Working Capital Management and Corporate Financial Performance: Evidence from Panel Data Analysis of Selected Quoted Tea Companies in Kenya

Abstract

This study aimed to provide empirical evidence about the impact of Working Capital Management on corporate financial Performance of tea firms in Kenya for the period 2005 to 2012. The study utilized panel data econometrics of 6 tea firms which are listed on Nairobi Securities Exchange. The results indicate that the cash conversion cycle, net trade cycle and inventory turnover in days are significantly affecting the financial performance of the firms. The tea firms are in general facing problems with their collection and payment policies. Similarly, the financial leverage, sales growth and firm size also have significant effect on the firm’s profitability. The study also concludes that tea firms in Kenya are following conservative working capital management policy and the firms are needed to concentrate and improve their collection and payment policy. The effective policies must be formulated for the individual components of working capital. In addition, efficient Management and financing of working capital (current assets and current liabilities) can increase the operating profitability of tea firms. For efficient working capital management, specialized persons in the fields of finance should be hired by the firms for expert advice on working capital management in the tea firms.

Keywords: Working Capital Management, Cash Conversion Cycle, Net Trade Cycle, Average Collection Period, Average Payment Period, Tea sector, Fixed Effect Model.