The relationship between working capital management policy and financial performance of companies quoted at Nairobi Securities Exchange

Abstract

Corporate financial managers identify working capital as being important to firm's value. Working capital management is defined as the ability of an organization to fund short term assets and short term liabilities .The objectives of the study was to establish working capital policies adopted by quoted companies at NSE and to establish the influence of working capital management policy on financial performance. This study was premised on three theories to explain the management of working capital. They include; the quantity theory of money, the Keynesian theory of money, Baumol inventory model, the modern quantity theory, the Miller and Orr's cash management model, the treasury approach to cash management and operating cycle theory. The research adopted correlation research design to establish the relationship between working capital management policies and firm's performance for firms listed the NSE. To establish the causal relationship multiple regressions was used as a tool of data analysis for the study covering a period of five years from 2008 to 2012.Data was represented using tables. The population of the study included all the firms listed at the NSE from which a sample of sixteen Companies was selected. The study sought to establish the relationship between the degree of working capital management policy and fmancial performance for firms listed at the NSE. From the results it was concluded that working capital policy affects performance of a company. The value of R-square was 0.194. This means that 19.4% of the changes in dependent variables could be explained by explanatory variables while 80.6 % cannot be explained by explanatory variables hence error term. Conclusions from this study could assist fmancial managers to make prudent decisions on working capital management.