Effect Of Risk Mitigation Costs On Financial Performance Of Manufacturing Firms Listed In The Nairobi Securities Exchange In Kenya

Abstract

The desire of manufacturing firms like any other business is to maximize profits, achieve wealth maximization and growth. In the midst of this endeavor, businesses are exposed to various risks (uncertainties resulting in adverse variations of profitability or in losses) which need to be mitigated, to mitigate these risks are a cost to the firm. Kenya’s manufacturing sector is going through a major transition period largely due to the structural reform process, which the Kenya Government has been implementing since the mid-eighties with a view to improving the economic and social environment of the country. Manufacturing firms fall under the umbrella of Kenya Association of Manufacturers. By incorporating risk management into manufacturing firms’ operations, manufacturing firms are better equipped to exploit their resources, thereby enabling their organizations to transform an expenditure activity into an activity that can yield a positive return. However, risk management is a cost to the firm. Several studies relating to risk mitigation have previously been conducted in Kenya. However, there lacks evidence so far of a study conducted in Kenya to investigate the impact of risk mitigation costs on the financial performance of manufacturing firms listed in the Nairobi Securities exchange in Kenya. Therefore, this study sought to fill this gap by answering the following question; what is the effect of risk mitigation costs on the financial performance of manufacturing firms listed at the Nairobi securities exchange in Kenya. The study adopted a correlation approach and panel data design. The population of the study was the 10 manufacturing firms listed at the Nairobi securities exchange in Kenya. The objective of the study was to establish the effect of risk mitigation costs (Insurance cost, security cost and audit cost) on financial performance of manufacturing firms listed at the NSE. The study relied on secondary data which was analyzed using STATA software and the results presented in tables. The results consistently support the potential association between the three independent variables and the dependent variable (Financial performance) for manufacturing firms listed at the NSE. At 5% level of significance, Insurance cost and audit cost were found to be statistically significant while cost of security was not significant. Moreover, the overall r squared 71.39% showed that the independent variables can explain 71.39% of variability in the dependent variable which means that 71.39% variation on return on assets was explained by the risk mitigation costs when combined. Based on the findings and conclusions of the study we therefore recommend that the manufacturing firms should consider risk mitigation cost in their budget planning. Of much importance is the cost of insurance and audit cost the firms must seek the most optimal insurance services to cover the risk of the firms as this improves the level of confidence of the stakeholders about the future uncertainties of the firm. Firms should also consider highly the auditors they have chosen to audit their books. Audit exercises whether internal or external help to identify the risk exposure of institutions. The audit reports also communicate the authenticity of the financial reports prepared and presented by the directors of the firm. These reports also identify areas of improvement to the management. The stakeholders of firms consider the credibility of auditors while looking at a firm. The more credible the audit firm is, the higher the reliability of the reports of institutions. These enhances the level of business agreement and negotiations with external parties which in turn improves on cost management in other areas. Finally, manufacturing firms need to improve the security of the firms we not necessarily to improve their performance but for security and safety purposes.