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.