Working capital management and profitability of dairy companies in Kenya

Abstract

The study examined the effect of working capital management on profitability of dairy companies in Kenya, with firm age as a moderating variable. The focus was on three key components of working capital—accounts receivable management, cash management, and payables management—and how their efficiency influences financial performance in the dairy sector. The study adopted a descriptive and correlational research design, targeting finance, operations, and sales managers from selected dairy companies across Kenya. Data were collected using a structured Likert-scale questionnaire and analyzed through descriptive statistics, correlation analysis, and hierarchical regression techniques using SPSS. Descriptive results revealed that most dairy firms practiced sound working capital management, including regular credit assessments, adherence to cash forecasting, and strategic negotiation of supplier credit terms. Correlation analysis showed positive and significant relationships between all working capital variables and profitability, indicating that efficient management of short-term assets and liabilities enhances firm performance. Regression analysis without the moderator established that the three working capital components collectively explained 68 percent of the variation in profitability (R² = 0.680, p < 0.01), signifying a strong overall model. However, individually, accounts receivable management had a positive but statistically insignificant effect (R² = 0.068, p > 0.05), suggesting that while credit control improves liquidity, it does not independently drive profitability. Cash management had a positive and statistically significant relationship (R² = 0.430, p < 0.05), implying that prudent management of cash inflows and outflows directly enhances profitability through better resource utilization. Payables management showed a positive but insignificant influence (R² = 0.070, p > 0.05), indicating limited impact unless complemented by other financial practices. When firm age was introduced as a moderating variable, the model’s explanatory power increased to 78.6 percent (R² = 0.786), demonstrating that mature firms benefit more from efficient working capital management due to experience, stability, and stronger financial structures. Although the moderating effects of firm age on individual variables were not statistically significant, the overall improvement in model fit suggests that organizational maturity enhances financial discipline and performance. The study concludes that effective working capital management, particularly cash management, is crucial for improving profitability, and firm age strengthens this relationship by reinforcing managerial and operational efficiency within Kenya’s dairy industry.