EFFECT OF WORKING CAPITAL MANAGEMENT ON FINANCIAL PERFORMANCE OF LISTED COMMERCIAL AND SERVICE FIRMS AT NAIROBI SECURITIES EXCHANGE LIMITED KENYA

Abstract

The study analyzed the relationship of WCM on financial performance, taking the case of Firms in the Commercial and Services Segment of NSE, Kenya. Specifically, the study analyzed the effect of accounts receivable, accounts payable, stock conversion period, cash conversion cycle on Return on Asset as measures of financial performance of commercial and services segment listed in Nairobi Securities Exchange, Kenya. The study adopted the following theories to explain the effect of working capital on financial performance of Listed commercial and services segments; Residual Equity Theory, Value Chain Theory, Operating Cycle Theory, Cash Conversion Cycle Theory and Transaction Cost Economics Theory. The study adopted descriptive research design which tested variables the way they occur in natural environment without interfering with them. The target population of the study was the 12 firms in the Commercial and Services Segment of Nairobi Securities Exchange. The secondary data used in the analysis was from audited accounts reports from 2007to 2017. The researcher had a challenge in the companies which did not disclose some components of working capital on their financial statements but had to visit their company‟s premises to access the data. Data was analyzed using panel data regression models and correlation analysis with the help of Stata Statistical Software to establish the combined influence of the four components of working capital management on financial performance. The results is useful for the Capital Market Authority (CMA) of Kenya who formulate policies that promote efficiency in the management of the listed firms in understanding how the existing policy support efficient working capital management with an aim of improving financial performance of the listed companies. The study found out that that apart from Cash Conversion Cycle, the other elements of Working Capital Management (Accounts Receivable, Accounts Payable and Inventory Conversion Period) affected financial performance measured in terms of Return of Asset of firms‟ in commercial and service segment in the NSE. Accounts Receivable had positive correlation with financial performance, r=.686, p=.012<.05 indicating that Accounts receivables affected financial performance of firms‟ in the commercial segment of the NSE,Accounts Payable had positive correlation with financial performance, r=.509, p=.05 indicating that Accounts Payable affected financial performance of firms‟ in the commercial segment of the NSE, Inventory Conversion Period had no correlation with financial performance, r=.509, p=.050 indicating that Inventory Conversion Period affected financial performance of firms‟ in the commercial segment of the NSE, Cash Conversion Cycle had no significant relationship with financial performance, r=.001, p=.073>.05 indicating that Cash Conversion Cycle did not affect financial performance of firms‟ in the commercial segment of the NSE and on overall, there is a weak relationship between cash flows and performance indicators . The study recommends that firms‟ in commercial and service segment in the NSE should enhance credit management to avoid over investment in accounts receivables. Collection policies should be reviewed in order to make the cash conversion cycle shorter for efficient working capital while keeping in view the intensity of competition. The study also recommends proper inventory management to avoid overstocking which could negatively affect financial performance. While coming up with inventory related policies.