Effect of Working Capital Management on Efficiency of Commercial and Services Firms Listed at the Nairobi Securities Exchange

Abstract

The management of working capital is a key managerial concern, managers realize there is no substitute for WCM regardless of the firm size, asset base and profitability, the only fact is that only firms with effective WCM decisions will survive and keep their operations running. Poor liquidity management leads to a situation where the firm is unable to achieve its maturing obligations. Consequently, this could lead to lost business opportunity which definitely would impact on the efficiency of the firm. The aim of this study was to ascertain the effect of working capital management on efficiency of commercial and service firms quoted at Kenya NSE. The population for the study was all the 12 commercial and service companies quoted at the NSE. This study independent variable was working capital management as characterized by ACP, ICP and APP. The control variables for this study were capital structure as calculated by considering the debt ratio, liquidity as represented by current ratio while the organisation size was characterized by natural logarithm of total assets. Efficiency was the dependent variable and was measured by the ratio of total expenditure to total revenue. Secondary data was collected over a 5-year time frame (January 2013 to December 2017) annually. Descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The results of the study produced R-square value of 0.259 which means that about 25.9 percent of the variation in efficiency of commercial and service firms quoted at the NSE can be explained by the six selected independent variables while 74.1 percent in the variation of efficiency of commercial and service firms listed at the NSE was associated with other factors not covered in this research. It came to the researcher’s attention that the independent parameters had a strong correlation with efficiency of commercial and service firms listed at the NSE (R=0.509). The model was fit to explain the association between the selected variables after conducting the F test. The findings also showed that inventory conversion period produced negative and statistically significant values for this study. Average collection period and capital structure produced negative but statistically insignificant values while average payables period, firm size and liquidity produced positive but statistically insignificant values for this study. Top management of commercial and service firms should monitor inventory conversion period when making their capital management decisions as it has a statistical significance on efficiency of commercial and service firms listed at the NSE.