Effect of Working Capital Management on Firm’ Financial Performance: A Survey of Water Processing Firms in Puntland

Abstract

The study aimed to establish the effect of working capital management on financial performance of water processing firms in Puntland state of Somalia. The study period of 2011 to 2015 was divided into financial quarters with working capital and financial performance variables determined for each of these quarters. There were four specific objectives for the study relating to the effect of firstly cash management, secondly inventory management, thirdly receivables management and lastly payables management on financial performance of the water processing firms. Three theories used in the study are the agency theory, transactional cost theory and working capital management cycle theory. The study used descriptive survey to accomplish the objectives. The study focused on a convenient sample of four companies located in Garowe. It used multiple linear regression of return on assets (ROA) on the four independent variables of cash conversion cycle ratio (CCR), stock turnover ratio (STR), receivables turnover ratio (RTR) and payables turnover ratio (PTR). The findings from descriptive statistics indicated that all the variables are very volatile given the high values of coefficient of variation for each of the variables. From inferential statistics, the study found out that CCR and STR have a positive effect on return on assets of the water companies in Garowe. Receivables turnover, the indicator of receivables management had however a negative effect of ROA. The last working capital variable, payables turnover ratio had no effect on financial performance of water companies as indicated by ROA. The study concludes that the findings which in some cases are not similar to findings from elsewhere could be because of the unstable nature of the business environment in Puntland state of Somalia and Somalia in general. Because of the study limitations, the study makes two recommendations for further study that is there should be studies to cover a wider population of water companies in Somalia to check the effect of working capital on financial performance will remain the same after adjusting for the increased population. A similar study could be done for other types of companies outside of the water processing firms in Puntland.

Keywords: Cash management, Inventory management, Receivables management, Payables management & financial performance.