Effects Of Working Capital Management Practices On Financial Performance Of Food And Beverage Manufacturing Companies In Kenya

Abstract

In the recent past, the Food and Beverages manufacturing industry has been facing challenges to thrive and this has resulted in some of the companies in the sector to close and others relocate to other countries. This follows the unfavorable working environment in the country including individual firms challenge. The challenges force the organizations to maintain either inadequate or excess working capital levels. These working capital levels maintained are not desirables in the current competitive market. Working capital management practices involves managing the firm's inventory, receivables and payables in order to achieve a balance between risk and returns and thereby contribute positively to the creation of a firm’s value. Excessive investment in inventory and receivables reduces the profits, whereas too little investment increases the risk of not being able to meet commitments as and when they become due. This study aimed at examining the effects of working capital management practices on financial performance of food and beverage manufacturing companies in Kenya. The dependent variable was financial performance and the independent variables were inventory management practices, cash management practices, accounts receivable practices and accounts payable practices. A descriptive research design was used in the study. The target population was 181 food and beverage manufacturers in Kenya registered under KAM. The sample for the study was all the 65 food and beverage manufacturing companies in Nairobi County which are spread across various sub-sectors of food and beverage. The study used primary data. Questionnaires were administered as the preferred primary data collection instrument. Data analysis was done using Stata software. Diagnostic tests on normality, randomness of residuals, multicollinearity and homoscedasticity of the residuals was carried out to ensure goodness of fit. Mean, Standard deviation, and Regression analysis were calculated. The analyzed information was presented in tables, charts and figures for interpretation to establish the relationship between financial performance and working capital management practices for food and beverage manufacturing firms. The study found that in relation to inventory management practices that the firm periodically forecasts inventory requirements. The study further established that with regard to cash management, the company updates prepayment schedule. In relation to accounts receivable, credit limit is set for each customer. Additionally, regarding accounts payable practices the firm has set up payment policy. At 5% level of significance and 95% level of confidence, inventory management practices and accounts receivable practices, were significant on financial performance of food and beverages companies in Kenya. Cash management practices and accounts payable practices are not statistically significant in explaining financial performance. The study concluded that the company periodically forecast inventory requirements, credit limit is set for each customer and that the firm has set up payment policy. The study recommends the use of various inventory management practices and accounts receivable practices in management working capital amongst the food and beverage companies in Kenya.