Working Capital Management Practices And Profitability Of Manufacturing Companies Listed At Nairobi Securities Exchange, Kenya

Abstract

“Working capital management” is reasonable because majority of organizations, especially, manufacturing, have their current assets accounting to more than a half of the overall assets where the proportion could even be higher for a distribution company. A business organization’s liquidity management is very important for every business regardless of its size. However, cash shortages will result when a firm does not essentially manage its liquidity accordingly experience issues paying its commitments when they fall due. Main goal of the current research was the examination of the relationship between a firm’s profitability using return on assets as an indicator and the working capital of listed manufacturing firms in Kenya which was tested through use of elements of such as “inventory turnover period, cash conversion cycle, average payment period and average collection period.” The foundation of the study was based on risk theory of profit as well as rent theory of profit. “The study employed descriptive research design” where the research’s population of study was 8 listed manufacturing companies which were listed on “Nairobi Securities Exchange” for the period ranging from 2004 – 2018. Nevertheless, this research only focused on 7 firms which were found to have traded for the whole study period under investigation. The research gathered “secondary data from the consolidated annual reports and financial statements of the companies.” Descriptive statistics, regressions and correlations were major methods used for analysis. The correlation estimations have found out that there existed noteworthy association between average payable period, firm size and debt ratio towards how the manufacturing firms had performed financially. On contrary, “inventory turnover period, average collection period and cash conversion cycle were found to have an insignificant association towards profitability of listed manufacturing.” Regression findings indicated that only firm size and account payable period were significantly predicting financial performance of listed manufacturing, unlike “cash conversion cycle, average collection period, inventory turnover period and debt ratio.” The study recommends that the manufacturing firms listed on Nairobi securities exchange should put more emphasis on managing their total assets invested and that it employs an optimal level of total assets that has good systems to properly manage in-order to improve performance.