Relationship Between Working Capital Management Policies and Financial Performance: a Survey of Deposit Taking Mfis in Kenya

Abstract

Working capital management is the management of short term financing requirements of a firm. This includes maintaining optimum balance of working capital componentsreceivables, inventory, payables- and using the cash efficiently for day to day operations. Optimization of working capital balances means minimizing the working capital requirements and maximizing possible revenues. Efficient WCM increases firm’s free cash flow, which in turn increases the firm’s growth opportunities and return to shareholders. The following are the objectives of this study: To establish the working capital management policies among Micro Finance Institutions with a bias towards Deposit Taking Institutions in Kenya and to examine the relationship between working capital management and profitability in deposit taking Micro Finance Institutions in Kenya. The study employed a descriptive design to explain the relationship between working capital policies and profitability. The population study comprised all deposit taking MFIs as at 2011, as licensed by the CBK at the end of 2011. The financial statements of these DTMs for the year 2011 were used to extract data pertaining to working capital practices and profitability. Multiple linear regression models were used to establish the relationship between the two variables. The study findings indicated that there was a significant relationship between working capital management policies and ROA (measure of profitability). A negative correlation existed between ROA and all the working capital components analysed (WCC, DTD, CPD, ATO), meaning that no significant component contributed to working capital management and most

important that a reduction in either of the components ratios (days) led to an increase in the profitability (ROA). The study recommends that, it is critical for financial managers to observe closely all their working capital components in order to improve on their overall profitability, for the survival of the organization. The DTMs most of whom have recently been licensed into operations by the CBK, need especially take keen interest on their working capital components especially their Creditor Payable Days to create a correct balance and also maintain profitability as they are also in business and for long term survival.