The Relationship Between Working Capital Management and Profitability of Petroleum Companies in Kenya

Abstract

Working capital management (WCM) refers to the management of current assets and current liabilities. Its aim is to ensure that a firm is able to continue its operations and has sufficient ability to satisfy both maturing short-term debt and future operational expenses. This study sought to establish the relationship between working capital management and profitability of Petroleum companies in Kenya. The study was based on the Baumol model, Miller Orr Model and the EOQ model. The research design used was a CrossSectional Study. Data for six large petroleum companies was gathered over a seven year period between 2007 and 2013. This period was considered by the researcher to be adequate to establish the existence of any relationship. Secondary data collected from annual audited financial statements of the firms was used for this study. This consisted of data from the income statement and statement of financial position of the companies which was used to compute ROA, DSO, DSI, DPO, CCC and leverage. Data collected was analyzed using descriptive and inferential techniques. Descriptive analysis showed the average, median and standard deviation of different variables of interest in the study. Pearson correlation analysis and regression analysis were performed on the variables. Study results indicated that there was an insignificant moderate relationship between ROA and DSO (r = 0.305; p > 0.05). DSI had an insignificant weak and negative relationship with ROA (r = -0.234; p > 0.05). DPO had an insignificant positive relationship with ROA (r = 0.238; p > 0.05). CCC had an insignificant positive relationship with ROA (r = 0.20; p > 0.05). Regression results indicate that DSO, DPO and CCC were not significant predictors of ROA. Study results however indicated that DSI had significant influence on ROA. The study recommends that management of companies in the Kenyan market should effectively manage their working capital to ensure maximum returns as other forms of finances have constraints