The effect of working capital management on profitability of manufacturing companies listed at Nairobi securities exchange

Abstract

Working capital management involves the management of the most liquid resources of the firm which includes cash and cash equivalents, Inventories and trade and other receivables. Most firms do not hold the correct amount of working capital and this has been a major obstacle to their overall profitability. The study analyzed the effects of working capital management on the profitability of manufacturing firms listed on the Nairobi Securities Exchange. The study objectives were to; analyze the relationship between average collection period and profitability of listed manufacturing firms, assess the relationship between inventories turnover in days and profitability of listed manufacturing firms, establish the relationship between average payment period and profitability of listed manufacturing firms and to evaluate the relationship between cash conversion cycle and profitability of listed manufacturing firms. The study utilized a descriptive research design and targeted the 9 listed manufacturing firms trading on the Nairobi Securities Exchange. However, the study only covered 7 of the targeted manufacturing companies, 2 were not trading at the time of the study. Data was obtained from document analysis of consolidated financial reports of years ending December: 2009, 2010, 2011, 2012 and 2013. Multiple regression and correlation analyses were carried out on the data to determine the relationships between components of working capital management and the gross operating profit of the firms. The study established that gross operating profit was positively correlated with Average Collection Period and Average Payment Period but negatively correlated with Cash Conversion Cycle. The relationship between Inventory Turnover in Days and gross operating profit was insignificant. Profitability of manufacturing firms depends upon effective working capital management. The study therefore recommended that managers should focus on reducing cash conversion cycles, collect receivables as soon as possible because it is better to receive inflows sooner than later and delay payment of creditors in order to invest the money in short term securities which are profitable.