Working Capital Management and Firm Profitability : Empirical Evidence from Manufacturing and Construction Firms Listed on Nairobi S ecurities Exchange, Kenya
Makori, D. M.
Jagongo, A. O.
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Working capital management plays a significant role in improved profitability of firms. Firms can achieve optimal management of working capital by making the trade-off between profitability and liquidity. This paper analyzes the effect of working capital management onfirm’s profitability in Kenya for the period 2003 to 2012. For this purpose, balanced panel data of five manufacturing and construction firms each which are listed on the Nairobi Securities Exchange(NSE) is used. Pearson’s correlation and Ordinary Least Squares regression models were used to establish the relationship between working capital management and firm’sprofitability. The study finds a negative relationship between profitability and number of day’s accounts receivable and cash conversion cycle, but a positive relationship between profitability and number of days of inventory and number of day’s payable. Moreover, thefinancial leverage, sales growth, current ratio and firm size also have significant effects on the firm’sprofitability. 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 reducing 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 can also take long to pay their creditors in as far as they do not strain their relationships with these creditors. Firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the resources of the organization through a careful reduction of the cash conversion cycle to its minimum. In so doing, the profitability of the firms is expected to increase