The Effect of Working Capital Management on Profitability of the Manufacturing Firms Listed at The Nairobi Securities Exchange

Abstract

The main objective for carrying out this research was to establish the effect of working capital management on the profitability of the manufacturing firms that are listed at the Nairobi securities Exchange. The objectives of this study included the determination of the effect of inventory conversion period, effect of cash conversion cycle, effect of average collection period and the effect of the payables period on the profitability of the listed manufacturing firms at the NSE. Return on Assets (ROA) was used as a measure for profitability. The study employed the use of descriptive design to describe the effects of working capital management on firm profitability. The study’s population consisted of all the 9 manufacturing firms that were listed at the NSE from 2017 to 2021. Secondary data was used to collect data which was obtained from the annual financial reports of the manufacturing firms listed at the NSE for the period 2017 to 2021. Stata version 14 was used to enter the collected data and analysis was done through the aid of multiple linear regression method. The research discovered a negative correlation between average receivables period, average payment time, and leverage ratio for manufacturing firms listed on the Nairobi security exchange indicating that a reduction in the accounts receivable time will increase profitability and vice versa. This suggested that firms who collect their debts early generate more profits than those that collect their receivables late. Firm size has a substantial beneficial influence on profitability, as assessed by ROA, with a p-value of 0.032 compared to the conventional significance values of 0.05 and 0.01. However, the other components (average receivable period, inventory period, liquidity ratio, and leverage ratio) are less significant than the traditional significance levels of 0.05 and 0.01. In consequence, the cash conversion cycle slowed as businesses, on average, delayed to pay their suppliers. Because of this, the CCC has a positive impact on company profits. This study concludes that WCM is significant since it influences a company's profitability and liquidity, and hence it’s of value and thus, effectively managing working capital will improve managerial performance