Effect of Working Capital Management Practices on Profitability of Retail Supermarkets’ Chains in Kenya

Abstract

Working capital management practices is an integral aspect in success of the business due to its effect on profitability and liquidity. This study attempts to examine working capital management practices and profitability of retail chain supermarket in Kenya. The objective of the study is to establish the effect of working capital management practices on profitability of retail chain supermarkets in Kenya, and at the same time answer the following questions; what is the effect of cash conversion cycle on profitability of retail chain supermarket? How does inventory holding period affect the profitability of the retail chain supermarket? What is the effect of accounts receivable period on profitability of retail chain supermarket? How does account payables period affect the profitability of the retail chain supermarket? The researcher used descriptive design. For the researcher to find out and define the association between working capital management practices and profitability of retail supermarket in Kenya, the researcher used yearly secondary data for the period between 2012 and 2016. Data was collected from a sample of retail stores, whose financial statements were provided by their managers or owners. The data from the financial statements were presented and analyzed in relation to the objective of the study. Data collected was analyzed by use of descriptive statistics and inferential statistics. Descriptive statistics included trend analysis over the years for the variables under study. Inferential statistical techniques that were applied included Pearson’s correlation and regression analysis which were used to draw a causal relationship between working capital management and profitability. Data was investigated by means of a statistical software - Statistical Package for Social sciences (SPSS) in order to assess and determine the correlation and regression analysis between the profitability and cash conversion cycle, inventory holding period, account payable period and receivable period. Data was presented using tables and figures. The correlation results show the association between the Inventory holding period, Account payable period and account receivable period. Regression results show that there is a positive relationship between the account receivable period, inventory holding period and account payable period. The regression results further showed that the account receivable period was statistically significant hence an important determinant of profitability. It can be concluded that, the inventory holding period, account payable period and account collection period are key determinant of the profitability. The researcher recommend that to increase the value of the firm, the management should focus on greatly reducing the cash conversion cycle and increasing the number of days of account payable with check and balance to ensure no strain relationship with the suppliers which can impair their public image and good reputations. It would be worthwhile if the further studies would be extended to effect of information technology on the working capital management practices and subsequently to the profitability of the firm.