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

Abstract

Every firm to run its operations successfully; working capital items inventory, cash, account receivables, prepayments, accruals and accounts payable play a significant role thus managing them is important because they directly affect profitability and liquidity of a firm. In most cases the firm’s main objective is to increase profits and maximize the shareholder’s wealth though if it does so at the expense of liquidity serious problems might arise that is reduction in sales volume and consequently affect profitability, therefore the firm needs to have a striking balance between liquidity and profitability. This research dissertation analyzes the effect of working capital management on the financial performance of manufacturing firms listed at the Nairobi Securities Exchange in Kenya. The specific objectives comprise of finding out the effect of inventory level management, accounts receivables management, and cash management on the financial performance of manufacturing firms listed at the NSE. The theories adopted in the study include cash conversion cycle theory, trade off theory, resource based theory and operating cycle theory. A census of all the 7 listed manufacturing firms at the Nairobi Securities Exchange was used in determining the variables to be studied. Secondary data extracted from financial statements of the listed manufacturing firms for a period of 10 years from 2008 to 2017 was used to collect and analyze data in the study. Panel data was used for the data analysis. Data was analyzed using STATA technique. To test the relationship between working capital management and financial performance hausman test, Multicollinearity, autocorrelation, normality and residual plots were used. The research found out that there is no significant relationship between inventory level management and financial performance on the other hand trade receivable management and financial performance of the firm have a positive and significant relationship, there also exists a significant relationship between cash management and financial performance of the listed manufacturing firms at the Nairobi Securities Exchange. All stakeholders involved in the operations of the firm are expected to ensure that working capital items are properly managed so that they do not affect the overall performance and profitability of firms and also to ensure that continuity of the firms is secured and guaranteed.