Effects of Working Capital Management on Profitability of Sugar Manufacturing Firms in Kenya

Abstract

Working capital management plays a vital role in the success of businesses because of its effect on profitability and liquidity. The purpose of this study is to examine the effect of working capital management variables including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Sugar Manufacturing firms in Kenya. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. The study used secondary data collected from 8 Sugar Manufacturing firms in Kenya covering the period from 2008-2013. Using Pearson’s correlation and regression analysis, the study finds a significantly negative relationship between variables of the working capital management and profitability of Sugar Manufacturing firms in Kenya. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. The study suggests that managers can create value for their shareholders by increasing their inventories to reasonable levels and also reducing accounts receivable period. It is further recommended that, scope for further research may be extended to the individual working capital components including cash, marketable securities and receivables.