The Effect of Working Capital Management on the Profitability of Non-financial Listed Firms in Kenya During the Covid-19 Pandemic

Abstract

Working capital management is at the heart of businesses’ financial operations, since it affects the utilization of short-term financing (current liabilities) to generate value for the organization in the form of cash, profits and appreciated value for the firm. It also determines how the organisation manages its short-term investments (current assets) efficiently to generate value for its shareholders. Working capital management, as important as it is, is determined by various factors that can broadly be categorized as internal or external. Internal factors are those that are inside the organization and can to a large extent be controlled by the organizational practices of the firm. Examples are the size of the firm, growth in the sales of the company, the company’s profitability, how the company uses debt, and so on. Examples of external factors may include the economic climate or environment that the company is operating in, the gross national product or the GDP of the country the company operates in, factors such as taxes and legal requirements, and so on. Working capital management can be measured by looking at how the organization utilizes its short-term financing to generate short term investments. The cash conversion cycle is an excellent way to achieve this since it determines the efficiency of the organization in converting financing (from procurement stage) into liquid or cash state, that is, into cash. Presumably, the more efficient a company is, the shorter its cash conversion cycle will be, holding other factors constant. The longer the cash conversion cycle, the less efficient we assume the company is at managing its working capital. In 2020, a worldwide pandemic was declared (COVID-19) which had the effect of mass lockdowns in many countries. The lockdowns had a myriad of effects such as employees not being able to go to work, disruptions in supply chain, and other effects on the working capital cycle such as delayed payments to suppliers. This research project focused on studying how the working capital management techniques of non-financial companies listed in the Nairobi Stock Exchange was affected by the Covid-19 pandemic. To do this, the trend in the cash conversion cycles and the profitability of the sampled organisations were analysed. The results from this analysis were then used to draw conclusions on the effect of working capital management on the profitability of non-financial listed firms in Kenya’s Nairobi Stock Exchange. The conclusion of this research project was that although Covid-19 affected the working capital of companies positively, the financial performance of organisations as shown by the return on assets, was affected adversely. This means that the profitability of the sampled organisations was affected by factors other than the working capital management as demonstrated by the cash conversion cycle. Improvements in working capital indicators such as increased credit periods, reduced inventory and reduced days receivable were more than proportionately offset by poor sales which in turn affected the profitability of the organisations despite increased effectiveness in working capital management.