Effect of Accounts Receivables Collection Period on Financial Performance of Tea Firms in Kenya

Abstract

Corporate failure among companies in Kenya has often been associated with their financial management decisions. The objective of all financial management decisions is wealth maximization and the immediate way of measuring quality of such decisions is to examine its effect on the firm's financial performance. Accounts receivable collection period being one of such decisions is considered as fundamental in any business and has significant impact on the financial performance and overall value of a company. This study aimed to provide empirical evidence about the impact of Accounts receivable collection period on corporate financial Performance of tea firms in Kenya for the period 2014 to 2019. The study utilized panel data econometrics of 40 tea firms which are in Kericho, Bomet and Nandi Counties in Kenya. The results indicate that accounts receivables in days are significantly affecting the financial performance of the firms. The tea firms are in general facing problems with their collection 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 accounts receivables 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 accounts recivables. In addition, efficient Management and financing of accounts recivables can increase the operating profitability of tea firms. For efficient accounts receivable collection period, specialized persons in the fields of finance should be hired by the firms for expert advice on receivables management in the tea firms. This study will assist decisions makers to implement new set of policies regarding accounts receivable management in Kenya to ensure continuous economic growth. It will help to meet the need of management accountants, academia, and students who will be interested in this study. Other researchers on corporate governance will find useful information from this study, it will also add to the existing literature on the topic. Keywords: Net Trade Cycle, Average Collection Period, Average Payment Period, Tea sector, Fixed Effect Model, Random Effect Model. DOI: 10.7176/RJFA/13-8-01 Publication date: April 30 th 2022