The effect of working capital management on the profitability of general trading small and medium enterprises in Nairobi County

Abstract

Working capital management is a very pertinent determinant of liquidity and profitability of organizations. Short term management of corporate finances is a leeway for success and survival of the firms in the future. Efficient management of working capital cannot be ignored if the firm is to attain stable profitability and cash flows. This research sought to determine the effects of working capital management on profitability of general trading small and medium enterprises in Nairobi County. Descriptive research design was adopted for this study in which secondary data from financial statements of small and medium enterprises was gathered over the period 2010-2014. The collected data was analyzed by use of Microsoft excel 2013 and statistical package for social sciences (SPSS) version 17. Regression and correlation analysis were done to determine the effects of working capital on profitability. It was established that working capital is among the determinants of SMEs profitability of general trading SMEs in Nairobi County though not very key. Average collection period and Average age of inventory were found to be negatively related to profitability while a positive relation was noted between average payables period and cash conversion cycle. The study recommends that for general trading SMEs to remain profitable, efficient working capital management practices should be employed. This is imperative in determining, the financing mix, matching investment to organizational objectives, effective allocation of resources and striking a balance between risk, liquidity and profitability.