Working Capital Management and Profitability of Firms Listed Under the Construction and Allied Sector at the Nairobi Securities Exchange, Kenya.

Abstract

The construction and allied sector remains key to Kenya’s vision of becoming an industrialised nation by year 2030 as per Kenya Vision 2030. The industry has however faced challenges in terms of erratic profits, reduced access to credit and competition from imports that have affected its growth. The study sought to assess the effect of working capital management (cash management, inventory management, debtors management and creditors management) on profitability of listed construction and allied firms listed at the Nairobi Securities Exchange (NSE), Kenya. The study was anchored on the cash conversion cycle theory, transaction cost theory and agency theory. Descriptive longitudinal design was adopted. The target population comprised all the construction and allied companies listed at the NSE, Kenya. Data was obtained from the annual financial statements of the firms for the years 2010 to 2016. Diagnostic tests were conducted and were all in the affirmative. Data was analysed using Descriptive analysis, Pearson’s Correlation analysis and panel regression analysis (fixed effects model). Results were presented in tables. Correlation analysis documents a negative and weak correlation between average collection period and inventory holding period with profitability. The average payment period and the cash conversion cycle were positively correlated with profitability, but this relationship was found to be weak. The study found an inverse and insignificant relation between average collection period and inventory holding period with profitability. The average payment period and the cash conversion cycle were positively related with profitability but this relationship was found to be insignificant. These findings indicate that the firms should increase their payments period and cash conversion cycles and reduce debtor days and inventory days to increase profitability. The study found that the average payments period had the greatest predictive strength in the working capital equation while cash conversion cycle had the weakest predictive strength. Working capital however explains a small portion of profitability as measured by net income. The study concludes that there is an overall inefficiency in the management of working capital by managers of firms operating in the construction and allied sector in Kenya.