Effect of working capital management on financial performance of five star hotels in Nairobi county
Management of working capital aimed at maintaining an optimal balance between the working capital and units such as cash receivables, inventory and payables which is fundamental section of overall corporate strategy that creates value thus important source of competitive advantage in business. For a company to operate optimally it must have a positive working capital to ensure that it is able to continue its operations and to have sufficient funds to satisfy both maturity shortterm and upcoming operational expenses. In conclusion research on effect of working capital management on profitability and company’s performance on five star hotels in Nairobi County has not been comprehensive thus creating a research gap that needs attention. Due to this knowledge gap, the study seeks to answer the research question of whether there exists an effect of working capital on company’s financial performance on five star hotels in Nairobi County. The study sought to answer the research question of whether there exists an effect of working capital on company’s financial performance on five star hotels in Nairobi County. The study establishes that possessing a lower average collection period is seen by the five star hotels 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 hotels need cash to pay off its own expenses (such as operating and administrative expenses) including suppliers who supply food products to them on credit. They also tend to have a longer accounts payable period so as to maintain a high current ratio and avoid operating in the red. Monitoring the working capital is important for the five star hotels’ cash flow and its ability to meet its obligations when they come due. However, they optimize this to ensure that their credit worthiness is not tainted, take advantage of discounts including avoiding accruing interest rates unnecessarily. The five star hotels also monitor their inventory conversion period to ensure that it is a short as possible since conversion period is negatively correlated with profitability. If conversion period is long, the five star hotels will take longer to pay off their suppliers and meet their financial obligation.