The effect of working capital management on financial performance of manufacturing and construction firms listed at the Nairobi securities exchange

Abstract

Management of working capital which aims at maintaining an optimal balance between each of the working capital components, that is, cash, receivables, inventory and payables is a fundamental part of the overall corporate strategy to create value and is an important source of competitive advantage in businesses (Deloof, 2003). The objective of the study was to establish the effect of working capital management and financial performance of manufacturing and construction firms listed in NSE.The research used both descriptive and quantitative research design. The population of interest in this study constituted all manufacturing and construction companies quoted at the NSE for the period of ten years from 2005 to 2014.The quantitative research approach was employed to arrive at the findings of the study. The study found average collection period, inventory turnover period, cash conversion cycle, liquidity, leverage and sales turnover had positive effects on return on equity of manufacturing and construction firms listed at NSE. However, the effects of average collection period, inventory turnover period, cash conversion cycle and liquidity were insignificant at 5% level, while leverage and sales turnover was significant at 5% level. Based on the key findings from this study it has been concluded that the management of a firm can create value for their shareholders by increasing the number of day’s accounts receivable. The management can also create value for their shareholders by increasing their inventories to a reasonable level. Firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the resources of the organization through a carefully reduction of the cash conversion cycle. In so doing, the profitability of the firms is expected to increase.