The impact of working capital management on cash holdings of small and medium enterprises in Nairobi

Abstract

In order to manage working capital efficiently, there is the need that financial managers be able to plan and control current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations. The objective of this study was to determine the impact of working capital management on the cash holdings of small and medium enterprises in Nairobi. The data was collected from secondary sources which were the financial statements for the year 2010 and 2011 from a sample of 40 Small and medium manufacturing enterprises in Nairobi. The data analysis was carried out using both descriptive and quantitative analysis and was analyzed using both Microsoft Excel, SPSS Version 19 and the multivariate regression model The findings of the study were that all the components of working capital management were negatively related to cash holdings except day’s payables outstanding which were positively related to cash holdings. The study recommends that small and medium manufacturing should tactically manage the accounts receivable, inventory and accounts payable with the technique of highly efficient working capital management in order to shorten the cash conversion cycle, generate more internal cash to firm and increase the level of cash holdings. The Decision-makers from small and medium enterprises can obviously benefit from the findings of this work in that an alternative approach to explaining cash holdings in SMEs is presented. These findings could also concern practitioners from banks, other financial institutions or consulting firms since the results are of crucial importance to the credit rating, survival and performance of their potential clients. Due to the same reasons, policy makers who are interested in the short-term financial conditions of SMEs could gain from the results that have been described and discussed in this study. Moreover, academics can benefit from this study in that existing research is brought into the context of working capital management.