EFFECT OF INTERNAL CONTROL PRACTICES ON LIQUIDITY LEVEL OF SMALL AND MEDIUM ENTERPRISES

Abstract

This study aimed to examine the effect of internal practices on the liquidity of Small and Medium Enterprises (SMEs) in Babati, Tanzania. Specifically, it explored three key objectives: the effect of control environment practices, risk management practices, and internal audit practices on SME liquidity. The research employed a descriptive correlational design with a quantitative approach, collecting data from 196 SME owners using structured questionnaires. Data analysis was conducted using descriptive statistics and regression analysis. The findings indicate that control environment practices such as ethical values, leadership commitment, role clarity, communication procedures, and employee competence significantly influence liquidity. However, role clarity and communication gaps were noted as areas of concern. Regarding risk management practices, risk identification, assessment, mitigation, monitoring, and evaluation were positively linked to liquidity. Despite this, inconsistencies in monitoring and evaluation were evident, impacting some SMEs' ability to manage liquidity effectively. Internal audit practices, including audit planning, financial audits, cash flow monitoring, inventory reviews, and procurement audits, were also found to affect liquidity significantly. The regression analysis for each category revealed a significant positive relationship between internal practices and liquidity, emphasising the critical role these practices play in financial stability and cash flow management. The study concludes that while SMEs in Babati demonstrate a foundational understanding of internal practices, inconsistencies in implementation limit their overall effectiveness. To enhance liquidity, SMEs should invest in strengthening internal control systems, focusing on formalizing procedures, training employees, and establishing consistent monitoring mechanisms. These measures will ensure robust internal practices, fostering financial stability and sustainability for SMEs in Babati.