The effect of working capital management on profitability of manufacturing companies in Kenya

Abstract

The objective of the firm is to maximize shareholders’ wealth. The structure of working capital and liquidity analysis plays a key role in the process of wealth maximization of shareholders. The concept of working capital management is concerned with managing working capital components to promote a satisfying liquidity, profitability and shareholders’ value. The objective of this research is therefore to establish the effect of working capital management on the profitability of manufacturing companies in Kenya. This study employed a descriptive statistical approach to analyze the results. The quantitative methods have been applied on financial data from secondary database. The study used pooled ordinary least square and generalized least square methods for the analysis. The study found that the size of the firm significantly affect the profitability of a company. The larger the company, the more its profitability. However, the other working capital component had less significance on profitability of the manufacturing companies in Kenya. The study therefore recommends for the manufacturing firms to have a policy of increasing the size of the firm through improved sales revenue, while at the same time maintaining a sound working capital management. Firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the resources of the organization through a careful reduction of the cash conversion cycle to its minimum. In so doing, the profitability of the firms is expected to increase. The period covered saw a global economic crunch that started in the year 2007 and its aftermath. This could have affected the result findings due to the general effect of the same on companies’ performance as consequence of unpredictable trend of working capital components. Therefore, future studies should cover longer periods and include private companies as well for a more credible results that can be used for policy direction