Effects of Working Capital Management on Profitability of Sugar Manufacturing Firms in Kenya
Abstract
Working capital management plays a vital role in the success of businesses because of its
effect on profitability and liquidity. The purpose of this study is to examine the effect of
working capital management variables including the Average collection period, Inventory
turnover in days, Average payment period, Cash conversion cycle and Current ratio on
the Net operating profitability of Sugar Manufacturing firms in Kenya. Debt ratio, size of
the firm (measured in terms of natural logarithm of sales) and financial assets to total
assets ratio have been used as control variables. The study used secondary data collected
from 8 Sugar Manufacturing firms in Kenya covering the period from 2008-2013. Using
Pearson’s correlation and regression analysis, the study finds a significantly negative
relationship between variables of the working capital management and profitability of
Sugar Manufacturing firms in Kenya. It means that as the cash conversion cycle increases
it will lead to decreasing profitability of the firm, and managers can create a positive
value for the shareholders by reducing the cash conversion cycle to a possible minimum
level. The study suggests that managers can create value for their shareholders by
increasing their inventories to reasonable levels and also reducing accounts receivable
period. It is further recommended that, scope for further research may be extended to the
individual working capital components including cash, marketable securities and
receivables.
Publisher
University of Nairobi