Effect of Working Capital Management on the Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange
Abstract
The analysis of working capital is very crucial as it includes policies relative to liquidity
management. Working capital informs or rather signals the organization on the liquidity
needed for the smooth flow of operations in a company. When payables are due before
collectables or rather the receivables, then there would exist a situation of illiquidity in
the organization. Payments may have to be suspended in extreme cases and this would
lead the firm to financial distress. Cash is of great value to firms which are constrained
financially than those which are unrestrained, less valuable to mismanaged
organizations than those which experience good governance. The cash conversion
cycleserves as an applicable analysis tool which establishes how and why the firm needs
more cash to operate.Manufacturing firms based on their nature, require to invest in a
substantial amount of fixed assets and working capital. Recently, several manufacturing
companies in the sector have fallen down into statutory ownership, due to unsuitable
strategies of monetary management, viewed as the chief reason of bad fiscal
performance.The aim of this study was to investigate the effect of working capital
management on the financial performance of manufacturing firms listed at the Nairobi
Securities Exchange in Kenya.This study was anchored on the Agency Theory, the
Keynesian Demand Theory for Money and the Cash Conversion Cycle theory. The
research employed the use of descriptive design. This research was a census of all
manufacturing firms listed at the NSE in the years 2014 to 2018. A census survey of
these companies was undertaken since the population was relatively small. Secondary
data was utilized whereby audited accounting statements for the manufacturing firms
between the periods of 2014 to 2018 were analyzed. SPSS version 21 was used to
analyze the secondary data collected. Descriptive statistics was done in order to know
normality of the data distribution. Skewness and kurtosis results confirmed that
variance was within the limits. Inferential statistics was used to study the study
variables and to test the research model adopted in this study. Correlation results
indicated existence of a positive correlation between days inventory outstanding, cash
conversion cycle, firm size and return on assets. Negative correlation was shown
between days sales outstanding, current ratio, leverage and return on assets. F-Test
under regression analysis showed that all results were significant with a p-value of 0.00
at 95%.The study concluded that there is a positive relationship between working
capital management and performance. Among the recommendations is that in order for
manufacturing firms to survive during these harsh economic times, financial managers
need to come to speed and apply their working capital skills effectively. This would
ensure that the debt collection team is at their work so as to maximize on revenue
collection to ensure smooth running of the organization. A ready market for the firm’s
products needs to be established as well, to allow for circulation of money or prevent
cash being held in stock for longer periods. The managers also need to ensure that their
creditors are paid promptly to avoid bad publicity. The study suggested that further
research be conducted on working capital however on other sectors other than the
manufacturing sector.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
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