EFFECT OF BUDGET PLANNING ON FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NAKURU TOWN CENTRAL BUSINESS DISTRICT

Several Small and Medium Enterprises (SMEs) fail to make budgets; others do it but fail to constantly update their budgets and evaluate their progress against the actual budgets, or are disgruntled by the futility of the budgets prepared, or the budgeting process. Subsequently, most SMEs pay more attention to financial performance measures but disregard the more strategic non-financial indicators. This study sought to establish the effect of budget planning on financial performance of SMEs in Nakuru town C.B.D. It was guided by the Agency Theory, Balanced Scorecard Theory, Contingency Theory and Stakeholders’ Theory and it adopted the descriptive research design. The unit of observation was SMEs within Nakuru town C.B.D. while the unit of analysis was business owners or officer in-charge of finance in the SME. Each SME produced one respondent who was either the owner or officer in-charge of finance. According to Nakuru East Sub-County Business Register (2018), there are 26,158 SMEs in Nakuru East Sub-County; 7,456 are located within Nakuru town C.B.D. and are classified into eight major categories. Nassiuma’s (2000) formula was used to get a sample size of 108. It also adopted stratified random sampling to get the sample size of each SME category. The formula was appropriate to ensure equal probability of selecting each unit from the population being studied. The study further used purposive sampling to select the biggest SMEs in each category. This was informed by the fact that some of the small SMEs have no structures and rarely prepare budgets. Questionnaires were used to collect the primary data desirable for the study. Quantitative data was analyzed through the aid of Statistical Package for Social Sciences (SPSS) version 22. Descriptive and inferential statistics were used in data analysis. Descriptive statistics involved the use of percentages, frequencies, measures of central tendencies (mean) and measures of dispersion (standard deviation). The inferential statistics employed were Pearson’s correlation coefficient and multiple regressions. The findings revealed that there is a moderate positive and statistically significant correlation between budget planning and financial performance. (r = 0.443; p < 0.05). The study recommended that budget review should be done as frequently as possible to increase the level of understanding. Also, evaluating major projects should be given priority for it increases reliability and accountability and makes the employees more knowledgeable on budget planning practice