Effect Of Working Capital Management Practices On Financial Performance Of Manufacturing Firms Listed In The Nairobi Securities Exchange

Abstract

The main objective of thisstudy was to establish the effect of working capital management practices on financial performanceof manufacturing and allied firms quoted in the Nairobi Securities Exchange (NSE). The working capital aspectsthat the study focused on were receivables, cash and inventory which are an essential part and the overall influence its performance. The context of the research study was to figure out the influence of working capital management practices on the financial performance of manufacturing companies listed in NSE.Population of this study comprised of the 10 firms listed in the NSE.There was no sampling due to the number of the target population as the whole population was studied through census. The Manufacturing and Allied firms which were listed in the NSE had a representation of the major sectors within the manufacturing firms which were:Food & Beverage, Chemical & Allied,Energy, Electrical and Electronics, Building Construction and Mining and therefore helped eliminate bias in the study and acted as a good representation of the target population. This studyutilized secondary data as reported in the financial statements of the manufacturing firms. The study was conducted in 2016.Data collected was analyzed using Stata software using the fixed effects panel data model. The results indicated that debtor’s collection period had a significant negative effect on financial performance of the manufacturing firms quoted in the NSE(β = -0.1588; p < 0.05). Results also established that cash conversion cycle did not have a significant effect on financial performance of the manufacturing firms listed quoted in the NSE(β = 0.0546; p > 0.05). Moreover, study results established that inventory turnover period did not have a significant effect on financial performance of the manufacturing firms quoted in the NSE(β = -0.0030; p > 0.05). The study makes the following recommendations. First, there should be strict efficiency in management of accounts receivables collection in the manufacturing firms. However, though reducing the accounts receivable collection period would result to an increase in profitability, management should do this with caution as haphazard reduction in debtors’ days would have a negative effect on sales. Secondly, the study recommends that firms should take careful analysis of the cash conversion cycle as it is the outcome of inventory turnover, payables days and debtor days. Lastly, the study recommends that management should apply advanced techniques of management of inventory to ensure that resources allocated for inventory are commensurate with the value and cost of the inventory.