The effects of working capital management on the financial performance of retail supermarkets in Nairobi county, Kenya

Abstract

Working capital management (WCM) refers to the management of current assets and current liabilities. Management and evaluation of WC is aimed at ensuring that the firms’ current assets and Current liabilities are employed in an optimal way to achieve the goal of profit maximization. By doing this, managers need to ensure that a firm is able to continue its operations and has sufficient ability to satisfy both maturing shortterm debt and future operational expenses. This study sought to establish the relationship between working capital management and financial performance of retail supermarkets in Nairobi County, Kenya. The study adopted a descriptive survey design.. Data for eight large supermarkets was gathered over a five year period between 2010 and 2014. 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 Return on assets, Days of sales outstanding, Days of sales in inventory, Days of payables outstanding, leverage and size of the firm. Pearson correlation analysis and regression analysis were performed on the variables. The results indicate that DSI had a positive and insignificant relationship with ROA (β = 0.060; p =0.278> 0.05). Further, t-test indicated that DSO had a positive and insignificant relationship with ROA (β = 0.056; p=0.348> 0.05). Regression results further indicated that DPO had a moderate negative significant relationship with ROA (β = -0.071; p=0.061> 0.05). Size of the firm had a strong significant relationship on ROA (β = -0.588; p=0.004<0.05). Management of working capital through increasing DPO without hurting the credit standing has an effect on the financial performance and the value of a firm. The current study results indicate that a longer DPO would lead to higher ROA. Leverage according to study results had an insignificant negative influence on ROA (β = -2.115; t = -0.249; p < 0.05). This indicated that increase in leverage would not have a major impact on ROA for the surveyed supermarkets.The study recommends that retail firms in the Kenyan market should effectively manage their working capital to ensure maximum returns because other forms of financing have limitation