Working Capital Management and Profitability of Firms Listed Under the Construction and Allied Sector at the Nairobi Securities Exchange, Kenya.
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Date
2018-10
Authors
Andisi, Lung’aho Christine
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
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.
Description
A Research Project Submitted to the School of Business in
Partial Fulfillment of the Requirements for the Award
of Degree of Master of Business Administration (Finance)
of Kenyatta University. October 2018.