Effects of working capital management on profitability among manufacturing and allied firms listed on Nairobi securities exchange, Kenya

Abstract

The study sought to assess the effects of working capital management on profitability among manufacturing and allied firms, Kenya. Moreover, specific objectives of this study are to: determine effect of Average Collection Period on profitability of Nairobi Stock Exchange manufacturing and allied firms; establish influence of Inventory Conversion Period on profitability of manufacturing and allied firms on Nairobi Stock Exchange; determine effect of Average Payment Period on profitability of Nairobi Stock Exchange manufacturing and allied firms; and to establish the effect of Cash Conversion Cycle on profitability of Nairobi Stock Exchange manufacturing and allied firms. Explanatory research approach is employed. Panel data obtained from Nairobi Stock Exchange between 2009 and 2018 are analyzed with the help of Eviews 10 student version program. Baumol’s theory is adopted as an underlying theory of the study whereby, random effect method is chosen to be the best method to run panel data at 5% level of significance. It is observed that Average Collection Period and Cash Conversion Cycle are significant at the 5% level of significance with p-values of 0.0021 and 0.0240, respectively while APP and Inventory Conversion Period had insignificant influence on profitability (Return on Assets) of Nairobi Stock Exchange manufacturing and allied firms, evidenced by p-values of 0.8758 and 0.6639, respectively. The study recommends that manufacturing and allied firms ought to minimize the time taken by their customers to pay for the already sold goods. Furthermore, the management of the firms should come up with a credit policy to reduce as well as define the credit period the clients are given (the duration allotted to debtors) to settle their debts. Also, manufacturing and allied firms ought to take appropriate steps to minimize the cash conversion cycle. This can include developing relations with debtors in order to make it simpler to collect receivables, taking proper steps to avoid bad debts, for example assessing consumer payment risk, and, most importantly, implementing a sound cash management strategy.