Effect Of Working Capital Management And Capital Structure On Financial Performance Of Manufacturing Firms Listed In The Nairobi Securities Exchange

Abstract

The major objective of corporate and competitive strategies is to develop a sustainable competitive advantage, which enables the business to achieve and maintain a return in excess of that which would be allowed in a perfectly competitive market. Working capital management is essential because of its effect on a firm‟s profitability and risk, and consequently, its value and long-term survival of the firm. Working capital management is one of the most important areas while making the liquidity and profitability comparisons among firms and involves the decisions on the amount and composition of current assets and the financing of these assets. The study sought to establish the effect of working capital management and capital structure onfinancial performance of manufacturing firms listed in the Nairobi Securities Exchange. A descriptive research design was applied in this study. The quantitative research approach was employed to arrive at the findings of the study. Correlation and regression analysis were also used in the study to identify the nature and extent of relationship and to find out the effect of working capital management variables and capital structure on financial performance measures. The statistical analyses were performed. The Pearson correlation analysis was performed in order to examine the relationships among variables and check for multi-collinearity problem among the explanatory variables. The study found that the working capital ratio, debt ratio and firm size contribute to 78.4% and 69.2% of profitability in the two regression models and that a unit increase in working capital ratio leads to a -0.632 and -0.577 increase in profitability in each case. From the study findings and discussion, the study concluded that corporate capital ratio negatively affects the level of profitability of manufacturing companies listed in the NSE for the period of this study. The study also concluded that debt ratio positively and significantly influence the profitability of manufacturing firms listed in NSE The study recommends the manufacturing companies should concentrate on growing their sales revenue as a matter of policy. At the same time, they should pay attention to sound management of other working capital management components and financial leverage since the results show that they do affect profitability, although to a lesser significance.