The Effect of Working Capital Management Policies on Financial Performance of Non Financial Companies Listed on the Nairobi Securities Exchange

Abstract

Efficient management of working capital is very important for business survival. It involves management of short-term resources and their financing requirements. This study analyzed the effect of working capital management policies on financial performance of non-financial companies listed at the Nairobi Securities Exchange. A diagnostic research design was used targeting thirty non-financial companies from seven sectors of the Nairobi Securities Exchange. Data was analyzed using descriptive statistics to summarize the data. Correlation analysis was used to examine the relationship between variables. Multiple regression analysis was implemented to explain the effect of independent variables on ROA. All these analyses were done using Statistical Package for Social Scientists (SPSS). Results revealed that both working capital investment policy (WCIP) and working capital financing policy (WCFP) had a positive and statistically significant effect on financial performance. A change in WCIP by one unit increased financial performance by 65.7%, while the same change in WCFP increased financial performance by 26.2%. Firm size affected financial performance negatively as a change in firm size by one unit reduced financial performance by 28.6%. Sales growth did not affect financial performance since its coefficient was statistically insignificant. However, a declining trend in sales growth over time was established. Long-term debt had a positive and statistically significant relationship with financial performance. A change by one unit of long-term debt to assets ratio increased financial performance by 35.5%. The study also established a strong positive correlation between WCIP and WCFP and that most companies applied the moderate level of WCIP (0.408 mean) and conservative WCFP (0.291 mean). This study concluded that working capital management policies influenced financial performance positively and recommended that financial regulatory agencies work closely with companies to ensure adequate reporting of working capital management components financial reports. Risk management be incorporated in definition and application of working capital management policies; and that Universities, financial regulators, and companies collaborate closely to enhance availability of research data for students and improve financial management practices.