Working Capital Management and Profitability of Manufacturing Companies Listed at the Nairobi Securities Exchange, Kenya

Abstract

The study sought to examine the relationship between working capital management and financial performance of the manufacturing companies listed at the Nairobi Securities Exchange. There are a total of 9 firms; Flame Tree group Limited, East African Breweries Limited, Carbacid investments, Eveready East Africa, BOC Kenya, Mumias Sugar, Unga group, British American Tobacco and Kenya Orchads. Secondary data from the published reports and audited financial reports covering a span of five years from 2012-2016 of listed firms was used in conducting the study. The collected data was cleaned for consistency in preparation for analysis. The analysis was done using the Statistical Package for Social Sciences (SPSS). The study used both descriptive and inferential statistics in analyzing the data. Regression analysis and Pearson’s correlation analysis was used to test the relationship between working capital management and the financial performance. The study established that there exists a strong relationship between working capital management and financial performance. The study further established that working capital management explains 31.9% of the changes in financial performance of the firms listed at the NSE. The study established that the management of listed firms can create value for their shareholders by reducing the average collection period of accounts receivable. The management can also create value for their shareholders by increasing the inventory turnover so as to buffer against unforeseen shortages and delays in the manufacturing process. The study also concludes that managers can create value for their shareholders by making prompt payments to creditors to increase their credit worthiness and reputation. The study also found out that firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of resources of the organization through a careful reduction of the cash conversion cycle. In so doing, the profitability of firms is expected to increase