Effect of Working Capital Financing Policy on Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

Working capital management is a significant constituent in business finance as it directly affects the company's profitability and liquidity. However, majority of financial managers attach great premium to other financial commitments, notably capital budgeting and financing decisions. In addition, most CEOs pay less attention to WC financing in carrying out the company's day-to-day business and delegate most decisions on working capital to low-ranking staff whose decisions are rarely implemented by the senior management. Thus, this study explored the 1effect of working capital 1financing policy on financial performance of firms listed at the Nairobi Securities Exchange. The research was grounded on working capital cycle theory, the transaction costs theory and the trade of theory of working capital. The study employed a descriptive study design and the population was made up of 45 non-financial corporations quoted at NSE as at 31st December 2018. The research entirely used secondary data, which was retrieved by use of data collection sheet for a time-period of five years from 2014 to 2018. The collected data was sorted and keyed into the SPSS then analyzed using descriptive statistical tools like the mean, standard deviation, maximum and minimum values and the regression technique to establish the link between the dependent and explanatory variables. The results revealed a negative and significant relationship between aggressive financing policy (AFP) and ROA while the relationship between leverage and ROA was also negative and statically significant respectively. The results further established that the relationship between company size and ROA was positive but statistically insignificant but the association between liquidity (CR) and ROA was 1negative and 1significant respectively. The study concluded that the aggressive financing policy (AFP), leverage and liquidity significantly affects the financial1performance1of firms listed a1NSE.1The study thus recommended that the management of listed firm should minimize the use of short term financing sources since they reduce the firms’ profitability levels and 1that the 1management of firms listed at NSE should hold optimal liquidity since too much liquidity adversely affects the firms’ profit levels.