The Impact of Accounts Receivables Management on the Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

Company profitability is a good measure of the internal operations that take place in an organization. This means studies to determine what can influence profitability are crucial to all firm stakeholders. This research sought to find out how the management of accounts receivable impacts on the profitability of firms as measured using the ROA. The variables used were the average collection period, the bad debts to accounts receivable ratio and the firm size. Also studied was the capital structure as measured by debt to equity ratio. The inclusion of the variables was advised by the idea that factors are intertwined and is hard for one factor to influence another independently. Time of study was for 12 years from 2009 to 2020. In total, 8 manufacturing companies were used which ensured there was adequate data for analysis. The method of analysis was multiple regression and the data used was all quantitative. SPSS software was employed. Regression results indicated that the variables studied explained 12.3% of the changes in the ROA and the model had a p-value of 0.017. The outcome also indicated that the constant of the equation which connects the independent variables and the dependent one is -0.760 with a p-value of 0.093. ACP, debt to equity ratio and firm size were the variables with a positive change on ROA with coefficients of 0.011, 0.003 and 0.084 respectively. BDRR and debt to equity ratio had p-values of 0.499 and 0.797. While firm size was significant at 0.025. ACP, BDRR, and debt to equity ratio had coefficients of 0.011, -0.19, and 0.003 respectively. This implied that ROA was affected positively by the variables except BDRR. The effect of both ACP and BDRR were found to be insignificant with p-values of 0.868 and 0.499 respectively. The positive effect of firm size was found to be significant at a 5% significance level, with a p-value of 0.025. With these findings, a conclusion was reached that management of receivables has an impact on the firm’s performance. It can also be concluded that there are many other factors that dictate the firm’s profitability. To improve their company performance and cause a good return to the investors, managers of manufacturing firms are encouraged to continue to take measures that would improve on their collection efficiency. In terms of bad debts, managers should take measures that would ensure that the bad debts do not occur, or they are maintained at the lowest possible level. The firms have also been found to have been impacted positively by adoption of more debt in their capital structure. Firms need then to determine optimal debt levels which do not compromise profitability of their businesses. On the relationship identified for firm size, managers in manufacturing firms should endeavour to improve the value of their assets as it has been found to affect ROA positively. The management can also concentrate on ACP, BDRR and debt to equity ratio and take measures to minimise them as this will increase ROA. There is also need for another extensive research as there are other unidentified factors that account for the 87.7% of the changes in ROA, unaccounted for by this research.