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e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 6, Issue 6. Ver. III (Nov. - Dec. 2015), PP 53-61
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Abstract: Working capital management is concerned with short-term investment and financing decision of an
entity and is a major business requirement and a significant part of corporate finance. Thus, this study sought to
examine the effect of working capital management on profitability of cement manufacturing companies in
Kenya. The study used a sample of the 3 cement manufacturing firm listed at the Nairobi Securities Exchange.
The study used secondary data from the cement manufacturing companies audited financial statements for a
period of 15 years from 2000 2014. The data collected was analyzed using the Karl Pearson correlation and
the multiple linear regression. The study findings established that inventory conversion period (ICP) positively
and significantly influences profitability while average receivables period (ACP) had a positive insignificant
relationship with profitability. The study findings also revealed that average payables period (APP) had a
significant negative relationship with profitability. In addition, the study findings established a positive
significant relationship between leverage and profitability while liquidity and size of the firm had a positive
insignificant relationship with profitability. The study concluded that inventory days, receivables period,
liquidity, leverage and firm size positively influences profitability while payables period negatively influences
the profitability of cement manufacturing firms in Kenya.
Keywords: Working Capital Management, Profitability, Inventory Conversion Period, Average Receivables
Period, Average Payables Period
I.
Introduction
Working Capital is the flow of ready funds necessary for the working of a concern. It comprises funds
invested in current assets, which in the ordinary course of business can be turned into cash within a short period
without undergoing diminishing in value and without disruption of the organization (Mohanty, 2013). Working
capital is a vital element in any organizational setting that requires cogent attention, proper planning and
management (Owolabi and Alu, 2012). A positive working capital indicates the ability of the business to pay off
its short term obligations at most when request comes from suppliers but a negative working capital indicates
the inability of the business organization to pay short term obligations. As such, excessive working capital
indicates an accumulation of idle current assets, which do not contribute in generating income for the firm
during the operating period. Inadequate working capital on the other hand harms the credit worthiness and the
day-to-day activities of firms, which may lead to insolvency (Singh and Asress, 2010).
Working capital management is concerned with short-term investment and financing decision of an
entity and is a major business requirement and a significant part of corporate finance (Sajjad and Bukhari,
2012). WCM covers the planning and controlling activities of companies regarding their current assets and
current liabilities in a manner that guarantees their ability to meet their current obligations satisfactorily as well
as a maximum return on their precious investment in these floating assets. The ultimate goal of working capital
management is to ensure that firms are able to continue their operations with sufficient cash flow that will
service their long-term debts and satisfy both maturing short-term obligations and upcoming operational
expenses (Owolabi and Alu, 2012). WCM is used as an optimization tool to make the most profitable use of
liquid funds while maintaining a minimum level of liquidity to cover possible unexpected short-term
expenditures (Kunze and Peri, 2015).
Efficient working capital management involves planning and controlling of current assets and current
liabilities in a manner to strike a balance between liquidity and profitability (Uchenna et al., 2012). An improper
management of working capital components that is, accounts receivables, accounts payables and inventories will
result to difficulties in the firms continued operations and consequently the market value of the firm will also
suffer (Mohamad and Saad, 2010). The ultimate objective of any firm is to maximize shareholders wealth and
maximizing shareholders wealth can be achieved when a firm maximizes its profit. A firm that wishes to
maximize profit must strike a balance between current assets and current liabilities and hence keeping abreast of
the liquidity and profitability trade-off (Uchenna et al., 2012). Profitability reflects the final outcome of business
operations thus a well designed and implemented working capital management is expected to contribute
positively to the creation of a firms value and profitability.
DOI: 10.9790/5933-06635361
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Literature Review
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III.
Methodology
To achieve the study objective this study adopted a quantitative research design. A quantitative
research design addresses research objectives through empirical assessments that involve numerical
measurement and analysis approaches (Zikmund et al., 2011). The target population comprised all the six
cement manufacturing companies in Kenya. A sample of the 3 cement manufacturing firm listed at the Nairobi
Securities Exchange was selected for the study. The 3 firms included Bamburi Cement, ARM Cement and East
African Portland Cement Company. The listed companies were preferred due to availability of secondary data
since they are required to publish their financial reports to the public. The study used secondary data from the
cement manufacturing companies audited financial statements. The data covered a period of 15 years from
DOI: 10.9790/5933-06635361
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Current Ratio (
IV.
N
45
45
45
45
45
45
45
Minimum
-.067
46
10
31
.469
.000
10.49
Maximum
1.32
181
220
149
9.76
3.40
17.44
Mean
.1072
93.30
47.22
77.36
1.958
.3309
15.635
Std. Deviation
.19599
31.714
36.067
30.582
1.3751
.5227
1.2287
ROA
1
-.079
-.132
-.215
.156
.787**
.172
ICP
ACP
APP
CR
DR
Firm Size
1
.132
.297*
-.234
-.293
.134
1
.307*
-.040
-.044
-.327*
1
-.126
-.003
-.307*
1
.077
-.107
1
.038
.
1
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Coefficients
-.111
.002
.000
-.002
.018
.321
.004
17.662
.736
.694
Std Error
.256
.001
.000
.001
.012
.033
.015
P- value
t-stat
-.432
2.898
-.424
-2.720
1.429
9.701
.232
.000a
P-value
.668
.006
.674
.010
.161
.000
.818
V.
The study established that inventory conversion period (ICP) positively and significantly influences
profitability whereas average receivables period (ACP) has a positive and insignificant relationship with
profitability. The study also revealed that average payables period (APP) has a significant negative relationship
with profitability, which indicates that payables period negatively, influences profitability. In addition, the study
established that positive and significant relationship between leverage and profitability while liquidity and size
of the firm have a positive insignificant relationship with profitability. Thus, the study concludes that inventory
period, receivables period, liquidity, leverage and firm size positively influences profitability while payables
DOI: 10.9790/5933-06635361
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