Effect of Working Capital Management Techniques on Financial Performance of Manufacturing Firms in Kenya

Abstract

working capital management techniques is one critical area that influences liquidity of the firm while at the same time have other underlying effects on financial performance depending on the policy adopted by one firm over the other. Increasing liquidity of a firm implies that the firm reduces liquidity risks as well as bankruptcy risks. However, increasing liquidity beyond a certain point means that the management is not lucrative in identifying opportunities with positive NPVs and therefore increase the financial performance of the firm. Management therefore requires developing policies that will help to balance between the risk and the returns for each decision they make. The study sought to determine the effect of working capital management techniques on financial performance of manufacturing firms in Kenya. The study targeted manufacturing firms that are listed at NSE since it is easier to obtain data on them. The study therefore targeted a total of 10 firms and the study period consisted of the period 2017 to 2021. The variables that were found to be significant and could express working capital management techniques included accounts receivable management, accounts payable management, inventory management period as well as size of the firm. However, the study was not able to collect complete data from one of the manufacturing firm as it was delisted. The study was however able to get data from all the other nine manufacturing firms for the study period 2017 to 2021. This comprised of a response rate of 90% that was found to be adequate for data analysis. The study undertook descriptive statistics that described the data collected for each variable in form of mean standard deviation, minimum and maximum, skewness and kurtosis. In summary performance of manufacturing firms was in average poor as it recorded a loss of -3.17%. The variability of returns across the firms was high as depicted by standard deviation. Tis was also observed in working capital management techniques where it was observed that the firms in average adopted poor policies in regard to accounts receivable management, accounts payable management, inventory period management as well as cash management. The correlation that was undertaken indicated that only accounts receivable as well as size of the firm that had significant effect on financial performance. The working capital management technique indicated that there was negative Spearman’s correlation between these working capital management techniques and financial performance. The regression analysis was used to determine the significance of the effect of liquidity management on financial performance of manufacturing firms. The regression model adopted by the model was only able to describe 22.8%. The adjusted R square on the other hand was smaller than R square that indicates that there were some elements in the model that did not help to improve the model. The study found that accounts receivable did not have significant effect on financial performance. The p-value of the F-test was less than 0.05 and therefore the study found statistically significant effect of working capital management on financial performance of manufacturing firms. The regression coefficients indicated that both accounts payable management and cash management had significant but negative impact on financial performance while size and inventory management had positive significant effect on performance.