EFFECT OF WORKING CAPITAL MANAGEMENT ON CORPORATE FINANCIAL PERFORMANCE: A SURVEY OF AUTOMOBILE AND ACCESSORIES COMPANIES LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Working capital management entails the relationship between a firm's current assets and its current liabilities and it plays an integral role in financial decision making. It involves the management of the most liquid resources of the firm which includes cash and cash equivalents, Inventories and trade and other receivables. Majority of firms do not maintain the correct mix of working capital and this has been a major hinder to their overall profitability. The main goal of working capital management is to ensure that a firm maintains a healthy liquidity position. Previous studies have been conducted on the effects of working capital management on financial performance both locally and globally providing conflicting results. The study aimed to iron out these differences by analyzing the effects of working capital management on corporate financial performance and confined itself within automobile firms listed on the Nairobi Securities Exchange. The study purposed to form a basis for policy creation and implementation in the area of working capital management, identify priority cash management techniques to be employed in working capital management in addition to providing a platform for further research on related field of working capital management. The study was anchored on cash conversion cycle theory, working capital management theory and Keynesian theory of money and supported by existing related literature in relation between working capital management and financial performance. The study adopted a quantitative research design, targeting the all listed automobile firms trading on the Nairobi Securities Exchange. Data was obtained from in-depth analysis of consolidated financial reports of years 2007-2016. Thereafter data was analyzed using panel data methodology. Random effects models and correlation analysis with the help of stata statistical analysis software were used to determine the relationships between working capital management and the corporate financial performance of these firms. The findings and results were presented on tables and charts. The study concluded that, inventory conversion period had a positive correlation with return on assets while average receivables period, cash conversion cycle and average payables period had negative correlation though none of the variables under study was statistically significant. The study also reported 6.8 % variation in returns on assets to be caused by working capital management and the study suggested that other components affecting financial performance be carried on the same companies. The study further recommends that finance managers should review specific policies regarding each component of working capital management as they have combined effects on financial performance. Also relevant institutions should consistent monitoring of competencies of financial manager.