10th U6+ Consortium of African Universities International Conference

Small and Medium Enterprises (SMEs) play a pivotal role in the economic development of Kenya owing to their contribution to employment creation, income generation and economic growth. However, many SMEs still have a high failure rate, which is linked to poor financial risk management practices, which is often attributed to low financial literacy of the SME owners. The research was an investigation of the influence of financial literacy on financial risk management of Small and Medium Enterprises (SMEs) in Nakuru County, Kenya. Specifically, this study aimed to explore how financial awareness, financial skills, and financial attitudes impact financial risk management. The study used a cross sectional survey design with a predictive correlational research approach. The sample was proportionately stratified randomly drawn from the target population of 336,661 registered SMEs to give a sample of 100 SME owners/managers as determined by Nassiuma's sample size determination formula. The primary data was collected using structured questionnaires and then analyzed based on descriptive statistics, Pearson correlation analysis and multiple linear regression. The results indicated that there was a significant relationship between financial literacy and financial risk management for the SMEs. Financial skills had the highest correlation (β = 0.485), while financial awareness (β = 0.325), financial attitudes (β = 0.211) had lower correlations. The three dimensions together accounted for 70.9% of the variation in financial risk management (R² = 0.709), highlighting a significant impact of financial literacy on better financial decision-making and risk management. The findings also show that financially literate SMEs are more likely to have taken effective budgeting measures, keep proper financial records, manage cash flows, and have contingency plans to boost the resilience of their businesses. The study finds that financial risk management is important to the success of the SMEs in terms of sustainability of enterprises and the strengthening of financial literacy is essential. It suggests that financial literacy initiatives should be scaled up within the financial institutions, enterprise development institutions as well as government agencies and specifically highlight financial management skills. The results add to the existing knowledge base about financial resilience of SMEs and evidence to support policy-making to enhance SME sustainability and competitiveness in Kenya and other emerging economies.