Relationship between working capital management financing policy and profitability: A survey of manufacturing firms in Kenya. Caffaso Unni agnes

Abstract

Working capital management (WCM) is of a particular importance to manufacturing firms at NSE .Corporate finance literature has traditionally focused on the study of long term financial decisions. However, short term assets and liabilities are important components of total assets and needs to be carefully analyzed. Management of these short term assets and liabilities warrants a careful investigation since the working capital management plays an important role for the firms’ profitability. The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. The objective of this research study was to establish whether there is a relationship between working capital management financing policies and profitability of manufacturing firms in Kenya. The population of interest for the study was all manufacturing firms in Kenya. There are 600 registered manufacturing firms as at 31st Dec 2010.Convinient sampling technique was used. Secondary data for the research was extracted from the audited financial statement of the companies sampled. A descriptive statistics analysis was conducted on all the variables to give the general behavior of the manufacturing firms quoted at the Nairobi Stock Exchange with respect to working capital financing policy and ROA. Pearson correlation coefficient analysis was also conducted to establish the relationship among the variables. The relationship between the dependent variable, ROA and the other variables was conducted using a general regression model. To establish whether level of the aggressiveness/conservativeness had any significant relationship a regression model was conducted separately between the dependent variable and the independent variables alongside the control variables for each of the group. From the Pearson correlation coefficient analysis, the results showed some aspects of relationship among the variables. There was negative relationship between ROA and financing working capital policy. The regression models indicated that there was some relationship between financing working capital policy and the firm’s ROA.