The relationship between working capital management and financial performance of firms in the agricultural sector: the case of firms in the coffee industry in Kenya

Abstract

The financial performance of any business organization is a very basic and important criterion used to measure the effectiveness and success of the firm's operations. One way in which a firm can gain competitive advantage is through effective management of its working capital. This means the management of Cash Conversion Efficiency, Days of Operating Cycle and Days of Working Capital. This study, therefore, sought to find out the relationship between working capital management and financial performance in firms in the coffee industry in Kenya. This was done through a time series correlation study in which financial performance was the dependent variable and the three components of working capital, namely, Cash Conversion Efficiency, Days of Operating Cycle and Days of Working Capital were the independent variables. The study was a census study targeting all the 40 firms registered by Kenya Coffee Traders Association. Historical quantitative data for the period 2009 to 2013 was used in the research. The data including cash flows from cash flow statements, the annual turnover and EBIT income statements of the firms for the study period were obtained from the finance departments of the firms being studied. Regression was used to determine the relationship between financial performance and each component of working capital. The results show that the constant term of the regression was positive and statistically significantly different from zero. Secondly, the coefficient of cash conversion efficiency was negative and statistically significantly different from zero. The coefficient of days operating capital was positive and statistically significantly different from zero. The coefficient of days working capital was negative and statistically significantly different from zero. The study, therefore, recommends that other than focusing on working capital management only, firms in the coffee industry should single out other factors and incorporate them in their profitability drive; the coffee firms should be less aggressive in changing stocks to sales to make higher profit the; the firms become more aggressive in reducing the time span during which working capital is tied up within the company; and This research recommends that the firms become more aggressive in collection of debts.