Determinants of liquidity risk in manufacturing companies listed at Nairobi Securities Exchange

Abstract

To maintain high financial performance, many manufacturing companies both local and international have adopted risk management strategy with the objective of reducing losses. Due to globalization, many companies have fallen victims of economic factors which make the risk management strategy impossible to implement. When a company does not identify areas that affect liquidity and manage it well, it can fall into cash shortages and as a result become unable to settle its obligations when they fall due. Because of these reasons firms have come up with strategies to improve their liquidity position. The factors that affect liquidity risk include the inflation rates, exchange rates, technology innovation and unhealthy competition involved within the manufacturing industry. The research project sought to find out the determinants of liquidity risk in the manufacturing companies. The study was anchored on the liquidity risk management theories which include the Baumol’s model of cash management, the Miller-Orr model and the cash conversion cycle model. The researcher used a descriptive research in the study. For this research, the study population was the entire collection of listed manufacturing firms at the Nairobi Securities Exchange from 2011 to 2015. The study used census-sampling method. The data for the study was secondary data from company’s financial statements of manufacturing companies listed at Nairobi Securities Exchange. For analysis, the statistical package for social scientists (SPSS) program was used to generate both descriptive and inferential statistics. The study found that liquidity risk has relative strong positive correlation with inventory turnover and a relatively weak positive correlation with inflation. In addition, the study found that liquidity risk has relative strong negative correlation with debtor turnover and company size. The study reached a conclusion that for the success of operations and survival, manufacturing companies listed in the NSE should not compromise efficient and effective inventory turnover. The study recommended that the management of the manufacturing firms listed in the NSE should strive to achieve and maintain an optimal debtor’s turnover, company size and rate of inflation.