Is internal control system an effective tool in financial management? a practical experience from small and medium enterprises in Eldoret municipality, Kenya

Small and Medium Enterprises (SMEs) constitute the engine of economic growth in developing countries. They are the source of employment to millions of people, technological innovations and also help in reducing poverty in developing countries. In Kenya, SMEs created 440,400 jobs in the year 2010 and also accounted for 18.4% of the gross domestic product (GDP) in 2011. The Kenya government has offered great support (both direct and indirect) to SMEs in line with the nation’s goal to become a middle level income economy by the year 2030. Despite their immense contribution to economic growth, SMEs in Kenya continually face challenges, including mainly lack of planning, improper financing and poor management. This has been the main cause of over 60% of the small enterprises failing each year in Kenya. Finance is the backbone for any businesses, whether small or large. As such, systems need be put in place to ensure that they are effectively managed. Guided by Systems and Competitive Advantage Theories, the study sought to establish the internal control systems (ICS) in place, how they are being evaluated, challenges faced by SMEs while implementing these systems and if they are effective tools in their financial management. The study targeted 21,320 SMEs in Eldoret Municipality but sampled 100 using the Taro Yamane’s 1967 table. Questionnaires were used to collect data which was then analyzed using descriptive statistics. From the findings, the ICS were being implemented by SMEs in Eldoret Municipality although no evaluation was being done. Furthermore, the ICS was found to be an effective tool in financial management, although many of the respondents said they lacked the knowledge about ICS while developing and implementing it. The study recommends that further research should be conducted on ways to evaluate the ICS and address the challenges related to ICS faced by SMEs.