Effects of Working Capital Management on Profitability of Tea Trading Companies – A Case of Chai Trading Company Limited

Abstract

The study was intended to examine the effect of working capital management on profitability of tea trading companies with Chai Trading Company Limited (CTCL) as a case study. CTCL is the trading arm of Kenya Tea Development Agency (KTDA). Lately, CTCL hasbeen associated with cash flow mismatch between inflows and flows occasioned by working capital elements which are affecting its profitability as a tea trading company. While available empirical data provides an insight on the roles of capital management practices that CTCL has adopted such as Inventory, Debtors, Creditors and Overdraft management practices, they have not effectively illustrated the specificeffects of the practices on profitability of the company. The study therefore sought to make its contribution in sealing the existing research gap by establishingthe effects of the company’s working capital management practices on its profitability. A descriptive survey study involving 36 senior personnel in Executive Management, Finance, Freight, Trading and Chai DMCC divisions of CTCL were selected through stratified random sampling to provide data for the study. The dependent variable forthe study was profitability while the independent variables were Inventory, Debtors, Creditors and Overdraft management practices. The specific objectives of the study were; to determine the extent to which inventory management affects the profitability of tea trading companies, to investigate the extent to which debtors management affects the profitability of tea trading companies, to examine the role of creditors management on profitability of tea trading companies and to establish how overdraft management affects the profitability of tea trading companies. Data was obtained from the respondents using a questionnaire which was then analyzed using ANOVA and Pearson’s correlation coefficient. TheANOVA results showed that there exist a significant mean differencebetween Inventory, Debtors and Creditors management practices on one hand and profitability on the otherhandat 0.05 level of significance. Pearson correlation coefficient showed that debtor management is the most significant working capital management practice for CTCL followed by creditor management then inventory management and lastly overdraft management in decreasing order of effect. It is therefore recommended that the management of CTCL enhance the process of inventory cycle management, improve the company’s debt collection and ensure that the company fully utilizes its credit facilities with suppliers within the optimal range.

Keywords: Tea trading companies, Working capital, Profitability