The Effect of Working Capital Management on Profitability of Firms in the Soft Drinks and Beer Industry in Kenya

Abstract

This study set to explore and also analyze the impact of working capital management (on firms in the soft drinks and beer industry in Kenya) and its effect on these firms profitability. Working capital management could be measured either by the operating cycle, cash conversion cycle or the net-trade cycle. The study hypothesized that there is a significant relationship between working capital variables and profitability of these firms. This study was descriptive and quantitative in approach. The population of interest in this study constituted soft drinks and beer companies for the period of 2012-2015. It comprised both listed and non-listed firms. Data collected from 15 firms was analyzed using both descriptive and inferential statistics Furthermore testing of the null hypothesis is undertaken. The dependent variables were six (Average Collection Period, Debt Ratio Average Payment Period, Inventory period, Cash Conversion Cycle and, Current Ratio). The dependent variable in this study was Return on Assets. F-test was used to test the hypothesis. In this regard, an F-test value (4.05) which was significant (0.002) was obtained. Seeing that the significance value of F was below 0.05, it can be deduced that there was overall significant relationship between the independent variables and the dependent variable under investigation in the study. This led to the acceptance of the alternative hypothesis. This means that there is a significant relationship between working capital variables and profitability of these firms. Furthermore, the standardized regression coefficients obtained were used to show the contribution of each variable to the model. Some of the coefficients are not significant. Only the inventory turnover (ITID) and, debt ratio (DR) are the only reliable predictors of financial performance (Return on Assets) in the selected soft drink and beer firms in Kenya since they have significant t-test values. A firm that has lower debt ratio is able to enjoy good balance between profitability and liquidity. This study recommends comparative studies in other sectors in Kenya. This study used the descriptive survey design, comparative studies could be taken on the subject under investigation using longitudinal surveys. This would be vital since they could show the nexus liquidity and profitability in the sector over longer periods of time rather that the four years focused by this study. In addition, in-depth studies could be undertaken on the various independent variables that were under investigation in this study. Since accessing secondary data is often a hard feat, it is vital to remodel this current study and undertake studies using primary sources for verification purposes of the findings obtained. It is also worth noting that government regulation affects capital management in Kenya. The signing of the interest capping law in Kenya for example may affect the level to which firms in the soft drinks and beer industry access capital. It is imperative to undertake studies that unearth the effect of such legislation on capital management and financial performance in the soft drinks and beer industry. Lastly, it is also important to undertake studies on other possible factors affecting capital management practices in the beer and soft drinks sector so as to enhance the richness of information unearthed by this current study.