The relationship between working capital management and profitability of state owned commercial enterprises in Kenya

Abstract

The aim of this study was to determine the most prevailing working capital management practices among state owned commercial enterprise in Kenya and to identify their relationship with profitability. It was also intended to determine if there is any difference in working capital management practices amongst state owned commercial enterprises in the economic sectors they are operating. The study was based on the review of financial statements of state owned commercial enterprises for five years from 2005 to 2009. This period represented the turning point for most of these organizations following increased competition and the demand by the government and other stakeholders for greater efficiency in the use of financial resources, hence greater focus on working capital management was inevitable. The study which looked at the working capital from three perspectives namely aggressive, moderate and conservative management approaches revealed that profitability is dependent on these variables. Organisations in the same industry operating on shorter cash conversion cycles than their peers are able to report better returns. Those with lower current to total asset ratios earn relatively better returns because they manage to keep the quantity of idle resources at optimum levels. The different economic sectors in which state owned commercial enterprises are represented have varied working capital characteristics which also influence their average returns on assets. The findings of this study support past empirical studies and conclusions drawn by Deloof (2003), Nyakudi (2003) and Solano (2005) regarding working capital management and its relevance to profitability.