The Relationship Between Working Capital Management and Profitability of Manufacturing Companies in Kenya Listed on the Nairobi Securities Exchange

Abstract

The working capital management plays an important role for success or failure of firm in business because of its effect on firm‟s profitability as well on liquidity. One requirement of a firm is to maintain equilibrium between liquidity and profitability while tending to its daily operations. However, many manufacturing companies are faced with an uphill task of determining the optimal working policy which in turn gives the firm a competitive edge in the market. Thus, the objective of the study was to establish the relationship between the working capital management and the profitability of manufacturing companies in Kenya. A sample of 9 firms listed in the Nairobi Securities Exchange (NSE) for the period of 3 years from 2009 – 2011 was used. Different explanatory variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Kenyan manufacturing firms, Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio were used while, Net operating profit was used as dependent variable. Descriptive statistic, Pearson‟s correlation and multiple regression analysis were used for analysis. The results showed that there was a strong negative relationship between profitability and the following two variables namely account payable and cash conversion cycle. On the other hand a positive relationship was observed between profitability and account receivables and inventory conversion period. This meant that the working capital management variables had significant effect on the profitability of manufacturing firms listed in the Nairobi Securities Exchange. This implies that these firms should focus on reducing the account receivable period. Also firms should strive to have a shorter cash conversion cycle by improving the inventory control process. Therefore, the managers can create positive value for their shareholders by reducing the accounts receivables period, having shorter cash conversion cycle and having longer accounts payable period.