The relationship between working capital management and profitability in petroleum product marketing companies in Kenya
Working capital is simply current assets used in operations. Management of working capital aims at maintaining optimum level of working capital components which are cash, inventory, receivables and payables. Working capital management is an important component of corporate strategy for value creation and competitive advantage (Deloof 2003). The target population was all the 236 licensees as per the Energy Regulatory Commission license Register as at 31st December 2013. A sample size of 10 firms whose total market share is 81.9% was selected. The profitability of these companies measured by Return on Total Assets was analyzed. The following ratios were calculated for the last four years and compared with the Return on Assets to establish any relationship, receivables collection period, inventory conversion period, average payment period, current ratio and current asset to total assets ratio.The study sought to establish the relationship between working capital management of Petroleum Marketing Companies and profitability of Petroleum Marketing Companies in Kenya. From the determination coefficients, it could be denoted that there is a weak relationship between dependent and independent variables in the 2009-2008 datasets since the R2 values were less than 0.25. There was, however, a moderately strong relationship between the two variables in the 2013 dataset. Using the adjusted R2 value which was a correction to the R² by taking into account the number of variables used in the model, the study found a moderately strong relationship in the 2013 dataset. The study also used Durbin Watson (DW) test to check that the residuals of the models were not auto correlated. From this study it was noted that inventory conversion period (ICP) and size of company would have the highest impact on profitability of petroleum products marketing companies. From the finding of the study in the year 2008, the study found that holding Current asset to total asset ratio, Inventory conversion period, average payment period (APP) and size constant, profitability was -0.526. From the study in this year it was noted that a company size and current asset to total asset ratio would have the highest effect on profitability though the former would have a positive effect and the latter negative effect. From the findings of the study in the last year of study which was 2013 it was noted that holding Current asset to total asset ratio, Inventory conversion period, average payment period (APP) and size constant, profitability was -1.304. From the study it was also noted that size and current asset to total asset ratio (CATA) would have the highest effect on profitability though on different directions with size having positive effect. From the results, possessing a lower average collection period is seen by the petroleum product marketing companies as optimal, since this means that it does not take them very long to turn its receivables into cash. This owes to the fact that these petroleum marketing companies need cash to pay off their own expenses (such as operating and administrative expenses) including suppliers who supply fuel products to them on credit. They also tend to have a longer average payment period so as to maintain a high current ratio and avoid cash flow problems. Monitoring the working capital is important for the petroleum product marketing companies’ cash flow and its ability to meet its obligations when they fall due. However, they optimize this to ensure that their credit worthiness is not compromised, take advantage of discounts including avoiding incurring unnecessary interest costs.