An Assessment of the Impact of Financial Literacy on the Profitability of SMEs in Kiambu County, Kenya

Kenya's economy depends heavily on small and medium-sized businesses (SMEs), but many of them still have low profitability and high failure rates because of poor financial management. This study evaluated how financial literacy affected SMEs' profitability in Kenya's Kiambu County. The study was guided by the Profit Maximization Theory, which emphasizes that firms make rational decisions to maximize net profits. An explanatory research design and a mixed methodology were employed to examine how financial literacy influences the profitability of SMEs in Kiambu County, Kenya. Data were gathered from a sample of 73 SMEs chosen by stratified random sampling using an explanatory research design. The results showed that SMEs' budgeting, saving, investing, and diversification practices are greatly improved by financial literacy, which raises profitability. Regression analysis revealed that 65.9% (R² = 0.659) of the variation in profitability can be explained by financial literacy, while the correlation results demonstrated a strong and statistically significant positive relationship between financial literacy and profitability (r = 0.812, p < 0.01). These findings support the idea that financially literate business owners are better at-risk mitigation, resource management, and financial decision-making that enhances company performance. The study came to the conclusion that one of the main factors influencing SME profitability and long-term viability is financial literacy. The study recommends digital platforms and mentorship programs to promote good financial management practices that support profitability and growth, as well as improving financial literacy training and incorporating financial education into SME development programs. Keywords: Financial Literacy, Profitability, Small and Medium Enterprises (SMEs), Microfinance, Credit