The Effect of Working Capital Management Cycle on Profitability of Retail Supermarkets in Mombasa, Kenya: A Case Study of Binathman Household Supermarket in Mombasa City

Abstract

Working capital management involves running of short-term assets and liabilities due to its direct effect on profitability of a business. The aim of this research was to scrutinize the effect of working capital management cycle on the profitability of retail supermarkets in Mombasa, Kenya. This research was guided by Operating Cycle Theory, Trade-off theory and Transaction cost economic theory. This study applied descriptive survey design. Target populace of this research was seventy-five workers of the supermarket. Secondary data was gathered from monetary reports of the supermarket for 9 years from year 2011 to 2019. Data was presented using tables. To test how working capital management (WCM) and the profitability of Binathman Household Supermarket are related, a linear multiple regression test was conducted and analysis was carried via coefficient of multiple regression. The descriptive outcomes indicate a modest level of receivables collection period, cash conversion cycle, payables deferral period and inventory conversion period. The study found a positive correlation amid working capital management cycle variables in addition to profitability of the supermarket. However, the research indicated an inverse relationship between average payables period and return on assets; showing that longer payables periods had possibility of reducing a firm’s earning if the cost of financing purchases was higher than the benefits. This research concludes that supermarket determine the cost of sales for their sales which was indicated by the mean of 3.81 and a Standard Deviation of 1.482. When supermarkets improve on their average collection days, their financial performance will be improved. The researcher recommends that it is imperative for companies to make an initial cost-benefit investigation of the numerous working capital management decisions prior to committing the companies’ resources to a particular decision. It is also important for supermarkets in Kenya to integrate a proper risk management framework in their execution of the numerous working capital management policies. This research demonstrated that operative working capital management practices play a critical role in refining the general profit margins in lieu of supermarkets.