Effect of capital expenditure on working capital management among manufacturing firms listed at the Nairobi securities exchange

Abstract

Corporate finance focuses on investment decisions, dividend decisions, financing and WCM decisions. Working capital is usually considered circulating capital that is normally used to identify the assets that change with relative speed from a form to another for example from cash, to raw materials, which are converted to work-in-progress, completed products, sales of complete goods and finally end with generation of cash from receivables. Optimal level of working capital improves firm value, hence trading-off liquidity and profitability. WCM practices would be determined internally by firm-specific variables and externally by macroeconomic factors. These determinants may not have clearly and sufficiently been recognized and are likely to be the main cause of deficiencies and inefficiencies in management of working capital in public and private sectors, both locally and internationally leading to the recent high rate of business failure. The objective of this research study was assessing how capital expenditure impacts WCM of NSE listed manufacturing firms. The population for the research was all the 9 NSE listed manufacturing firms. Predictor variable in this research was capital expenditure operationalized as the ratio of net fixed assets plus depreciation to total assets. The control variables included profitability given by return on assets, leverage as given by total debt to total assets and firm size given by natural log of total assets on an annual basis. WCM was the dependent variable given by ratio of current assets to current liabilities. Secondary data was collected over five years (January 2015 - December 2019) annually. Descriptive cross-sectional design was used for the research to assess the relation between the study variables. Analysis was made using SPSS version 24. Findings produced an R-square value of 0.433, meaning that 43.3 percent of changes in WCM among manufacturing firms was the result of the four independent variables while 56.7 percent changes in WCM of NSE listed manufacturing firms was the result of other factors which are not highlighted. This research showed independent variables had a moderate association with firm’s values (R=0.658). ANOVA show the F statistic was substantial at 5% level with p=0.000. This implies that the overall regression was appropriate to explain the influence of the independent variables on WCM. Findings also showed that capital expenditure has a substantial negative influence on WCM while profitability and firm size is positive and statistically significant to WCM of NSE listed manufacturing firms. Financial leverage produced statistically insignificant influence for this study. The recommendation is that manufacturing firms listed at the NSE should focus on having a tradeoff between the benefits of capital expenditure and the risks of liquidity while at the same time enhancing profitability positions and firm size as these three have a significant influence on their WCM.