Working capital management impacts on small-scale coffee wet mills' financial performance in eastern Kenya

Abstract

The manufacturing sector is critical in the realization of the economic pillar of the Kenyan Vision 2030. Over the last decade, the sector has experienced declining growth, mainly attributed to the agro-processing industry's poor financial performance. The Kenyan government has initiated stringent financial reforms across agro-based sectors, including coffee processing firms, to improve performance and increase farmers' returns. However, limited studies have investigated the impacts of working capital management (WCM) on small-scale coffee wet mills' financial performance. We assessed the effect of working capital management on financial performance in small-scale coffee wet mills. We collected the data from 41 small-scale coffee wet mills in Embu County, Eastern Kenya. We adopted a multivariate regression analysis approach on panel data (2014–2018) to analyze working capital management's impact on small-scale coffee wet mills' financial performance. Our findings showed that the current ratio and average payment period negatively affected the return on small-scale coffee wet mills' assets. Thus, the wet mill processors could lower their payables period and current ratio to improve return on assets. The study revealed that the firm's Size and age also had a positive and negative effect, respectively, on return on assets of small-scale coffee wet mills. Both average payment period and current ratio had a positive effect on return to farmers. We conclude that working capital management, that is, average payment period and current ratio, negatively influences ROA while positively influencing farmers. Therefore, the management of the coffee wet mills should increase the current ratio and lengthen the average payment period to enhance return payable to farmers.