Relationship between working capital management and financial performance of manufacturing firms in Kenya

Abstract

Financial performance is influenced by management of current assets and liabilities. These current assets can be described as the assets which will be turned into physical cash in a year, if the business runs smoothly, outside of having to suffer a decrease in value, or disturbing the running of the company. The study employed both descriptive and inferential analysis. Descriptive analysis shows the relevant aspects of the phenomena under consideration. Inferential analysis study employs Pearson correlation, the generalized multivariate linear regression analysis and the Chi-square statistics. Initially the study determined the performance of the financial performance variables under consideration that were debt ratio, average payment period, average collection period, inventory turnover period and cash conversion ratio. Their mean, standard deviation, minimum and maximum values were determined. The Pearson correlation result shows that manufacturing firms’ financial performance has a significant association with current ratio, average payment period, inventory turnover period and cash conversion ratio. The results indicated that current ratio, average Payment Period (in Days), inventory turnover period and cash conversion period had statistically significant influence on the financial performance of manufacturing firms. Evaluating whether working capital management has a relationship on financial performance of manufacturing companies in Kenya with a Pearson coefficient of 17.700 and p-value of 0.007 shows a strong, significant, positive dependence between working capital management and financial management of companies in Kenya. Therefore, centering on these findings the research fails to accept the null proposition that there is no relationship between working capital management and financial performance of companies in Kenya and accepts the alternative proposition that there exists an association between working capital management and financial management of companies in Kenya.