The Relationship between Working Capital and Profitability of Cement Manufacturing Companies in Kenya

Abstract

The management of a firm‘s capital is necessary for all businesses, small, medium or large. When a business does not manage its capital well, it will have cash shortages and as a result experience problems paying its obligations when they fall due. Objective of the Study was to determine the relationship between working capital management and profitability of cement manufacturing companies in Kenya. The study was based on the following three theoretical foundations; The Pecking Order Theory and trade-off-theory. The study employed a descriptive survey as its research design. The study focused on a census of the 6 cement manufacturing companies in Kenya. Secondary data was collected from audited annual financial reports for individual firms found on the company website and at the Nairobi securities exchange website and library. The data collected was analyzed using descriptive. Descriptive statistics was used to quantitatively describe the important features of the variables using frequency, mean, and standard deviation. Multiple regression was also used to measure the quantitative data which was analyzed using the SPSS. The researcher carried out a T-test at 95% confidence level to establish the significance of the independent variable in explaining the changes in the dependent variable. The study used one-way ANOVA to test the level of significant of the independent variables on the dependent variable at 95% level of significance, the oneway ANOVA was used to test whether there exists any significant difference between the study variable. The study found out existence of negative correlation between Return on Assets and the firms inventory and cash conversion cycle. However, the study findings suggest that there is a positive correlation between profitability and (average collection period and average payment Period). Due to a positive constant of regression established the study concludes that that there is a part of financial performance in the firms that is independent from the variables used to capture working capital. Irrespective of the changes in working capital, the firms still realized some profit. The conclusion is that there are other factors apart from working capital that affect profit. To realize enhanced firm profitability, the study recommends that manufacturing firms should have an extended payment period through negotiation with the firm stakeholders such as the suppliers, creditors and providers of funds in order to utilize the available funds for other firm operations that generate more profits, before the lapse of the payment period. Cash conversion cycle is critical in the management of working capital. It is therefore recommended that manufacturing firms should have a shorter cash conversion cycle in order to realize cash promptly to run the firm profitably. The study recommends a longer credit period for the firms to realize higher profitability