Effect of Working Capital Management Decisions on Financial Performance of Small Holder Tea Factories in Kenya

Abstract

Working Capital Management (WCM) covers aspects relating to planning and controlling of an organization's current assets and current liabilities in ways that enhance the capabilities to fund liabilities when they fall due as well as earn maximum returns on investments in recurrent assets. Managers are coming to realization that there is a higher default risk if they do not assess liquidity well (Richard & Laughlin, 1980). This study sought to investigate how WCM decisions affect the financial operations of smallholder tea companies in Kenya. Using a correlation design, information was retrieved from publications of financial reports within a 5-year period (2011-2015) to achieve study objectives. Multiple regression analysis was used to assess the association between independent and dependent variables. From the findings, there is a positive correlation between the actual ROA of the smallholder tea firms over the period of the study, and the return predicted by the regression model, considering that the coefficient of multiple correlation stands at 0.485. The regression model explains approximately 23.5% of the variation in the smallholder tea firms’ return on assets over the period covered by the study. Tests of significance have affirmed that the regression model is significant at 0.05 level, just as most of the coefficients of the regression models are. Future studies should consider how strategic decisions of the firm interact with decisions on working capital management to influence organizational performance.