Influence of Internal Controls on Financial Performance of Medium Enterprises in Food Manufacturing Sector in Nairobi County

Abstract

Businesses across the world are faced with the threat of failure with a majority of them not surviving their third anniversary. The majority of these challenges are fraud-related and could be avoided if a strong internal control system is put in place. The study’s main aim was to establish how the financial performance of MEs in the food manufacturing sector in Nairobi County was influenced by internal control. The objectives of the study were to establish the influence of cash reconciliations, segregation of duties, inventory audit, cost management, and risk assessment on the financial performance of SMEs in the food manufacturing sector in Nairobi County. The study was descriptive, the study’s target population included 95 MEs in the areas of the food processing sector. The sample for the population was 77 MEs obtained through the Yamane formula at a margin error of 5%. Data for the study was collected using a questionnaire through the in-person drop and pick method. The study obtained secondary data from the financial statements of the companies on revenues as well as net profit earned. Collected data was then analyzed through descriptive analysis and inferential analysis using SPSS. Presentation of the results was done on tables and narratives. Descriptive analysis revealed that the majority of food manufacturing companies in Nairobi carry out routine cash reconciliations, they keep proper cash reconciliation records and have real-time cash registers and bank alert messages on transactions as internal cash controls. The study also found that manufacturing companies in Nairobi County have allocated more than one person to authorize the payment. The study found that many companies in the manufacturing industry in Nairobi County carry out inventory audit regularly. The study also revealed that food manufacturing companies in Nairobi County have cost management internal control practices that involve budgeting and comparison of budgets with actual spending, besides the company outsources materials and services from the cheapest suppliers that have enabled them to save profound amounts. The study finally found that risk assessment as an internal control is carried out among food manufacturing companies in Nairobi County through the identification of risks, conducting risk evaluation, and analysis of risks to establish benefits. Regression analysis revealed a significant influence of cash reconciliation on financial performance; the study also revealed a significant influence of the segregation of duties on financial performance. Further, inventory audits were found to have a significant influence on financial performance. Besides, the study revealed that cost management significantly influenced the financial performance of food manufacturing companies in Nairobi County. Finally, the study revealed that risk assessment significantly influenced the financial performance of food manufacturing companies in Nairobi County. The study concluded that cash reconciliations, segregation of duties inventory audits, cost management, risk assessment as internal control practices had a positive and significant influence on the financial performance of food manufacturing companies in Nairobi County. The study recommended for the manufacturing MEs in Nairobi County to keep petty cash records for reconciliation, reconcile payment receipts and invoice records and conduct ad-hock cash checks. The study also recommended better communication of job responsibilities to the employees. The study further recommended an increase in the number of stock-taking times in a year. The study also recommended the introduction of cost budgetary reviews. The study finally recommended the allocation of an optimal amount of financial resources for resources assessment.