The Relationship Between Working Capital Management Practices and Profitability of Companies Quoted at the Nairobi Stock Exchange

Abstract

Working capital management is important part in firm’s financial management decision. An optimal working capital management is expected to contribute positively to the creation of a firm's value. To reach optimal working capital management, the firm’s managers should control the trade-off between profitability and liquidity accurately. The purpose of this research was to establish the relationship between working capital management practices and profitability of companies quoted at the Nairobi Stock Exchange. A census study of the companies listed at the Nairobi Stock Exchange as at 3E1 December 2009 was used. The researcher studied the effect of different variables of working capital management on the net operating profitability through questionnaires and a regression model. 1 he researcher used pooled regression with net operating profitability being the dependent variable while different components of working capital management such as average collection period, inventory turnover, average payment period, cash conversion cycle and current ration being independent variables. I'he findings of the research indicate that there is a significant negative relationship between net profitability and the average collection period for a sample of Kenyan firms listed at Nairobi stock Exchange. The finding implies that managers can improve profitability by reducing the credit period granted to their customers. It also implies that a more restrictive credit policy giving customers less time to make their payments improves performance. This is consistent with findings of previous similar researches. The findings will enhance the knowledge base oi working capital management and help companies manage working capital efficiently.