Working Capital Management and Firms’ Financial Performance in Tea Processing Companies in Nandi County, Kenya

Abstract

Working capital management entails monitoring and utilizing of the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. The objective of the study was to determine working capital management on firm financial performance of tea processing firms in Nandi County, the study was based on Pecking Order Theory, agency theory, aggressive theory and cash conversion cycle, the population of interest in this study consisted of 9 tea processing firms in Nandi County. The study adopted secondary data collection method obtained from financial statements for the last five years (2011 to 2015). Descriptive statistics was used to arrive at the findings of the study, Correlation and regression analysis were used in the study to identify the nature and extent of the effect of working capital management on firms' financial performance. The data were analyzed by use of SPSS package to produce the correlation as well as regression analysis. The study concludes that efficient management and effective control of inventories help in achieving better operational results and reducing investment in working capital. Effective management of receivables lead increase in firm's size, realized through increased total sales consequently increasing recycling of funds and generating higher profitability, improved liquidity will enabled the tea processing firms to meet its financial obligations, tea processing companies that have low average return on asset and return on equity have negative cash conversion cycle. Larger tea processing firms have advantages such as a greater possibility of enjoying economies of scale enabling more efficient production, a greater bargaining power over both suppliers and distributors or clients and that a high debt-to-equity ratio indicates that tea processing firms may not be able to generate enough cash to satisfy its debt obligations. The study recommends that Tea processing companies should maintain leverage ratio at an optimal level. This is based on revelation that too much debt can be dangerous for firms and its investors as uncontrolled debt levels can lead to credit downgrades while at the same time low debt-to-equity ratios may also mean that a company is not taking advantage of the increased profits that financial leverage may bring. Tea processing firms should create a credit collection policy spelling out the practices and procedures used by the company to collect overdue accounts receivable.