The Effect of Working Capital Management Policies on Financial Performance of Non Financial Companies Listed on the Nairobi Securities Exchange
Abstract
Efficient management of working capital is very important for business survival. It
involves management of short-term resources and their financing requirements. This
study analyzed the effect of working capital management policies on financial
performance of non-financial companies listed at the Nairobi Securities Exchange. A
diagnostic research design was used targeting thirty non-financial companies from
seven sectors of the Nairobi Securities Exchange. Data was analyzed using descriptive
statistics to summarize the data. Correlation analysis was used to examine the
relationship between variables. Multiple regression analysis was implemented to
explain the effect of independent variables on ROA. All these analyses were done
using Statistical Package for Social Scientists (SPSS). Results revealed that both
working capital investment policy (WCIP) and working capital financing policy
(WCFP) had a positive and statistically significant effect on financial performance. A
change in WCIP by one unit increased financial performance by 65.7%, while the
same change in WCFP increased financial performance by 26.2%. Firm size affected
financial performance negatively as a change in firm size by one unit reduced
financial performance by 28.6%. Sales growth did not affect financial performance
since its coefficient was statistically insignificant. However, a declining trend in sales
growth over time was established. Long-term debt had a positive and statistically
significant relationship with financial performance. A change by one unit of long-term
debt to assets ratio increased financial performance by 35.5%. The study also
established a strong positive correlation between WCIP and WCFP and that most
companies applied the moderate level of WCIP (0.408 mean) and conservative WCFP
(0.291 mean). This study concluded that working capital management policies
influenced financial performance positively and recommended that financial
regulatory agencies work closely with companies to ensure adequate reporting of
working capital management components financial reports. Risk management be
incorporated in definition and application of working capital management policies;
and that Universities, financial regulators, and companies collaborate closely to
enhance availability of research data for students and improve financial management
practices.
Publisher
University of Nairobi