Effect of Working Capital Management on Profitability of Manufacturing Firms Listed in Nairobi Securities Exchange, Kenya

Abstract

In Kenya, manufacturing sector has been cited by Kenyan government as one pillar of the larger agenda. The Kenyan government aims to increase Gross Domestic Product by 15 percent using effective manufacturing. Manufacturing is instrumental for domestic productivity, economic growth, reducing poverty, foreign exchange and employment. Working capital management acts as a useful instrument for manufacturing firm’s profitability. Previous scholars have devised that improved Working Capital Management contained positive results on profitability of manufacturing firms. For the past five years Kenya's manufacturing sector has been hit by poor working capital management that has led to erratic profits. In addition, manufacturing firms are likely to be very profitable, but still have problems with short term operational standards. Most manufacturing firms invest highly on current assets and poor management of short term operating assets causes unexpected revenues. Although various studies have been conducted, lack of consistence revenues requires further examination on how elements of effective Working Capital Management affect profitability and what causes these deviations. This study sought on filling these research gaps by evaluating effect of Working Capital Management on profitability of manufacturing firms listed at Nairobi Securities Exchange, Kenya. Current study was piloted by following specific objectives; Influence of inventories, receivable, payable, and cash managements on profitability of manufacturing firms registered at Nairobi Securities Exchange. Theories that guided this study were: agency, transaction cost, and cash conversion cycle theories. Descriptive statistics was used in analysis especially, minimum, maximum, mean and standard deviation. Mathematical data evaluation involved inferential statistics like, multiple regression and correlation. In addition, study model quantitative data was presented in tables. The study accepted census sampling method for collecting of secondary data from population of 20 manufacturing companies listed for five years from 2016 to 2020. Secondary details were found in the financial statements of manufacturing firms and Nairobi Securities Exchange data base. Data was collected using a check list. Multiple regression statistical assumptions were tested using, multicollinearity, heteroscedasticity, normallity pannel unit test, model specification test and correlation. Model goodness of fit for predictor and dependent variables were tested at 5% significance level and 95% confidence interval. The study revealed that there was significant positive relations between working capital management with profitability of manufacturing firm with (R2 = 0.21). The study findings revealed inventories and cash management had insignificant positive effect on profitability with (R= 0.0001 P=0.0154) and (R=0.0129 P=0.0376) respectively. Account receivable and account payable had a significant negative effect on profitability with (R=-0.0720, P=0.0116) and (R=-0.0720, P=0.0235) respectively. The study recommends that manufacturing companies should estimate desirable quantity of working capital. The study overall conclusion is that there exists inefficiency of managing manufacturing firms working capital and this leads to erratic profits.