A Survey of Working Capital Management Policies Among Public Companies in Kenya

Abstract

There are many and varying views on the effect of the amount of long-term financing of current assets on the profitability of companies. There are also views that public companies in different sectors in Kenya follow different working capital management policies. The objective of this research study was to establish the working capital management policies of companies in Kenya. The research also addressed the question as to whether there is any significant relationship between working capital management policy and the profitability of a company as measured by the return on equity. The population of interest for the study was all public companies as listed at the Nairobi stock exchange. These companies were fifty one as at 31st December 2002. A random sample of these companies was used. The classification of the companies was based on the categorization as done by the Nairobi stock exchange. The secondary data for the research was extracted from the audited financial statements of the companies sampled. For each firm sampled annual data on the assets (split between current and non-current assets), liabilities (split between current and non-current liabilities), total shareholders' equity and the profit after tax were collected for the period 1998 to 2002. The data collected was analyzed to determine the individual company's annual working capital management policy as measured by the long-term financing of current assets (net assets) and also the profitability of the company. The annual working capital management policy and profitability was averaged using simple arithmetic mean to get the five year average for each of the company in the sample. The companies were then grouped into three categories depending on their working capital management policy. The statistical . significance of the differences between the three working capital management policies was done using the student 't' statistic. Simple regression analysis was also done to establish the relationship between working capital policy and the return on equity. The results of the analysis showed that the commonly practiced working capital management policy among the public companies in Kenya is the aggressive policy. The findings of the research did not show any significant differences between the working capital management policies across the five sectors. Further the research findings show that there are no significant differences in return on equity among companies that practice different working capital management policies. The regression analysis also showed that the working capital management policy explained only fifty three per cent of the variation in return on equity.