The Effect of Working Capital Management on Financial Performance of Manufacturing Companies Listed at the Nairobi Stock Exchange

Abstract

The objective of the study was to assess the effect of working capital on financial performance of manufacturing firms listed in the Nairobi Stock Exchange. Operating profit Margin profoundly depends on the ability of financial managers to effectively manage the components of working capital. Efficient working capital management includes planning and controlling of current liabilities and assets in a way it avoids excessive investments. The study was conducted using descriptive research design to determine the frequency of occurrence or extent to which the variables were related. The study’s population consisted of Allied and Manufacturing firms listed on the Nairobi Security Exchange as at 31st Dec 2016. The study employed a census on 10 manufacturing companies and therefore no sampling was carried out. This was because the population for the study was relatively small to carry out sampling. The study used secondary data from audited financial statements to obtain data relating to the research question. The data was analyzed through the use of regression analysis and correlation analysis. The correlation Coefficient and Coefficient of determination were used to test whether the expected values of quantitative variable with several pre-defined groups differed from each other. The study found that there is a significant effect of working capital management on financial performance of manufacturing firms listed in the Nairobi Stock Exchange.The study results indicated a positive relationship between CCC and profitability. It negates traditional view but consistent for manufacturing firms which require to hold higher inventory because of production, hence they need raw materials, work in progress and inventory buffer. Due to this inherent requirement to hold higher inventory, the study recommends manufacturing firms should be more vigilant in managing working capital to avoid overstocking which could negatively affect financial performance. Also, manufacturing firms may need to offer their products on credit to avoid expiry for perishable goods or to balance between holding cost vs sales. The study also recommends appropriate management of Accounts payables days to ensure cash payed out is not more than cash received.