Effect Of Working Capital Management Decisions On Financial Performance Of Manufacturing And Allied Firms Listed At The Nairobi Securities Exchange
The financial performance of any firm is largely considered as the final outcome of its core business activities. These core business activities are the firm’s operating activities which are influenced by management’s decisions on the working capital elements such as levels of inventory, short-term debt, accounts payables and accounts receivables. This study investigates the effects of working capital management decisions on financial performance of manufacturing and allied firms listed at the Nairobi Securities Exchange. Return on assets was taken as an indicator of financial performance and working capital management variables included; average collection period (ACP), inventory conversion period (ICP), account payables period (APP) and the cash conversion cycle (CCC). Secondary data was collected from six listed manufacturing and allied firms in Kenya. The study focused on the time period after the financial crisis of 2008, covering seven years 2009-2015. Using Pearson's Bivariate Correlation, multiple regression and ANOVA analysis, the study finds a significant impact of WCM on the financial performance of the firms under study. ACP and CCC had a negative significant relationship with the financial performance represented by ROA. However, the relationships of ICP and APP with ROA were statistically insignificant with ICP having a negative relationship with ROA and APP having a positive relationship with ROA. This finding implies that the manufacturing firms will significantly increase their ROA if they reduce the ACP, CCC and ICP. Regression analysis showed that 37.2% of the variation in ROA of the firms is jointly determined by the ACP, ICP, APP and CCC. It was concluded that WCM is consistent with value-seeking and maximizing behavior, management should always consider the effects working capital on the firm’s profitability as it enables them to take necessary steps to maximize shareholders’ wealth. WCM is of key managerial concern, managers realize there is no substitute for working capital regardless of the firm size, asset base and profitability, the only fact is that only firms with effective WCM decisions will survive, achieve growth and keep their operations running.
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