The relationship between working capital management and financial performance of automotive companies in Kenya

Abstract

A company policy on Working Capital Management has its effect on profitability as well as liquidity of the firm. This research study was to establish whether there is a relationship between working capital management and financial performance of automotive companies in Kenya. The study revealed that optimal levels of working capital that is current assets and current liabilities can result into increased profitability and consequently increase in shareholders’ wealth. A population of 22 automotive companies was studied for a period of five years from 2009 – 2013 to determine the effect of different working capital management variables including average collection period, inventory turnover in days, average payment period and cash conversion cycle on the profitability. Control variables were also used in the analysis including Current ratio, size of the firm measured using natural logarithm of sales, fixed financial assets to total assets ratio and leverage. Descriptive statistics and quantitative analysis were used to present data. Statistical Package for Social Sciences (SPSS) version 20 software was used for analysis of the different variables in the study. The package helped in organizing and summarizing data by use of descriptive statistics like tables. Pearson’s correlation and regression analysis were used in analyzing quantitative data, while descriptive statistics were used to show the mean and standard deviation of the different variables in this study as well as present the minimum and maximum values of the variables. The results show that there is a statistical significant negative relationship between variables of working capital management and the profitability of firms except for the average payment period which showed a positive relationship. This means that managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component of working capital management (accounts receivables, accounts payables and inventory) at an optimal level.