Effect of Working Capital Management on Financial Performance of Three Star Hotels in Nairobi County

Abstract

Management of working capital aimed at maintaining an optimal balance between the working capital and units such as cash receivables, inventory and payables which is fundamental section of overall corporate strategy that creates value thus important source of competitive advantage in business. For a company to operate optimally, it must have a positive working capital to ensure that it is able to continue its operations and to have sufficient funds to satisfy both maturity short-term and upcoming operational expenses. In conclusion, research on effect of working capital management on profitability and company’s performance on three star hotels in Nairobi County has not been comprehensive thus creating a research gap that needs attention. Due to this knowledge gap, the study sought to answer the research question of whether there exists an effect of working capital on company’s financial performance of three star hotels in Nairobi County. Further the study sought to answer the research question of whether there exists an effect of working capital on company’s financial performance of three star hotels in Nairobi County. The study establishes that possessing a lower average collection period is seen by the three star hotels as optimal, since this means that it does not take them very long to turn its receivables into cash. This owes to the fact that these hotels need cash to pay off their own expenses (such as operating and administrative expenses) including suppliers who deliver food products to them on credit. They also tend to have a longer accounts payable period so as to maintain a high current ratio and avoid operating in negative. Monitoring the working capital is important for the three star hotels’ cash flow and its ability to meet its obligations when they are due. However, they optimize this to ensure that their credit worthiness is not tainted, and take advantage of discounts including avoiding accruing interest rates unnecessarily. The three star hotels also monitor their inventory conversion period to ensure that it is as short as possible since conversion period is negatively correlated with profitability. If conversion period is longer, the three star hotels will take longer to pay off their suppliers and meet their financial obligations.