The relationship between working capital management and profitability of companies in the electric power sub-sector in Kenya.

Abstract

This research project sought to establish the relationship between working capital management and profitability of companies in the electric power sub-sector in Kenya. The research project covered the conceptual and empirical analysis of companies in the electric power sub-sector responsible for generation, transmission and distribution of electrical energy in Kenya. A total of six companies responded from the year 2008-2013 financial years. Components of working capital such as cash conversion cycle, average inventory period, average payment period and average collection period were examined and how each of these variables relate with profitability measured by the gross operating margin. The study also included control variables such as debt ratio, current ratio and size of the firm. The study was analysed using descriptive statistics, Pearson’s correlation coefficient and multiple linear regression models. The study established that the average collection period was negatively related to profitability of firms in the electric power sub-sector in Kenya. This implies that managers can create value for their firms by reducing the number of days in collecting receivables. The other variables like average inventory period, cash conversion cycle and average payment period were positively related to profitability. The average inventory period was positively related to profitability implying that management of firms need to increase inventory to avoid stock-outs to ensure difficulties of procuring materials to meet customer demands are minimised. The average payment period was positively significant in relation to profitability meaning that management should delay payment of suppliers to have enough cash to buy more inventory and increase sales hence improved profitability. It is a positive venture, as long as this policy does not compromise the relationship between suppliers or creditors and the companies in the electric power sub-sector in Kenya. This leads to the conclusion that indeed working capital management is important in profitability of firms in the industry.