Working Capital Management and Financial Performance of Manufacturing and Allied Category of Firms Listed at the Nairobi Securities Exchange, Kenya
Ochieng, Ruth Marenya
Jagongo, Ambrose O.
Ndede, Fredrick W. S.
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Manufacturing sector is one of the key pillars to economic development in Kenya. Most of the organizations consider working capital management as an important recipe in financial management due to its effects on a firm’s profitability, risk and value. Empirical evidence has shown that well formulated and implemented working capital management policy has a positive effect on the firm performance. In the recent, listed manufacturing firms has been experiencing volatility in their returns as well as poor stock performance in the last five years. This may be due to manufacturing firms investing heavily in the various working capital components. The sector is continually facing crucial challenges being inadequate resource linked to poor working capital management that is poor liquidity levels, firms operating without credit control department and increased cases of bankruptcy making it difficult for the sector to succeed. Despite various studies done, it is not clear how the various components of working capital affect profits, due to their varying effects on profitability hence the need for further research. The current study sought to fill this research gap. The study aimed at investigating how accounts receivables management, inventory management, accounts payables management and cash management influences the financial performance of manufacturing and allied category of firms listed at the NSE. The research utilized explanatory survey research design. The population of interest in this study constituted of all listed firms in the category of manufacturing and allied quoted at the NSE for the period of eleven years (2006 to 2016). There are 9 listed firms at the NSE on the category of manufacturing and allied sector. The study relied on secondary sources of data that was collected using a data extraction form. The collected data was analysed using SPSS.v.23.0. Descriptive statistics was used in the analysis which involved the use of frequencies, means and standard deviation. Quantitative data was presented in tables. The study used inferential statistics which involved tests for multiple regression assumptions of Multicollinearity, Normality, linearity tests, model fit and coefficients. The findings of the research indicated that there was a positive association of working capital management on the financial performance of manufacturing and allied category of firms as indicated by a R2=.923. The study further indicated that firm size had a significant and positive moderating effect on the interaction between WCM and financial performance. The research recommended that firms need to strengthen their management of accounts receivables, accounts payables, cash management and inventory management in order to foster financial profitability. Specifically, the study also proposed that, manufacturing and allied firms should stop making investments that cannot be accessed for longer periods than what the company is currently forecasting and to use a formula that best fits the industry to arrive at a reasonable maximum amount of credit to offer customers, over which a senior manager must approve the terms to ensure adherence to best limits.