Operational cost uncertainty and financial performance of manufacturing firms in Kenya

Abstract

The main objective of this study was to find out if uncertainty about the operational costs of manufacturing firms in Kenya affects financial performance. Kenyan manufacturing firms have not been performing as expected. They are meant to contribute to economic growth through GDP increments and market share, attract the largest strategic investments in the key processing industry, increase sales locally and internationally, and employ 20% of the Kenyan population. However, manufacturing firms have been facing various financial and non-financial challenges, including declining profit and sales, and some firms have moved out of the market. Many factors have been cited as contributing to declining financial performance. However, the influence of operational cost uncertainty on the financial performance of manufacturing firms in Kenya is not conclusive. Some studies found a negative relationship, while others found a positive relationship. Hence, the current study necessitates examining the influence of firm operational cost uncertainty on the financial performance of manufacturing firms in Kenya. The study anchored its variable on agency theory, which states that during financial uncertainty, operational costs are volatile. Indicators of operational cost uncertainty were the labour cost ratio and the research and development ratio, and proxies of performance were ROS and ROE. The study adopted positivism, philosophy, and an explanatory design. The target population was 856 manufacturing firms registered with the Kenya Association of Manufacturers. A sample of 90 firms was drawn from the population using the Nasuirma (2000) formula. The stratified random sampling technique was applied to 14 sectors, and each sample was picked by random sampling. The study covered 12 years, starting from 2009 to 2020. Panel data was collected from audited financial statements using a data collection instrument. Results showed that operational cost uncertainty had a positive and significant influence on the financial performance of manufacturing firms in Kenya. The labour cost ratio had a negative and significant relationship with the financial performance of manufacturing firms in Kenya. The research and development ratio had a positive and significant impact on the financial performance of manufacturing firms in Kenya. The study recommends manufacturing firms have enhanced technology in place to help reduce production costs. The study recommends having enhanced research and development in place that will take advantage of the market niche for products and technology for production. Key Words: Operational cost uncertainty, financial performance and manufacturing firms