Effects of working capital management on profitability of selected firms quoted in the Nairobi Stock exchange

Abstract

Working capital management is important in he success of a business because of its effect on the firm's profitability and risk and consequently its value (Smith, J 980). Maintaining high inventory levels reduces the possible interruptions on the production process or loss of business due to the scarcity of products (stock-outs), reduces supply costs of business due to the scarcity of products, reduces the supply costs and protects against price fluctuations among other advantages (Blinder and Manccine, 1991). Granting trade credit favors the firms sales in various ways and helps to strengthen long term customers and supplier relationship (Smith and Smith 1999). However firms that invest heavily in inventory and trade credit can suffer reduced profitability. Every company has to make arrangements for adequate funds to meet the day-to- day expenditure apart from investment. The main objective of the study was to examine the effects of working capital management (WCM) on profitability of selected firms quoted in the Nairobi Stock Exchange (NSE). Specific objectives were to analyze the effects of cash conversion cycle on profitability of the firm, to analyze the effects of account payable on profitability, to analyse the effects of account receivable on profitability and to establish how inventory turn over affects profitability of the fInn. Exploratory study design was used to conduct the study in Nairobi province. The primary data was collected using both closed and open-ended questionnaires. The seconda.ry data was also collected from sampled listed companies financial statements, thesis, documented information on these companies by the Kenya Capital Authority and other library resources. To analyze the WCM efficiency of the selected companies in NSE, statistical techniques viz Minimum, Maximum, Mean, Standard Deviation and Coefficient of Variation, Correlation, and Regression Matrix was used to ascertain the linear trend and sign of growth in various components of working Capital (WC) ratios. This was done by the use of Statistical Package for Social Science (SPSS) to facilitate the analysis. The processed data was presented using figures, graphs, tables and percentage to ensure ease of interpretation, clarity and preciseness. The study targeted selected 30 quoted companies from the NSE representing different market segments. Stratified random sampling was used to pick large and small companies. The collected data was later keyed in, analyzed to come out with the research findings, recommendations and study conclusions.