Effects of working capital management practices on profitability of small and medium enterprises in Nairobi County, Kenya
Wambugu, Peter Maina
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Proper working capital management is essential for business survival. This is based on the fact that a firm’s inability to identify relevant working capital management practices can be its source of inability to perform. The general objective of this study was to determine the effects of working capital management practices on profitability of Small and Medium Enterprises (SMEs) in Nairobi County which was guided by the following specific objectives; to determine the effect of cash conversion cycle on profitability of SMEs of Nairobi County, to establish the influence of inventory holding period on profitability of SMEs of Nairobi County, to determine the effect of accounts receivable period on profitability of SMEs of Nairobi county, to establish the effect of accounts payable period on profitability of SMEs of Nairobi county and, to establish the effect of the approaches of working capital management on profitability of SMEs of Nairobi county. The study provided insight on which working capital management practices are efficient and necessary for the success of SMEs. The study adopted a cross-sectional survey research design and in depth interviews which allowed the collection of primary quantitative data through structured questionnaires. A population of SMEs operating in Nairobi County was targeted. The study used stratified random sampling method by dividing the population into six subpopulations or strata. A simple random sampling method was then used to select the specific respondents for the study. Data was analyzed for descriptive and inferential statistics. Descriptive statistics such as tables, graphs, charts and percentages analysis were used for presentation of data. Also, a linear regression model was used to analyze quantitative data and was developed and tested to explain the relationship between various proxies of working capital management practices and profitability of SMEs of Nairobi County. The study results of the regression analysis indicated that the dependent variables are significant and have an effect on profitability of SMEs. The study concluded that managers of SMEs should adopt the correct working capital management practices and identifying critical areas that may improve the profitability of SMEs. The study recommended that SMEs managers should be thoroughly trained on working capital management skills. The managers should also undergo continuous development programs through interactive symposiums, conferences, and open forums. The study advocated for increased government support to the SMEs sector. This can be done through resource allocation in this sector. The government in conjunction with it agencies should also assist SMEs in sorting out the problems of managing working capital by setting out guidelines and regulations on proper corporate governance in this sector. The study suggested that further researcher should be conducted for the same study in other counties so as to compare the findings of this study with those of other counties. The study also recommends that in future researchers should do a follow up study in the same area so as to monitor and evaluate for improvements in the management of working capital management practices.