The relationship between working capital management and the profitability of small and medium enterprises in Nakuru Municipality

Abstract

Small and Medium Enterprises play a great role in the development of any economy and mostly in the developing Countries. Efficient working capital management is an integral part of the overall firm’s strategy to improving the firm’s value. The objective of this research was to determine the relationship between working capital management and profitability of small and medium enterprises in Nakuru municipality. The study selected sample of 61 small and medium enterprises for a period of five years (2006 -2010) with a total of 305 observations. The data for the study was collected from secondary sources (financial statements) and was analyzed using regression analysis and Pearson’s correlation. The results of the analysis indicate that there is a negative relationship between cash conversion cycle (as the main measure of working capital management) and profitability. A positive relationship between current ratio and profitability was noted as well as that of debt ratio and profitability. For the sales growth, evidence is positively related to profitability. This is consistent with often argument that sales growth is feature for future firm’s profitability. The results of the research show that in the small and medium enterprises studied there is a significant relation between working capital management and profitability. Owners and managers of these firms can therefore improve their profitability by reducing the cash conversion cycle.