The relationship between working capital management and profitability of small and medium enterprises in Nairobi county, Kenya
Working capital is the most crucial factor for maintaining liquidity, survival, solvency and profitability of business. The theory of working capital management suggests that to have higher profitability the firm has to sacrifice solvency and maintain a relatively low level of current assets. Studies have focused on the relationships of the various WCM measures and survival within this sector and not profitability levels, which is also important for sustainability. The objective of the study was to establish the relationship between working capital management and profitability of small and medium enterprises in Nairobi County. The study adopted both descriptive and quantitative research design. The population of interest constituted SMEs in Nairobi County and a sample of 150 SMEs was used. The coefficient of determination as measured by the adjusted R-square presented a strong relationship between dependent and independent variables given a value of 0.729. This depicted that the model accounted for 72.9% of the total observations while 27.1% remains unexplained by the regression model. Durbin-Watson test was used as one of the preliminary test for regression to test whether there was any autocorrelation within the model’s residuals. Given that the Durbin -Watson value was close to 2 (1.901), there was no autocorrelation in the model’s residuals. A number of small and medium enterprises in Nairobi County have failed to grow due to huge amounts of money, usually tied up in different components of working capital which are ill managed with lack of credit policies in some cases due to lack of proper overall working capital management. These results from the regression showed that when acting jointly, accounts receivable period, accounts payable period, inventory conversion period, cash conversion cycle and the number of years would increase the profitability of SMEs in Nairobi County.