The Role of Risk Management on Financial Performance of Small and Medium Enterprises in Kenya

It is necessary for every small business to manage its risks in order to minimize the loss exposure. SMEs in their operations encounter many risks such as political, natural disaster, credit and operation risks. Poor performance of SMEs is becoming a concern as many of them die immaturely. Therefore this study aimed to investigate the role of risk management on financial performance of small and medium enterprises in Kenya. The study was guided by the following objectives, to examine the role of entreprise risk management on the financial performance of SMEs, to analyse the role of strategic risk management on the financial performance of SMEs, to evaluate the effect of financail risk management on financial performance of SMEs and to establish the role of operational risk management on the financial performance of SMEs. The study is based on the protective motivation theory, risk compensation/risk homeostasis theory and situated rational theory. Empirical review shows that do not embrace risk management seriously due to lack of knowledge and skills. SMEs should focus on implementing comprehensive risk management systems in their businesses. The study adopted a desk research design. The target population was 100 SMEs that were selected for best practices as at 31st December, 2015. The study used secondary data mainly from financial statements of the Companies and other company documents like business plans and strategic plans. It was concluded that risk management practices affect the financial performance of SMEs and was recommended that SME s should adopt appropriate risk management approaches to manage risks in their organisations.