The Relationship Between Working Capital Management and Profitability of Sugar Producing Companies in Kenya

Abstract

Working Capital Management is an integral part of financial decision making as it directly affects the liquidity and profitability of a firm. Presently, there are no specific formulae used to establish working capital requirements of firms in different industries. Profitability is a reflection of good financial decisions taken by management which in return leads to an increase in a firm’s value. A firm’s value can be measured both in the short term and long term basis. Short term components are the working capital items and they include current assets and current liabilities. The research design used was descriptive. The population studied were the licensed sugar producing companies in Kenya as at 31st December, 2013. The study was carried out using secondary data obtained from the financial statements of the company’s annual report for a period of five years (2009 – 2013). The data collected was analysed using Microsoft Excel and SPSS. Pearson correlation and Regression analyses were used to establish the relationship between working capital management and profitability. Findings of the study indicated that there is a positive relationship between working capital management and profitability of sugar producing companies. The level of leverage is however found not to directly influence the performance. An optimum ratio of total debts to total assets is recommended to increase profitability. The results proposed optimal inventory levels to be maintained and prompt debt collection measures to be put in place. This would increase cash inflows that will provide good liquidity for revenue generation resulting to increased profitability