Accounting challenges facing Small and Medium Entreprises (SMEs) in Kenya

Many Small and Medium Entreprises (SMEs) in Kenya do not use the services of professional accountants. For this reason, they are not able to maintain the right records, financial statements, or books of accounts. This aspect has a great impact on their financial management, profitability and overall performance. These challenges hinder most of the SMEs from maintaining the right accounting records and information.

Difficulties in managing cash flow

Most SMEs have difficulties in managing their cash flow due to various operational issues such as irregular income, late payments by their clients, and poor financial planning. These issues have a great contribution to liquidity issues experienced by the SME’s.

Lack of accounting skills, knowledge, and financial literacy

The majority of the small business owners in Kenya lack formal training in accounting and bookkeeping and deem hiring professional accountants as expensive. This leads to errors in their financial reporting, problems with tax compliance, and compromised financial decisions.

Poor or inappropriate record-keeping systems

The majority of SMEs do not maintain proper accounting and financial records. This makes it difficult for them to appropriately manage expenses, track their cash flow, and prepare true and reliable financial statements.

Problems with tax compliance

The Kenyan tax laws regarding different taxes relating to the SMEs, such as PAYE, corporate tax, and VAT, are complex and might be a burden for many SMEs. For this reason, many end up struggling with remittance, filing, and other compliance requirements, leading to legal issues and penalties.

Compliance and regulatory issues

Many SMEs are not able to keep up with the constantly changing tax and accounting requirements and regulations, leading to unplanned non-compliance.

Poor or inappropriate budgeting and financial planning

Many SMEs operate without defining a clear financial plan or budget that outlines the expected income and expenditure of the business entity. For this reason, they end up facing financial issues such as underinvesting, overspending, or inability to scale effectively.

Difficulty or inability to access funding and credit

Banks and other lending financial institutions require accurate and well-prepared financial statements for them to offer funding or lend money to business entities. Poor accounting practices by SMEs disqualify them from getting funding from these institutions.

Possible remedies

For the above accounting challenges that SMEs face in their operations, here are some possible remedies that might enable them to improve their recording and overall accounting practices, enhancing their efficiency.

• Using simple accounting software to enhance record-keeping

• Emphasizing timely tax compliance to avoid legal issues and penalties

• Investing in the available financial and accounting training programs

• Engaging affordable accounting professionals and consultancy services.

While the above challenges affect the effective operation of SMEs in Kenya finding their solution is a possible endeavor. If SMEs adopt the provided remedies, they will be able to overcome these challenges and enhance their financial management and efficiency. The government in collaboration with financial institutions, can also support them by simplifying the credit and funding process, tax procedures and policies, and improving and increasing the training programs. Solving these challenges will enable the SMEs to thrive, drive economic growth, and create a more resilient and conducive business environment for SMEs and all other businesses.

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