Effects of Working Capital Management on Financial Distress of Non- Financial Firms Listed at the Nairobi Securities Exchange Market

Abstract

In Kenya many listed non-financial firms have gone under. The effect is loss of investors’ funds and erosion of confidence in the bourse. The general objective of the present study was to establish the effects of working capital on financial distress of non-financial firms listed at the Nairobi Securities Exchange. This is because appropriate working capital in firms can strengthen cash flow levels, improve profitability, budgeting and forecasting process. To achieve this general objective the study sought to find out the effects of inventory, cash, receivables and payables on financial distress of non-financial firms listed at Nairobi Securities Exchange (NSE). Quite a number of studies show are plagued by gaps; for instance, in their study Khaliq et al. (2014) considered only government linked listed firms; Nzioki et al. (2013) considered only 9 manufacturing firms; Gill et al.(2010)’s study covering 3 years was insufficient to establish effectively the relationship between working capital management and profitability of American firms; in his methodology, Mawutor (2014) unilaterally analyzed the study variables where the joint effects of all the working capital elements on profitability was not captured by the model. The study employed quantitative research design. All the 41 non-financial firms listed at (NSE) as at December 2016 comprised the population of study. The study did not adopt sampling but used a census instead. Secondary data for a period of 10 years (2007-2016) was used for analysis. Descriptive statistics and multiple regression analysis techniques were employed. Fixed effects model was applied to model the relationship among the variables of study. The results of this study were expected to reduce losses through establishing strong working capital levels applicable in non-financial firms listed at NSE. The study’s findings showed that cash had a positive and significant effect on financial distress; inventory had a negative and significant effect on financial distress; receivables indicated a negative and significant effect on financial distress; payables management indicated a positive and significant relationship with financial distress; firm value had a significant moderation effect on the relationship between working capital management and financial distress of non-financial firms listed at NSE. The study therefore recommended that in order to fix financial distress among non-financial listed firms good cash management, inventory management, receivables management, payables management ought to be embraced; firm value should be taken into consideration as a moderator in the relationship between working capital and financial distress of the non-financial firms. The study suggested a number of studies to be carried out: a study to investigate the effects of working capital management on financial distress among firms in East African Community; a study on working capital management and financial distress of small and medium sized firms in Kenya; Further empirical work was encouraged to test other measures like market demand conditions, political stability and financial contagion in addition to the four independent variables of the study; Lastly, a comparative study on the effects of working capital management on financial distress of non-financial firms listed in other countries was suggested.