Relationship Between Working Capital Management And Financial Distress: A Case Of Manufacturing Industry In Rwanda

Abstract

Governments and private investors have long been concerned about financial hardship in businesses. A precipitous fall in a firm’s financial performance may ultimately end in bankruptcy, causing significant financial loss to investors as well as creditors. It is on this basis that the study examined the relationship between working capital management and financial distress among the private companies in the flour milling and animal feed manufacturing industry in Rwanda. The specific objectives include to establish the link between average collection period and financial distress among the private companies in the flour milling and animal feed manufacturing companies in Rwanda, to assess the influence of average payment period on financial distress among the private companies in the flour milling and animal feed manufacturing companies in Rwanda, as well as to examine the relationship between number of days inventory and financial distress among the private companies in the flour milling and animal feed manufacturing companies in Rwanda. Lastly, to establish the influence of cash conversion cycle on financial distress among the private companies in the flour milling and animal feed manufacturing companies in Rwanda. The study adopted a descriptive-correlational research design in examining the eight private companies in the flour milling and animal feed manufacturing sectors in Rwanda. Financial distress was computed via A Z score. The panel data were analyzed using a random effect model. The results indicate that working capital management, comprising the average collection duration, the average payment period, and the number of day’s inventory, has a substantial impact on financial hardship among private businesses in Rwanda's flour milling and animal feed manufacturing sectors. Based on the study finding, there is need of the government to subsidize the operating cost of firms’ especially private companies via reducing cost of taxation to avoid undergoing into more debts. Further, there is need for further training to organizational managers with regards to averting operational, managerial and financial difficulties associated with poor inventory management.