Effects of Working Capital Management on Profitability of Manufacturing Firms in Kenya

Abstract

In Kenya, manufacturing sector is the second most important sector after agriculture. It is important in terms of contribution to gross domestic product, employment and foreign exchange earnings. In the last decade, the manufacturing sector has been struggling to thrive and some key firms in the sector have closed operations. This is due to unfavorable working conditions. These problems compel companies to maintain either excessive or inadequate working capital levels. Both levels are undesirable. Therefore, the purpose of this research was to determine the effects of working capital management on profitability of manufacturing firms in Kenya. The study had five objectives, that is, to determine whether credit policy influences profitability of manufacturing firms in Kenya, establish the degree to which accounts payable practices influence profitability of manufacturing firms in Kenya, examine how inventory control practices influence profitability of manufacturing firms in Kenya, establish whether liquidity management practices influence profitability of manufacturing firms in Kenya and investigate whether working capital levels influence profitability of manufacturing firms in Kenya. The study employed a correlational research design. A questionnaire was used to collect primary data for the independent variables and a record survey sheet was used to collect secondary data for the dependent variable (profitability). The target population was 413 manufacturing firms in Nairobi industrial area and its environs. These firms were registered with Kenya association of manufacturers and were in the KAM 2011 directory. A sample of 81 chief finance officers filled in the questionnaire. The sample was determined using stratified random sampling method. Data received from secondary sources and from the chief finance officers was analyzed using Statistical Package for Social Sciences (SPSS) version 20.0. Both descriptive and quantitative analyses were used. In descriptive analysis, percentages of the responses and the mean were computed. Under quantitative analysis, Karl Pearson’s correlation, regression and ANOVA analyses were used. The results of the study showed that there was positive linear relationship between all independent variables (credit policy, accounts payable practices, inventory control practices, liquidity management practices and working capital levels) and the dependent variable (profitability) and all the models were significant. The null hypotheses in this study were rejected. The overall model was tested using the F- test at 5% level of significance. The findings of the analysis revealed that all the independent variables had a significant combined effect (R 2 = 0.933) on profitability of manufacturing firms in Kenya and can be used to predict profitability. The study makes the following recommendations; manufacturing firms to regularly review their credit policies, make early payments to their suppliers to enjoy good relationship with their suppliers, install and maintain modern inventory control systems, establish optimal cash targets, lower and upper limits and employ accountants with adequate knowledge in financial matters. On policy implication, the government of Kenya through the ministry of industrialization should create an authority to oversee the development and success of manufacturing sector so as to be in line with vision 2030. Companies should employ qualified accountants who are members of the institute of certified public accountants of Kenya.