Effect Of Working Capital Management On The Profitability Of Listed Manufacturing Firms In Kenya

Abstract

Working capital management involves the management of the most liquid resources of the firm which include cash and cash equivalents, inventories, debtors and receivables. The inability of many organizations to effectively manage their working capital in such a way that it leads to a sustainable performance has been identified as the bane of growth in organizations. The main objective of the study was to determine the effect of working capital management on profitability of listed manufacturing firms in Kenya. The specific objectives of the study were: To determine the effect of Cash Management (CM) on the profitability of listed manufacturing firms in Kenya; to find out the effect of Inventory Holding Period (IHP) on the profitability of listed manufacturing firms in Kenya; to examine the accounts payable period (APP) on the profitability of listed manufacturing firms in Kenya; and to establish the effect of Accounts Receivable Period (ARP) on the profitability of listed manufacturing firms in Kenya. The study focused on four key theories: cash management theory, agency theory, value chain theory and the asset profitability theory. Descriptive research design was used as it describes systematically the facts and characteristics of a given population or area of interest, both accurately and factually. The target population for this study was the 8 listed Manufacturing firms on the Nairobi Securities Exchange (NSE). The study relied solely on secondary data which were analyzed using STATA. The data were extracted from annual reports and financial statements of the listed manufacturing firms, which data spanned the last 10 years. Descriptive and inferential statistics, particularly panel data analysis models, were used to assess the effect of working capital management on the profitability of listed manufacturing firms. The results of the effect of working capital management parameters of interest revealed that both CM and ARP had a negative relationship with ROA and the relationship was not statistically significant. Although IHP had a negative relationship with ROA, the results revealed a statistically significant relationship with ROA. The relationship between APP and ROA was strong, positive and statistically significant. The study recommends that firms should develop better relationships with suppliers to enable them make favorable agreements concerning accounts payables and accounts receivable days. It also recommends that managers should ensure proper maintenance of inventory books to avoid holding stock for a long period. Firms should automate control techniques like Economic Order Quantity (EOQ) and Just-in-Time to minimize wastages and improve financial performance. It recommends further that firms should review their credit criteria.