The effect of working capital management practices on the financial performance of manufacturing firms in Nairobi County

Abstract

The main purpose of this research was to establish the effect of working capital management on financial performance of manufacturing firms in Nairobi. Furthermore this study sought to determine the effect of specific working capital components on financial performance of manufacturing firms in Nairobi. The study used qualitative research design. The sample size of the study constituted 22 manufacturing firms in Nairobi County. Data for the study was obtained from audited financial statements of the sampled firms. Descriptive statistics was used to state the mean of the variables. Correlation analysis was used to determine the degree of association between the firm‟s performance and return on Equity. Regression analysis was used to determine the cause-and-effect relationship between working capital management and firm‟s performance. The results from regression analysis indicated that only 60.9 percent of variations on financial performance of manufacturing firms could be attributed to working capital management and the remaining portion being influenced by other factors. This study further revealed that working capital variables accounts collection period, inventory conversion period and average payables period were inversely related to financial performance as was measured by Return on Equity. This implies that effective working capital management policies may be implemented to improve financial performance of manufacturing firms. This study utilized a number of regression models with each model regressing each working capital variable against the Return on Equity. An overall regression equation that constituted all the relevant working capital variables subject to a set of control variables was used to study the variations in return on Equity. Multiple correlation analysis was performed with each of the unique models to examine the significance of relationship amongst the various independent variables and the dependent variable. All the variables were incorporated in one model, multiple correlation co-efficient was observed. The raw data obtained from financial reports of the firms under study were analyzed using Ms Excel spreadsheets after which regression analysis was performed with the aid of SPSS. Ordinary Least Square (OLS) regression found that cash conversion cycle is positively associated to the Return on Equity (ROE). The results show that managers can improve their performance by managing working capital efficiently. Further research should be done that involves other industries other than the manufacturing industry for example the insurance industry, construction industry, banking industry etc.