MODERATING EFFECT OF DIGITAL FINANCE SERVICE ON THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF SELECTED SMEs IN ELDORET CITY, KENYA.

Abstract

Financial performance refers to the measure of how well a company is using its assets to generate revenue, profit, firm credibility, and value for shareholders and its ability to pay off debts. Challenges affecting SMEs financial performance include poor financial management, lack of technological skills and enough resources. As a result, it was necessary to investigate the moderating effect of digital finance service on the relationship between financial management practices and financial performance of selected SMES in Eldoret city, Kenya. The specific objectives of the study were to examine the effect of cash flow management, budget planning, investment decision and digital financial services on financial performance of selected SMEs. In addition, the study sought to examine the moderating effect of digital financial services on the relationship between; cash flow management, budget planning, investment decision

and financial performance of selected SMEs. The research was guided by the priority- based budgeting theory, modern portfolio theory and resource-based theory. The study

utilized explanatory research design. Target population was 1236. Simple random

sampling techniques was utilized to collect data from 302 selected SMEs using self- administered questionnaires. Cronbach alpha was applied to test reliability while factor

analysis was applied to test construct validity. Hierarchical regression analysis was employed to examine direct and moderating effects, with firm age and firm size controlled as covariates. The findings indicate that firm age has a statistically significant positive effect on financial performance (β=0.282, p=0.022), whereas firm size does not (β=0.070, p=0.149) affirming the need to control these variables. The study revealed that cash flow management (β=0.237, p=0.000), budget planning (β=0.364, p=0.000), and investment decision (β=0.366, p=0.000) positively influence financial performance, collectively accounting for 71% of the variance (R2=0.742, ∆R2=0.713, p≤0.05). The study further examined the direct effect of digital finance services on financial performance, with results showing a positive and significant influence (β=0.137, p=0.007), contributing an additional 1% variance (∆R2=0.007) to the model. However, digital finance services did not moderate the relationship between cash flow management and financial performance (β=0.002, p=0.852), indicating no significant interaction (∆R2=0.000). Conversely, digital finance services significantly moderated the relationship between budget planning and financial performance (β=-0.049, p=0.000, ∆R2=0.016), and between investment decision and financial performance (β=0.035, p=0.042, ∆R2=0.003), resulting in a combined explained variance of 80% in financial performance (R2=0.798). The study provides valuable insights for SME managers, policymakers, and financial institutions, emphasizing the importance of targeted digital finance tools to optimize financial management practices and support SME growth. SMEs owners or managers should assess and adopt digital finance solutions that align with their financial management practices.