Effect of Working Capital Management on the Financial Performance: Evidence of Construction and Allied Sector Firms Listed at Nairobi Securities Exchange

Abstract

The success of any business depends on how financial managers effectively manage working capital components which includes mainly cash, receivables, payables and inventories. It’s required for a company to maintain a balance between profitability and liquidity. This study was carried out to determine the effect of working capital management on the financial performance of contruction and allied companies listed at Nairobi Securities Exchange. Explanatory research design was employed in this study. The target population in this study consisted of all construction and allied companies listed at NSE for the period between 1^st January 2012 and 31^st December 2016. This study used secondary panel data which consisted of time series and cross sections sourced from published annual financial statements on the company’s website and NSE hard books. In the analysis correlation analysis, descriptive statistics and multiple regression analysis was used. The findings clearly showed that there is a weak insignificant association among inventory conversion period, receivables collection period, payables payment period, cash conversion cycle, gross working capital, ratio of current assets to total assets, ratio of current liabilities to total liabilities, current ratio using return on assets and return on equity to measure financial performance. However using gross profit margin to measure financial performance, the findings shows that there is a strong positive relationship among independent variables such as inventory conversion period, ratio of current assets to total assets, ratio of current liabilities to total liabilities and gross profit margin.

Keywords: Working Capital Management, Working Capital Components, Firms, Financial Performance, Liquidity, Nairobi Securities Exchange