The Effect of Working Capital Management Policies on Financial Performance of Commercial and Services Sector Firms Listed at the Nairobi Securities Exchange

Abstract

The purpose of this study was to examine the effect of working capital management policy on profitability of commercial and service sector companies listed at the Nairobi securities Exchange Kenya. In light of this objective the study adopted quantitative approach. Financial statements of nine (9) commercial and service sector companies were used for a five-year period (2012-2016) with 45 observations. Data was analyzed using descriptive and linear regression analysis method. Components of working capital management policy that were analyzed include total current assets, total current liabilities, and total assets in relation to return on asset (ROA). In addition, the study used company’s size and leverage, as control variables. The key findings from the study were; Firstly, there exists an insignificant positive relationship between conservative investment policy and profitability indicating that an increase in the amount of current assets leads to an increase in profitability; secondly, there exists an insignificant positive relationship between aggressive financing policy and profitability translating to the fact that if commercial and service sector firms use more current liability it leads to increase in profitability. Thirdly, there exists a negative relationship between financial leverage and profitability of the firm. This indicates that as the total liabilities decreases it leads to an increase in profitability of the firm, and managers can increase profitability of their firms by reducing the amount of non-current liabilities that they hold. Finally, positive insignificant relationship exists between companies’ size and return on assets. The study recommends that firms in the commercial and service sector should adopt an aggressive investment policy and a conservative financing policy so as to make a company profitable and neutralise the risk associated with an aggressive investment by a conservative financing policy.