Working Capital Management, Ownership Structure and Financial Performance of Tea Firms in Kenya

Abstract

Collapse of companies in Kenya has been on the rise in the risen past. Far reaching endeavors to resuscitate these liquidating and ailing firms have generally been attributed on their corporate financial management decisions. Therefore, corporate directors and managers have the fundamental duty of understanding how their corporate financial management decisions influence the management of the company, in order to see to it that they achieve successful financial performance and on the other hand guarding against corporate collapse. Indeed, a huge predicament or puzzle for investors, management and other stakeholders is whether there exists an ideal or impeccable financial management decisions and how such fundamental decisions influence business financial performance. This study therefore explored the effect of working capital management and ownership structure on the financial performance in Kenya. The specific objectives of the study were to determine the effect of the accounts receivable management decisions, accounts payable management decisions, inventory management decisions, cash management decisions, firm size and sales growth on financial performance. The study also investigated the moderating effect of ownership structure. This study was underpinned by five theories: conservative plan theory, transaction cost theory, economic order quantity model, Baumol’s and Miller-Orr models and resource-based view theory. The study employed a correlational research design. The target population included 23 multinationals and 72 KTDA managed tea in Kenya. The study adopted a census approach where all the firms were included in the study. Secondary data was obtained from statistics published by KTDA, TBK and TRFK. A panel regression model was being used in the study. The analysis of the data was done using both descriptive and inferential statistics. The study illustrated that the receivable accounts in days is negatively and significantly related to return on assets (β = -0.1299, p=0.0160). The study found that the payable accounts in days is negatively and significantly related to return on assets (β = -0.0843, p = 0.0070). The study noted that the inventory turnover in days is negatively and significantly related to return on assets (β= -0.0623, p=0.0180). The study concluded that the receivable accounts in days, inventory turnover in days, is positively and significantly related to financial performance, while payable accounts in days and cash conversion cycle is negatively related to financial performance. Ownership structure moderates the relationship between receivable accounts in days, payable accounts in days, inventory turnover in days and financial performance in Kenya. The coefficient of determination (R2) before moderation was 65.69%, but after moderation, the R2 increased significantly to 78.08%. The study recommended the tea firms should increase the level of the receivable accounts by increasing the debtors and the payable accounts in days should be made as low as possible. A firm with a long payable accounts in days frustrates the supplier from supplying any more goods or services to the firms. The firms need to increase the inventory turnover in days. The study recommended that the cash turnover in days needs to be kept low. The tea companies need to ensure the interval of time (days) required to convert a shilling invested in current assets into cash is minimized. The companies can be involved more in improving cash flow to allow for business opportunities. The study recommended that the firms need to make more investment in current assets to accomplish target sales. It is recommended that KTDA Holdings need to be more innovative and look at the strategies utilized by the multinational firms to enhance their performance.