The effect of working capital management on the profitability of companies listed in the Nairobi securities exchange

Abstract

All businesses are created in order to make profits and consequently maximize shareholders wealth. Working capital is important because it provides a measure of a firm‟s ability to meet its short term debt obligations from its holding of current assets. This study was intended to determine the relationship between working capital management and profitability of the companies listed in the NSE. The study was designed as a descriptive study. The population of the study was 58 companies listed on the NSE by 31st December 2011. A sample size of firms with the exception of financial institutions was therefore selected for the study. Secondary data was collected in this study from the financial statements of the firms from 2006 to 2011. Data was analysed using descriptive analysis, correlation analysis and regression analysis. The regression analysis showed that logarithm of sales and current ratio had a positive and significant impact on performance at 5% level. The rest of the variables did not have a significant effect on performance. Therefore, of the working capital variables, only current ratio had a significant positive effect on performance. The study also concludes that as the current ratio rises, so does the firm performance as measured by ROA. The study recommends there is also need for companies to improve their quick ratios as this will have a significant improvement on firm performance. The study also recommends that there is need for firms to reduce on the cash cycle as the days it takes to convert sales to hard cash are not sustainable. There is also need for companies to improve their quick ratios as this will have a significant improvement on firm performance. Therefore, management should take up measures to improve the current v ratios. This study can be replicated in small and medium enterprises in Kenya to establish the practice of working capital management as well as the influence of the same on their financial performance. Future studies can be carried out specifically on the management of working capital by banks and insurance firms, due to the nature of the business they carry out. A similar study with data for all the listed companies may yield different results and conclusions.