The Effects of Working Capital Management on Organizational Performance - A Survey of Manufacturing Firms in Eldoret Municipality

Abstract

Working capital management is a crucial element in determining the financial performance of an organization. The purpose of this study was to investigate the relationship between working capital management (given by cash conversion cycle, CCC) and organizational performance (represented by profitability/returns) of manufacturing firms in Eldoret Municipality of Uasin Gishu County, Kenya.

A sample of 13 manufacturing firms in the region was used in the study. Historical data on financial performance was collected from the annual financial statements of the sampled firms for a period spanning ten years. More data was also obtained from the managements of these firms through interview schedules and questionnaires. Performance was measured in terms of return on assets and return on equity while cash conversion cycle, current assets to total assets and current liabilities to total assets were used as measures of working capital management.

Correlation and regression analysis were used for the analysis. The findings reveal that the working capital management is negatively correlated with return on assets (ROA) and return on equity (ROE) consisting the R values of -0.148 and -0.231 respectively. However, these figures are low, implying that there is no significant relationship between CCC and performance measures used in the study.

The regression coefficients of cash conversion cycle (CCC) relating to return on assets (ROA) and return on equity (ROE) were -0.007 and -0.018 respectively. This confirms the negative relationship between working capital management and performance measures.

KEY WORDS: Cash Conversion Cycle; Performance; Return on Assets; Return on Equity; Working Capital.