Relationship Between Working Capital Management and Profitability of Reinsurance Companies in East Africa

Abstract

Working capital management is a critical component of corporate finance because it directly affects the liquidity and profitability of the company. A firm's value cannot be maximized in the long run unless it survives the short run. Profitability and working capital relationship is frequently emphasized for deciding on the level of investment in working capital. The study sought to establish the relationship between Working Capital Management and profitability for reinsurance companies in East Africa. The study covered the entire population of six reinsurance companies’ in East Africa as at 1st January 2009. The data covered a period of five years from 2009 to 2013. The study was carried out through the use of secondary data as detailed in financial statements of the companies’ annual audited reports and their websites. The data collected was analyzed using descriptive and quantitative techniques. Regression analysis was used to determine the relationship between working capital management and profitability. The variables relating to working capital management for manufacturing firms includes debtor turnover days, creditors payable days, inventory period and cash conversion cycle. This study was to establish if this relationship exists for reinsurance companies which do not hold inventory. The study utilized the following variables; return on assets, debtors turnover days, creditors payable days, current ratio, age and natural logarithm of sales. The findings of the study show that debtors turnover days and current ratio are negatively related to return on assets while creditors payable days, age and natural logarithm of sales are positively related to return on assets. The study concludes that there exists relationship between Working Capital Management and Profitability of reinsurance companies in East Africa. Managers can create profits for their companies by managing and keeping each different component of working capital (accounts receivables, accounts payables, inventory) to an optimum level. They should collect their debts as quick as possible and delay payment as much as possible taking into consideration not to strain their relations with suppliers. The study recommends that reinsurance companies should ensure that they have a framework on managing the working capital since it has direct impact on their profitability