The Effect of Working Capital Management on Profitability of General Insurance Firms in Kenya

Abstract

Insurance industry is among the key economic development pillars in Kenya because of the role it plays in the mobilization and allocation of financial resources. Oversight of operational liquidity management is considered a crucial recipe in a firm’s success because of the part it plays in return enhancement, risk management and value addition. This analysis delves into the relationship between Oversight of operational liquidity and returns within the context of insurance enterprises in Kenya. The primary objective was to deduce the influence of operational liquidity components on the financial performance of insurance enterprises. The analysis employed a comprehensive dataset spanning from 2017 to 2021.The population of the academic work consisted of all the insurance enterprises in Kenya for the period of 5 years (2017-2021). The analysis aimed at examining the influence of operational liquidity management on the returns of general insurance enterprises in Kenya. From the descriptive statistics, general insurance enterprises showed a profitability level, as measured by ROA, of -0.04% between 2017 and 2021. The insurers showed a mean account receivable day of 163.78 days; account payable days of 94.73 days; and average cash collection cycle of 69.05 days with a mean current ratio of 41.8%. Leverage averaged at 52.96% with an average firm size with a log of 22.31. From the correlation analysis, there was a noteworthy negative correlation between profitability and account receivable days (r=-0.379; p=0.010) as well as the cash conversion cycle (r=-0.702; P=0.000). However, account payables (r=0.500; p=0.000), leverage (r=0.373; p=0.012) and firm size (r=0.488; p=0.001) had a positive relationship with profitability. On the other end, current ratio had an insignificant relationship with profitability (r= 0.103; p=0.500). From the model, R value was 0.590 with an R squared value of 0.348. From the ANOVA, account receivable days, account payable days, cash collection cycle, current ratio, leverage and firm size had a significant effect on profitability (F=4.164; p=0.009). Further, account receivable days and cash collection cycle had negative effect on profitability. On the other hand, account payable days, leverage and enterprise size showed a positive effect. current ratio had no remarkable outcome on returns. The analysis concluded that account receivable days and cash collection cycle have a remarkable downside outcome on returns of general insurance enterprises in Kenya. On the other hand, account payable days, leverage and firm size have a positive effect of general insurance enterprises in Kenya. It also concluded that current ratio had no significant effect on profitability of general insurance enterprises in Kenya. The study recommends a reduction in the account receivable days by having right policies that ensure reduced receivable days e.g cash discounts among others and cash collection cycle with an increase in the account payable days among the general insurance firms in Kenya. Similar studies are recommended based on other factors of profitability, different measures of variables, other firms and mixed data.