0.648611

Expense report 56 45 12 12 10 3.925926 0.881077

Invoice validation 44 48 21 12 10 3.77037 0.722866

Payment enquiry 58 41 26 10 10 4.162963 0.863934

View accounting

lines

49 44 26 10 6 3.888889 0.762603

Approve purchase

orders

61 25 23 13 13 3.8 0.876434

Quote analysis 51 51 10 11 12 3.874074 0.856374

Reports 62 41 21 6 5 4.103704 0.949701

Budget upload 55 52 23 5 3 4.185185 0.906568

Budget transfer 50 49 15 12 9 3.881481 0.817192

Journals enquiry 52 44 21 13 5 3.925926 0.803507

Payments 53 49 19 11 5 4.037037 0.852608

Payments enquiry 71 31 21 5 7 4.140741 1.067173


29

FMIS heavily supports various applications in accounts and financial report reporting, besides

general procurement and purchasing, with a mean of 4.02 and low standard deviation of lows of

0.7 and highs of 1.02 hence raising the reliability of our inferences from the collected and

analyzed data.

4.5 Design Issues and FMIS Influence on SMEs Financial Performance

As to what extent the following should be considered during the FMIS Design influence

performance of SMEs, the various assessment tools below indicate a multitude of responses but

with general trend pointing towards FMIS requirements analysis, outside consultancy, sufficient

time, direction of service advisories with vendors, and multiplicity of systems at mean scores of

3.9, 3.6, 3.8, 3.5, and 3.9 respectively, a sufficient score for policy recommendations on the

observations associated.

Table 4.6 Design Issues and FMIS Influence

Statement of Observation

Least

extent

Low

extent Neutral

Moderate

extent

Great

extent Total Mean Std dev

Requirements analysis is

important but tends to be an

often neglected step 9 6 21 51 48 135 3.91 0.02055

Outside consultancy at this

stage should be independent 14 21 18 29 53 135 3.64 0.08074

Sufficient time should be taken

during the planning of the

project to list all user

requirements for information to

be derived from the FMIS 12 11 21 37 54 135 3.81 0.10954

Managers should tell vendors

what is required and not the

other way round 15 14 31 45 30 135 3.45 0.26502

One system should not service

the information requirements of

all users 9 14 22 33 57 135 3.85 0.39942


30

4.6 Efficient utilization of FMIS

Table 4.7 Factors affecting the effective utilization of FMIS

Observations

To a very

large

extent

To a

large

extent

Fairly large

extent

Fairly

Low

extent

Not at

all Total

Training and employee

development 49 30 31 12 13 135

Weak institution policy 41 31 33 22 8 135

Technical know how 31 32 29 22 21 135

Management 58 29 27 13 8 135


In this respect, FMIS efficiency in the SMEs is of essence as this determines their financial

efficiency. There are factor hereinafter that affect efficiency of the financial operations of the

SMEs and they are as below:

From the observations, there is high preference to the idea that training, staff development, weak

policy and management, at mean scores of 3.9, 3.8, and 4.1 to 5 in weights respectively would be

major determinants of the extent of FMIS utilization quotient in the organizations in the

organizations’ SMEs cadre.

The means are displayed below showing negligible dispersion from our calculated mean scores

hence high reliability of our primary inputs and weighed data output thereafter.

Table 4.8 Mean Scores and Standard Deviations on Effective utilization of FMIS

Observations

mean To a

very large

extent

mean To a

large extent

mean

Fairly

large

extent

mean

Fairly

Low

extent

mean

Not at

all mf Std dev.

Training and

employee

development 1.81 0.89 0.69 0.18 0.1 3.889 0.42516

31

Weak institution

policy 1.52 0.92 0.73 0.33 0.06 3.785 0.03873

Technical know

how 1.15 0.95 0.64 0.33 0.16 3.460 0.05686

Management 2.15 0.86 0.6 0.19 0.06 4.074 0.08382


4.3.1 FMIS and Government

Sound FMIS systems not only help governments gain effective control over SMEs finances, but

also enhance transparency and accountability, reducing political discretion and serving as a

deterrent to corruption and frauds. The majority of respondents with a mean of 3.526 to 5 voted in

affirmative that the government stood to gain in attempts, if any, to take control of SMEs finances with

respect to ethical, integrity and transparency interests.

Table 4.9 FMIS and government control respondent approval

No extent low extent

moderate

extent great extent

very

great

extent

Mean

weighted

score Total

11 14 41 36 34 3.5259259

135


By indicating their level of agreement on the variable assessment statements on implementation

of FMIS such as need for FMIS, purpose of FMIS to the government, reforms communication,

the respondent put them heavily on a mean as high as 3.58, 3.79, and 3.65 respectively with low

standard deviations of highest 0.79, the data is statistically reliable therefore.

Table 4.10: Essence of FMIS Tallies

1-strongly disagree, 2-

disagree, 3-not sure, 4-agree,

Frequencies

Calculated

inferences

32

5-strongly agree

observation 1 2 3 4 5

Total

Mean Std

deviation

Organizational culture need

to be understood when

developing and

implementing initiatives

such as the FMIS

11 13 31 35 45

135

3.58518

5 0.61954

FMIS will help strengthen

the democratic, transparent

and accountable

governmental institutions by

improving SMEs financial

management

10 9 19 48 49

135

3.79259

3 0.79925

Reform by FMIS should be

addressed through

communication, education

and training, using various

channels

9 16 24 41 45

135

3.65185

2 0.64812


4.7 Econometric Model Specification

From our estimable model;

Y (Financial Performance) =α+β1Design Issues+ β2Efficient Utilization+ β3Application of

FMIS+ ε Error term,

We have made use of OLS estimation technique to carry out the analysis of the determinants of

FMIS performance in the country. The table below shows the empirical results obtained after

regression of the collected data.

Table 10: Empirical results

Coefficients Standard error t- statistic p-value

Intercept -0.002 0.001 -1.67 0.0000

Design Issues 0.0293 0.001 327.415 0.0000

33

factor

Efficient

Utilization Rate

-0.0116311 0.001 -8.398 0.005

Application of

FMIS

0.9812 0.003 21.953 0.004

Error Term Mean error

term

assumed=0

Mean error term

assumed=0

Mean error

term

assumed=0

Mean error

term

assumed=0

Source: Regressed data.

Multiple R 0.9311

R-squared 0.99

Adjusted R-squared 1.0000

Standard error of the model 0.0001

Total sum of squares 2.85081

Explained sum of squares 0.00132

Residual sum of squares 3.4874

F calculated 0.0011

F critical 0.0000

t- critical -1.6780

The OLS equation model obtained is of the following form:-

Y = - 0.002 + 0.0293 X1 – 0.0116311X2 + 0.9812X3 + ε

4.7.2 Interpretation of results

4.7.2.1 Multiple R

This represents the correlation co-efficient of the model which shows the strength of the

relationship among the variables used. It shows that, the variables used in this model are strongly

related at 93.11%. The dependent variable is strongly related to the explanatory variables.

34

4.7.2.2 R-squared

The coefficient of determination (R2) is a measure of strength of relationship/association between

dependent variable and explanatory variables. It measures the proportion of variation in Y that

can be attributed to explanatory variables. The model explains 99% of the variations in level of

FMIS performance inflows as shown by the value of R-squared. The rest 1% is explained by

other variables not in the model for example taxation policy, credit, and related government

policy.

4.7.2.3 Adjusted R-squared

Controlling for the degrees of freedom, the explanatory variables explain 100% of the total

variation in level of FMIS performance inflows.

4.5.2.4 F value (calculated)

F = ESS/(k-1)/ RSS/(n-k) or F = R2/(k-1)/ 1-R

2/(n-k).

ANOVAb

Sum of Squares df Mean Square F Sig.

2.851 3 .950 1.040E6 .001a

.000 1 .000

2.851 4

a. Predictors: (Constant), Desig_issues, Utiliz_efficency, Appli_efficiency

We do joint hypothesis testing to test for joint significance of model parameters at 5% level of

significance.

H0 (null hypothesis): β1 = β2 = β 3 = β 4 = 0 or H0 = R2

Ha (Alternative hypothesis): β1 ≠ β2 ≠ β 3 ≠ β 4 ≠ 0 or H0 ≠ R2

F cal = 0.0001 F critical (from f-distribution table) = 3.06

35

We compare F cal and F critical and find that F cal is less than F critical so we reject the null

hypothesis hence the variables used in the model are jointly significant determinants of FMIS-

oriented financial performance inflows. The partial slope coefficients are jointly significant and

different from zero.

4.6 Intercept (α)

If all the explanatory variables (Applications, Utilization and Design issues) are zero, there is a

decrease in FMIS performance inflows by 0.002 to a unit of the economy’s investment unit

hence performance. It also shows the level of di-investment when the above variables are equal

to zero. This further shows that the level of FMIS performance inflows is an increasing function

of the variables used in this mode.

4.8 Design Issues (β1)

A unit increase in real Design issues factor increases FMIS performance of our SMEs level by

0.0293 units of the investment unit of the economy. This also means a unit increase in real

financial performance by SMEs will lead to an increase of 0.0293 in SMEs’ FMIS performance

inflows. Design issues are quite inelastic with respect to FMIS performance inflows. This

conforms to theory, which postulates that a growing economy will attract more FMIS than a

depressed economy. The value of t-statistic (327.0) is much greater than t critical (-1.67) hence

from hypothesis testing we conclude that the variable is statistically significant.

4.9 Efficient Utilization (β2)

A unit depreciation of the efficient utilization leads to a decrease in level of FMIS performance

inflows by 0.01163 of the unit. This conforms to theory that a depreciation of the utilization

36

levels implies a decline in ploughed back dividends and profits when converted into FMIS

investments, this acts as a disincentive to FMIS-oriented financial performance inflows into the

country’s SMEs’ sector. Similarly, a fall inefficient utilization quotient makes imported inputs

more expensive thus reducing amounts of FMIS in the country. The variable is statistically

significant since t-statistic (8.398) is greater than t critical (-1.67). We reject the null hypothesis

that Efficient Utilization of FMIS is not a significant determinant of FMIS performance inflows.

4.10 Application of FMIS (β 3)

A unit increase in efficient application of FMIS to Financial Performance ratio leads to a

decrease in FMIS-oriented financial performance inflows by 0.9812. This conforms to theory

that efficiency and FMIS application on Financials of SMEs are likely to positively affect the

performance inflow of FMIS. In this model the variable is statistically significant because t-

statistic 21.953 is more than t critical (-1.67). We therefore reject the null hypothesis that β 3 = 0.

Openness of an economy has been found to encourage FMIS development. From this study it has

been shown that a unit increase in the openness index increases FMIS performance inflow by

large. Since openness of the economy shows the ease of transfers across borders as affected by

government controls, we would expect FMIS capital to flow into the SMEs’ economy easily.

37

CHAPTER FIVE

CONCLUSIONS, DISCUSSIONS AND POLICY RECOMMENDATIONS

5.1 Introduction

The study made use of primary data and estimation technique to explain determinants of

financial performance in regard to FMIS and SMEs in Kenya. There are three main conclusions

emerging from this review. First, the introduction of an FMIS into the SMEs market, in a

developing country should be regarded as a component of a wider reform process, and hence

Design Issues given priority. These projects, therefore, should not be viewed as isolated

interventions, but should be accompanied by, and related to, other reforms in Efficient

Applications of the financial management processes by FMIS besides thorough assessment and

implementation of any positive recommendation towards Efficient Utilization. It is also

necessary that the FMIS objectives and outputs are both relevant and consistent with wider fiscal

policy reforms in order to suit SMEs sectoral level.

5.2 Summary of Findings

Country authorities should be prepared for a long implementation path of FMIS by SMEs, and

one that involves significant challenges. It will be a complex learning process for all concerned.

A number of difficulties are likely to be encountered en route, but the existence of the previously

indicated three conditions, along with resolute commitment of key stakeholders, should

overcome these difficulties and ensure success of this worthwhile reform. The adverse situation

of decreasing trends in FMIS investments may also due to low relative risk adjusted returns

compared to other sectors like large scale firms and state corporations. The implication of this

situation is that policy efforts should be directed to improving the corporate enabling

environment in ways, which increase the returns on investment and reduce risks. Further the

situation may be as a result of market failures which include inadequate information,

misperception of risks, large externalities owing to interdependence of investment decisions and

market segmentation

38

The results from the study revealed that design issues had a positive and significant effect on

SME financial performance in relation to FMIS. This was at a computed 0.029 as the coefficient.

From the findings, almost the sampled staffs from SMEs agreed that utilization influences

performance, as indicated by 92% response. The study revealed that motivation had a positive

and significant effect on SME financial performance. The findings were supported by these

statistics: β= .0293, t=-1.6780, and our p=<0001.

From the findings majority of the respondents (70%) and a mean weight of 4.02 and low

standard deviation of lows of 0.7 and highs of 1.02 hence raising the reliability of our inferences,

indicated that employee creativity to a very great extent affect performance. These findings we

supported by the following statistics: β=0.9812, t=21.953, p=<0.002.

5.3 Conclusion

From the findings the study concluded that in SMEs; FMIS-oriented financial innovation and

change, application efficiency, financial system utilization and Employee and Customer system

response satisfaction are applied as the financial performance measures. Second, the decision to

introduce an FMIS needs to be accompanied by strong commitment, sufficient manpower and

financial resources, widespread internal support, and an agenda for effective change

management. Unless these are in place, the chances of success are limited. Third, the

implementation strategy both in terms of functionality and number of entities needs to be phased.

The benefits expected from the system develop only over time, and it will be necessary to

maintain interim arrangements to facilitate various aspects of financial control and reporting.

On motivation the study concluded that improved financial systems by SMEs frequently have

positive effects on utilization efficiency. It is also essential so that employees are made aware of

the relationships between cost and profit, while also enhancing employee performance with the

new FMIS in every SME partaking on the systems.

On utilization efficiency, the study concluded that, utilization enhances positive attitudes of

FMIS operatives as noted from the system financial output questions and is important for the

39

transformation and innovative talents into actual SMEs’ financial innovative outputs. If the

organizations managers use intrinsic output generating antics on FMIS handlers, employee

financial systems’ creativity is enhanced and makes a major change in a product or procedure,

they are accepted as an exemplification of creative financial performance. This facilitates

financial creativity enhances technological innovation. These findings we supported by the

following statistics, -1.6780, p=<0.0002. The alternative hypotheses that there is a significant

relationship between financial performance in SMEs and Efficient Utilization, Design Issues and

Application Efficiency were accepted.

On financial output by FMIS and job satisfaction, the study concluded that when employees

benefit from properly installed and well trained-for FMIS, the output they get from it enhances

their satisfaction hence raised financial performance. The most common efficiency scheme is

geared towards employee job satisfaction from system satisfaction owing to getting desired

output always and the head for effective and commendable financial performance, efficient

utilization also enhances FMIS financial delivery in exemplary performance, and application of

FMIS also enhances the SMEs financial performance. These finds were supported by these

statistics, β1, β2, and β3=.029, -0.0116, 0.9812, and t= -1.6780 and p=<0.0002. The alterative

hypothesis that financial performance is significantly affected by utilization, application and

design issues in SMEs was accepted. On system output delivery, the study concluded from SMEs

and other users and employees interviewed that FMIS function better when system-trained

employees work together as team towards financial integration and performance thereof.

5.3 Recommendations

From the foregoing summaries and conclusions, the study recommended that the SMEs should

put in place proper financial systems to enhance financial performance and generation of usable

output by employees. On motivation the study recommends that management for SMEs

responsible for FMIS integration should improve reward system because it has positive effects

on staff morale and enhances performance. Creativity should be encouraged because it

transforms innovative talents to into actual innovative inputs. Job satisfaction is enhanced

through proper reward system hence performance. Teamwork should always be encouraged

40

because organizations function better as a team, thus the need for Cooperative bank to have

proper reward systems to encourage team work.

5.4 Areas of further research

The policy is not simply to increase FMIS investments but also to ensure that they have a

positive developmental impact in regard to financial performance by SMEs. This can be

achieved if FMIS is seen by national governments as a compliment to domestic investment and

efforts are made to integrate these FMIS capital flows into a national development strategy,

which seeks to promote increasing corporate investment, savings and exports and the

development of SME-productive capacities and corporate competitiveness.

Thus basic policy issue that still needs to be addressed is whether the FMIS-oriented financial

performance inflows as a source of financial efficiency is both necessary for SME-supportive

economic growth, reduction of inapplicability of FMIS widely, and sustained efficient

utilization. More studies can be done to find out the impact of FMIS on economic growth and

development in the country.

In addition, social and political factors such as political instability, the degree of administrative

efficiency, corruption are important determinants that can influence FMIS decisions in a country

like Kenya. Studies then can be carried out to find out the impact of social-political factors on

FMIS inflows in the country.

41

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ANNEX: RESEARCH INSTRUMENT

QUESTIONNAIRE

Instructions:

(Please read the instructions given and answer the questions as appropriately as possible). It is

advisable that you answer or fill in each section as provided. Make an attempt to answer every

question fully and correctly.

THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT INFORMATION

SYSTEM AND FIRMS’ PERFORMANCE OF SMALL MEDIUM ENTERPRISES

PERFOMANCE

1. To what extent do you agree that SMEs uses Return on investment to measure financial

performance?

Strong Disagree [ ]

Disagree [ ]

Neutral [ ]

Agree [ ]

Strongly Agree [ ]

2. Indicate the company financial performance using Return on investment for the last 5

years?

Return on

investment

Year 2011

Year 2010

Year 2009

Year 2008

Year 2007

48

3. To what extent do you agree with the following statement on value, quality and use of

performance measures? Rank by placing a tick in the appropriate place. 1= Least

extent,2= Low extent, 3= Neutral, 4= Moderate extent and 5= Great extent

1 2 3 4 5

Information is highly valued

Willing to bet job on quality of the information

Measures are reported for external users

Measures are used for regular management

reviews

Measures are used for resource allocation

Measures are used to drive organisation change

Measures are linked to compensation

4. To what extent do you agree with the statement, SMEs need to ensure that Financial

Management Information System used for measuring performance?

Strong Disagree [ ]

Disagree [ ]

Neutral [ ]

Agree [ ]

Strongly Agree [ ]

5. Is it important for SMEs to manage Financial Management Information System that it’s

exposed to?

Yes [ ]

No [ ]

49

FMIS Design Issues

6. To what extent should the following be considered during the FMS Design influence

performance of SMEs? Use a scale where 1-No extent, 2-low extent, 3-moderate extent,

4-great extent, 5-very great extent

Statement 1 2 3 4 5

Requirements analysis is important but tends to be an often

neglected step

Outside consultancy at this stage should be independent

Sufficient time should be taken during the planning of the

project to list all user requirements for information to be

derived from the FMIS

Managers should tell vendors what is required and not the

other way round

One system should not service the information

requirements of all users

Efficient utilization of FMIS

7. To what extent has the following factors affected the effective utilization of FMIS in your

firm.

To a

very

large

extent

To a

large

extent

Fairly

large

extent

Fairly

Low

extent

Not

at

all

Training and employee

development

Weak institution policy

Technical know how

Management

8. To what extent do you agree with the fact that, “Sound FMIS systems not only help

governments gain effective control over SMEs finances, but also enhance transparency

and accountability, reducing political discretion and serving as a deterrent to corruption

and fraud”

1-No extent [ ] 2-low extent, [ ] 3-moderate extent, [ ]

4-great extent, [ ] 5-very great extent [ ]

50

9. Indicate your level of agreement on the following statement on implementation of FMIS.

Use the scale where 1-strongly disagree, 2-disagree, 3-not sure, 4-agree, 5-strongly agree

observation 1 2 3 4 5

Organizational culture need to be understood when

developing and implementing initiatives such as the FMIS

FMIS will help strengthen the democratic, transparent and

accountable governmental institutions by improving SMEs

financial management

Reform by FMIS should be addressed through

communication, education and training, using various

channels

14. In your opinion do you think that FMIS was carefully designed to meet SME’s needs, or

a) Yes b) No

15. Indicate your extent of concurrence with the statement, “Many FMIS projects have also

failed because the basic system functionality had not been clearly specified from the

onset of the intervention”

a) Strongly disagree [ ] b) Disagree [ ] c) Not sure [ ] d) Agree

e) Strongly agree [ ]

Applications of FMIS

16. To what extent has the FMIS supported the following functions influence performance of

your firm: tick as appropriate use the scale

To a

very

large

extent

To a

large

extent

Fairly

large

extent

Fairly

Low

extent

Not

at

all

View suppliers

Funds enquiry

Purchase orders

Purchase order summary

Quotations

Requisitions

Receiving transactions

Supplier merge

Employees /suppliers

51

creations

Bank account attachment

Invoice batches

Invoices

Expense report

Invoice validation

Payment enquiry

View accounting lines

Approve purchase orders

Quote analysis

Reports

Budget upload

Budget transfer

Journals enquiry

Payments

Payments enquiry

Others please specify

SECTION C: CHALLENGES IN IMPLEMENTATION OF FMIS

Challenges in implementation of FMIS

17. To what extent do you agree with the following statements about technical

complexity during implementation of FMIS? Use 1-strongly disagree, 2-disagree, 3-not

sure, 4-agree, 5-strongly agree

Statement 1 2 3 4 5

FMIS should designed to meet agency’s needs and

functional requirements

It is of crucial importance to spend enough time on the

design phase of the FMIS project.

FMIS core systems need to be adapted to the local context

and environment

Power shortage and interruptions should be addressed to

ensure smooth running of the project

18. What would you recommend to the SME’s top leadership in order to deal with technical

complexity when implementing FMIS?

………………………………………………………………………………………………

52

Ways of alleviating the challenges faced in utilization of FMIS

19. To what extent do the following ways help in alleviating the challenges faced in

utilization of FMIS in the SMEs? Use a scale where 1-To a very low extent, 2-To a low

extent, 3- To a moderate extent, 4- To a great and 5-To a very great extent

1 2 3 4 5

through implementing a change management strategy

Overcoming resistance through clear communication,

education, training, and “quick wins” that demonstrate the

benefits of change

Change geared to address political and bureaucratic

challenges

Through monitoring and support of the implementation of

FMIS to ensure sustainability

By reviewing the legislative and regulatory policies, in

coordination with a thorough financial business review

(legislative and regulatory modernization reform)

Any other (specify) ……………………………………..

Challenges in implementation of FMIS

20. To what extent do you agree with the following statements about technical

complexity during implementation of FMIS? Use 1-strongly disagree, 2-disagree, 3-not

sure, 4-agree, 5-strongly agree

Statement 1 2 3 4 5

FMIS should be designed to meet agency’s needs and

functional requirements

It is of crucial importance to spend enough time on the

design phase of the FMIS project.

FMIS core systems need to be adapted to the local context

and environment

Power shortage and interruptions should be addressed to

ensure smooth running of the project

53

21. What would you recommend to the SME’s top leadership in order to deal with technical

complexity when implementing FMIS?

………………………………………………………………………………………………

Ways of alleviating the challenges faced in utilization of FMIS

22. To what extent do the following ways help in alleviating the challenges faced in

utilization of FMIS in the SMEs? Use a scale where 1-To a very low extent, 2-To a low

extent, 3- To a moderate extent, 4- To a great and 5-To a very great extent

1 2 3 4 5

through implementing a change management strategy

Overcoming resistance through clear communication,

education, training, and “quick wins” that demonstrate the

benefits of change

Change geared to address political and bureaucratic

challenges

Through monitoring and support of the implementation of

FMIS to ensure sustainability

By reviewing the legislative and regulatory policies, in

coordination with a thorough financial business review

(legislative and regulatory modernization reform)

Any other (specify) ……………………………………..

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