Effect of Working Capital on Financial Distress Among Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

Working Capital Management (WCM) encompasses all elements of an organization's planning and management of current assets and current liabilities in ways that maximize the organization's ability to finance obligations as they mature and generate the highest possible returns on recurrent assets. Managers are becoming aware that poor liquidity assessment results in a greater default risk. The purpose of this research was to determine the effect of WCM judgments on the financial distress of listed manufacturing enterprises in Kenya. To accomplish the research aims, data were obtained from financial report releases over a five-year period (2016-2020) using a correlation approach. The connection between independent and dependent variables was determined using multiple regression analysis. The results indicate a positive connection between the degrees of financial hardship experienced by publicly traded manufacturing businesses throughout the research period and the return projected by the regression model, where the coefficient of multiple correlation is 0.485. The regression model accounts for roughly 23.5 percent of the variance in the financial distress score of publicly traded manufacturing businesses across the research period. The regression model is significant at the 0.05 level, as are the majority of the coefficients in the regression models. The report advises that managers of the listed industrial enterprises maintain the shortest feasible inventory turnover interval. Reducing the inventory turnover period will help the manufacturing firms incur reduced costs associated with inventory, such as the storage and warehousing expenses. With low inventory costs, there is no doubt that there will be a decrease in the overall cost of operations, which ultimately enhances a firm’s bottom line performance.There has also to be effective coordination in the policies guiding the settlement of sales and the collection of cash from the receivables in order to maximize the contribution of strategic working capital management to the performance of listed manufacturing firms. Manufacturing firms will benefit if they do not settle the obligations arising from credit purchases in a short time, and if they collect cash from credit sales within a very short time. The ultimate objective should be maximizing liquidity while ensuring that the firm’s profitability is not affected. Research in the future should examine how strategic decisions made by a corporation intersect with decisions made about working capital management in order to impact the performance of an organization.