Effect of Inventory Management on Financial Performance of Commercial and Service Firms Listed at the Nairobi Securities Exchange

Abstract

Inventory management is crucial in organizations since a simple misstatement can have an impact on the profits reported: “A misstatement of the balances in inventory directly impacts the profits reported since an inadequacy in inventory can mean a failure to meet outstanding sales and production requirements; a high level of inventory levels that causes poor flow of cash and financial losses; incorrect recording of the movements in inventory resulting in lack of awareness of the inventory position of a business causes a failure to meet customer requirements; inadequate security over inventory resulting in losses, theft or misappropriation and obsolete inventory held or erroneously being supplied to clients, results in financial losses and damages company reputation. The study’s objective was assessing effect of inventory management on performance of NSE listed commercial and service firms. The population for the research was all the 11 NSE listed commercial and service firms. Predictor variable in this research was inventory management operationalized as the ratio of cost of goods sold to average inventory in a given year. The control variables included liquidity given by current ratio, firm size given by natural log of total assets and management efficiency given by total revenue to total assets per year. Financial performance was the response variable given by return on assets. Secondary data was for five years (January 2015 - December 2019) annually. Descriptive cross-sectional design was used in analysis of the study variables. Analysis was made using SPSS software. Findings produced R-square value of 0.284, meaning that 28.4 percent of changes in financial performance among commercial and service firms is the result of variations in the chosen independent variables while 71.6 percent variation in financial performance of NSE listed commercial and service firms was the result of other factors which are not highlighted. This research showed independent variables had a moderate association with firm’s performance (R=0.533). ANOVA findings showed that the F statistic was substantial at 5% with p<0.05. This showed that the overall model was appropriate in establishing the relation between the variables. Findings also showed that inventory management, liquidity and management efficiency have a positive and statistically substantial influence on performance of the NSE listed commercial and service firms. Firm size was statistically insignificant in this study. This recommendation is that NSE listed commercial and service firms should focus on approved techniques of inventory management, enhance liquidity positions and management efficiency as these three have a significant influence on their financial performance.”