Financial Literacy and Tax Compliance by Medium, Small and Micro Enterprises in Nairobi City County, Kenya

Abstract

Kenya Revenue Authority (KRA) has on numerous occasions failed to meet its revenue collection targets. Discord in tax compliance between Kenya taxpayers and collectors has been highly witnessed. Most SMEs engage in rampant tax evasion hence this study sought to establish effect of financial literacy on SMEs tax compliance level with a nucleus on the effect of budgeting, financial forecasting, credit management and investment diversification. Four critical theories of knowledge-based view, theory of planned behaviour, dynamic capabilities theory and contingencies theory fastened the research. A correlational research design was employed. 190 SMEs was sampled from the population of 846 manufacturing SMEs registered with KAM. Employing a semi-structured questionnaire, primary data was gathered. It was established that budgeting, financial forecasting, credit management and investment diversification had a positive notable effect on tax compliance. A budget was concluded to curtail SMEs expenditures and ensure tax compliance is on track for the future, accurate financial forecasts enable businesses to identify potential market risks and opportunities, there by facilitating better decision-making, effective credit management plays a crucial role in sustaining a healthy cash flow, minimizing financial risks, and building strong customer relationships. Additionally, investment diversification enables SMEs to attract new clients without requiring significant investments in additional personnel or resources. The study recommends that the SMEs should keep their budgeting flexible for better business results and veracity. The SMEs should project future sales by analysing market trends, historical performance, and other influencing factors. SMEs should properly define their credit management process and head for overseeing credit management and enforcing payment terms including handling late payments. SMEs could also benefit from establishing their own virtual mutual fund by investing in a selection of trusted companies that they regularly engage with in their daily operations.