The Relationship Between Components of Working Capital and Financial Performance of Agricultural Firms Quoted at the Nairobi Securities Exchange

Abstract

Working capital management is a key issue in financial decision making since its overall goal is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses which directly affects the liquidity and eventual profitability of the company. This research project studies the relationship between components of working capital and financial performance of agricultural firms listed at the Nairobi Securities Exchange. The study employed descriptive research design using quantitative method approach and based on panel data set from a sample of 7 firms for the period 2009-2013. Secondary data from all the firms was collected. The different variables of working capital management studied included: the accounts collection period, inventory turnover, accounts payable period, cash conversion cycle and current ratio, leverage, firm size and sales growth on the profitability of these firms. The study used multiple linear regression and correlation analysis to show the relationship between the variables. The findings from correlation analysis show that accounts collection period, accounts payable period, inventory turnover period in days and cash conversion cycle have significant (p < .001) negative influence on financial performance. Regression analysis results shows that increase in accounts payable period (2.02E-04; p = .019), cash conversion cycle (-5.834E-06; p = .017) and accounts collectible period (-6.64E-04; p = .017) lead to a decrease in financial performance while inventory turnover period (1.88E-04; p = .041) would increase the same. The study concludes that optimizing the time span during which working capital is tied up in the company (higher cash conversion cycle) can be a way to improve profitability. It recommends that agricultural firms should endeavour to enhance their liquidity for higher financial performance by ensuring higher inventory turnover, collecting money from receivables faster and paying creditors last.