The relationship between capital expenditure and working capital management: a case of firms listed on the Nairobi Securities Exchange
Kenya is a developing country and the demand for goods and services is increasing all the time due to accelerated population growth rate which creates lot of growth oppoltunities. Due to these growth opportunities, capital expenditures are more likely to be increased but it happens only when the firms have required funds for investment. In this study, efforts were made to find out whether the funds generated by firms' operations are enough to be used in such big investments. Furthermore, due to efficient working capital management a firm can generate a handful amount of most liquid assets to be used in such an activity. In order to find out the relationship between capital expenditures and working capital management, Net Liquidity Balance (NLB) and Working Capital Requirement (WeR) were used as proxies for Working Capital Management. A sample of 39 firms listed at Nairobi Securities Exchange was used. The study eliminated 16 firms in banking, financial institutions and insurance sector since the definition of working capital for these firms is different from the one being investigated in this study. The study covered a period of five years from 2006 to 2010. Regression model was used for analyzing the relationship between Capital Expenditure and Working Capital Management for the sample firms. A significant negative relationship was found between NLB and Capi1al Expenditure, which implies that these firms don't increase the balance of most liquid assets when faced with capital expenditure since they don't have enough intemally generated funds to be used in long term fixed investments. Furthermore, a significant negative relationship is also found between WCR and Capital expenditure, which implies that these firms are efficiently managing the nonfinancial components to enhance their cash, balances to be used in speculative and operational activities.