Effect of Liquidity Management on Efficiency of Manufacturing Firms Listed at Nairobi Securities Exchange

Abstract

Manufacturing firms are very concerned of their liquidity levels since the management in such firms need to make decisions in regard to the level of liquidity that they should maintain to take advantage of interest earned from investments while at the same time maintaining enough cash to meet their obligations as and when they fall due. This study therefore undertook a study to determine the effect of liquidity management on efficiency of manufacturing firms listed at the NSE. Liquidity was the key independent variable but other factors that were related to liquidity but also were considered to have an influence on efficiency of manufacturing firms were accounts receivable turnover ratio, accounts payable turnover ratio, inventory period, and age of the firm. The efficiency of manufacturing firms was determined by inventory turnover ratio that measured the number of times a company was able to manufacture and sell all the inventory manufactured. Liquidity on the other hand was determined by current ratio which is the ratio of current assets over current liabilities. The study was undertaken for all listed manufacturing firms in Kenya for a period of 10 years (2012-2021). Regression analysis was adopted by the study to determine the relationship between the independent variables and the dependent variables. The R squared indicated that the regression model could predict 57.4% of the changes in the dependent variable which indicates a strong model. However, the adjusted R square was less than R square indicated that some independent variables in the study did not have significant contributions to the model. The F test had a p-value of less than 0.05 indicating that the null hypothesis was rejected and therefore there was a significant effect of liquidity management on efficiency of manufacturing firms listed at the NSE. The regression co-efficient indicated that both accounts xii receivable turnover ratio and age of the firm did not have significant effect on efficiency and therefore they did not have significant contribution to the model. However, current ratio, accounts payable ratio, and inventory period ratio had significant effect and contribution to the model. Liquidity ratio that was determined by the current ratio has a significant positive impact on efficiency. The co-efficient of current ratio is 4.92 that indicates that if all factors are held constant and current ratio (liquidity) is increased by one unit, then efficiency of manufacturing firms (measured by inventory turnover ratio) would increase by 4.92. Accounts payable turnover ratio has a significant positive effect on the model and therefore if all factors are held constant and accounts payable turnover is increased by one unit, then efficiency would increase by 3.963. This indicates that manufacturing firms should increase the period of time it takes them to pay their suppliers as it improves liquidity and therefore improving efficiency for the firm. Average inventory period has a negative significant effect on the model, indicating that if all the other factors are held constant and average inventory period is increased by one unit, then efficiency of the firm would decrease by 4.065. This means that manufacturing firms should ensure that they decrease the number of days they hold inventory, and therefore they ensure that they sell their products as fast as possible, without them taking too long, as it would increase efficiency of the firm.