The Relationship Between Working Capital Management and Financial Performance of Manufacturing Firms in Nairobi County

Abstract

Working capital management is a very important component of financial performance because it directly affects the liquidity and profitability of the company. Management performance would be improved by managing working capital efficiently. The study aimed at investigating the relationship between working capital management and financial performance in manufacturing firms in Nairobi County. The study was narrowed down to manufacturing firms within Nairobi County and the period of study was five years. The study used qualitative research design. The sample size of the study constituted 20 manufacturing firms in Nairobi County. Data for the study was obtained from audited financial statements of the sampled firms. Descriptive statistics was used to state the mean of the variables. Correlation analysis was used to determine the degree of association between the firm‟s performance and return on assets. Regression analysis was used to determine the cause-and-effect relationship between working capital management and firm‟s performance. The study found that there exist a negative relationship between average collection period and firm‟s performance among the manufacturing firms in Nairobi County of -0.001. However, the study found a positive relationship between average payment period and return on assets of 0.004. There also exists a positive relationship between inventory turnover period and return on assets 0.018. Moreover, control variables; current ratio and debt ratio have a significant effect on firms‟ performance. The study concludes that working capital management is a very important component of financial performance because it directly affects the liquidity and profitability of the company.