Working capital management approaches and the financial performance of agricultural companies listed at the Nairobi securities exchange

Abstract

Working capital management approach is one of the most important decisions that company managers consider for effective financial management. The relationship between firm’s profitability and working capital management approach is frequently emphasized for deciding on the level of investment in working capital. This study examined the relationship between working capital management approach and financial performance of all agricultural firms listed in the Nairobi Securities Exchange (NSE), Kenya. A diagnostic research design was used to determine the association of working capital management approach with company’s financial performance. The data was obtained through document analysis of annual consolidated financial reports of years ending December: 2009, 2010, 2011, 2012, and 2013 of all companies as published by the Nairobi Securities Exchange and Capital Markets Authority (CMA). The regression analysis was performed for each company to establish the relationship between the Return on Assets and the working capital management approach. The results indicated that Limuru tea Limited was the most profitable agricultural company (Return on Asset: ROA = 46.48%) while Eagards was the least profitable (ROA = 4%). There was significant difference between the companies profitability estimates (ANOVA P = 0.0005, F = 5.96, df = 6) probably because each firm has different proportion of total assets, which technically influences how much profit each company makes. Statistically, each company employed a different working capital management approach (ANOVA: P = 0.002, F = 4.55, df = 6). However, the working capital management approach was less than 50 % in all companies suggesting that the companies used different levels of conservative working capital management approaches. However, that the management approach for Kapchorua tea; Reavipingo and Williamson companies adopted less conservative approaches. The strong negative regression association (r2 = 0.73) between ROA and working capital management approach adopted by Sasini limited indicated significant effect of the working capital management approach on the company’s profitability (F = 21.64, P = 0.002, df = 6). This could be attributed to the large company’s total asset estimated at Ksh. 8.8 billion, of which a larger proportion could be idle. In conclusion, all the agricultural companies currently listed in the NSE exercise different levels of conservative working capital management approach. The study recommends that similar studies should be conducted for non listed agricultural companies in Kenya to derive a broader conclusion on the effects of working capital management approach on agricultural companies in Kenya.