Relationship between working capital components and financial performance of the commercial and services firms quoted at the nairobi security exchange

Abstract

The management of firm‟s working capital components is essential due to its effect on the firm‟s business strength and its liquidity. There is need for a balance to be struck between the need to achieve high profitability position and also for the firm to remain liquid in order to meet the short term obligations when they fall due. The research objective was to establish the relationship between working capital components and financial performance of the commercial and services firms quoted at the Nairobi Security Exchange. To achieve this objective, the study used secondary data obtained from the annual reports and financial statements of firms for the period 2009-2013. A regression model was determined on the relationship between the working capital components, control variables and the firm‟s profitability. In addition, Pearson‟s correlation used for the analysis and tests of significance were carried out for all variables using t-test at the 95% level of significance. The result findings showed that working capital management is an important parameter to be considered by a firm in projecting its profitability level as well as its influencing in liquidity. The results of general least squares method with cross section weights indicate the same interpretation that the working capital management affects profitability of the company and that if the firm can effectively manage its working capital, it can lead to increasing profitability. The firm size, as measured by the logarithm of total assets, is positively related to profitability. This means that larger firm report higher profits compared to smaller firms and all other factors remaining constant, the size of the firm is directly related to age of the organization. The study limited itself to only the commercial and services firms listed at the NSE and there is need to undertake a more extensive study to validate the results. The study is important for policy makers and regulators who need to motivate and encourage managers and shareholders to pay more attention on working capital through improving investors‟ awareness and improving transparency.