The relationship between working capital management and profitability of insurance companies in Kenya

Abstract

This study sought to assess the relationship between working capital management and profitability of insurance companies in Kenya. The study covered a sample of eighteen (18) insurance companies. The data covered a period of five years starting from 2005 to 2009. The research used secondary sources of data obtained from the insurance companies’ websites, AKI, CMA and NSE. The data collected was analyzed using descriptive and quantitative techniques. Descriptive analysis was used to describe relevant aspects and provide detailed information about each variable. The variables relating to working capital management in the case of a manufacturing firm includes: cash conversion cycle, accounts receivables period, inventory period, and leverage. Return on assets on the other hand is taken as a measure of profitability. Previous studies have shown a negative relationship between the measures of working capital management and profitability. This study was to determine whether this relationship exists in the case of insurance industry which is in the service industry and do not hold inventory. In line with this observation, this study utilized the following variables: return on assets, accounts receivables period and leverage. The findings of this study show that there is a positive relationship between working capital management and profitability in the insurance industry in Kenya. It also shows that when accounts receivable period increases it will have a positive impact on profitability. It further indicates that if debt ratio is increased, then profitability would increase.