Working Capital Management Practices on Profitability of Manufacturing Firms Listed in Nairobi Securities Exchange, Kenya

Abstract

The major purpose for which any company is formed is to generate profits for the shareholders. Profits are meant to keep growing and not static if the business is to be sustainable. Profits refer to the gains used for the benefit of the business stakeholders and is generally calculated after a specified period of time, for example within a financial year. The profitability of a business can be described as the ratio that provides more information about the profit number benchmarked against a given point of reference like the investments or equity of a firm. Through the profitability, the company is able to determine its combined success in the market that is crucial to its growth and survival more so to manufacturing firms. Profitability ratios are also used in examining the financial health of a company. The profits of the 9 manufacturing firms listed in the Nairobi Securities exchange has been dwindling for the period under study triggering the researcher to want to know whether declining profits was in any way related to the working capital management practices. The general objective of the study was to investigate working capital management practices on profitability of manufacturing firms listed in Nairobi Securities Exchange. The specific objectives of the study were; to analyze the effect of cash holding management practices on profitability of manufacturing firms listed in NSE, to determine the influence of inventory management practices on profitability of manufacturing firms listed in NSE, to assess the effect of current liabilities management practices on profitability of manufacturing firms listed in NSE and to analyze the influence of debtors’ management practices on profitability of manufacturing firms listed. The research relied heavily on the cash conversion cycle theory, the profit innovation theory, and the credit theory. The research strategy used in this study was explanatory. Nine manufacturing companies trading on the Nairobi Stock Exchange were the focus of the research. Due to the small sample size, the research relied on census data. Secondary data was gathered from the publicly available financial statements of the targeted organizations for the time period. The data was analyzed using the 23rd edition of the Social Science Statistical Package (SPSS).It was decided to do a panel data analysis. Secondary data in the form of panel data was used for the study, which spanned the years 2014 to 2022. The way in which cash is handled by management has a major impact on the bottom line. The financial success of companies trading on the NSE's manufacturing index is also significantly impacted by how well they manage their inventories. A company's financial success is significantly impacted by how well it handles its current obligations and by how well it handles its debtors. According to the study's findings, NSE-listed manufacturing businesses' financial performance may be described by differences in cash holding management methods, inventory management practices, Current liabilities management strategies, and debtors' management practices alone. Based on the findings, it was suggested that NSE-listed manufacturing firms improve their financial performance by implementing better cash holding management practices, inventory management practices, Current liabilities management practices, and debtors' management practices.