RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF FIRMS LISTED ON NAIROBI SECURITIES EXCHANGE

In order to run the company successfully, the fixed and the current assets play a laudable role. Managing the working capital is mandatory because, it has a major significance on profitability and liquidity of the business concern. Usually, it was observed that, if a firm want to take a bigger risk for bumper profits and losses, it minimizes the dimension of its working capital in relation to the revenues it generates. If it is willing to improve its liquidity, that in turn raises the level of its working capital. Nevertheless, this technique might tend to reduce the sales volume and consequently, it would affect the profitability. Thus, a company needs to have a striking balance between the liquidity and the profitability. Working Capital Management has its effect on liquidity as well on profitability of the firm. In this research, a sample 54 Kenyan firms listed on Nairobi Securities Exchange for a period of 6 years from 2011– 2016, we analyzed the effect of different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Kenyan firms. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. Pearson’s correlation and regression analysis were used for analysis. The results show that there was a strong negative relationship between variables of the working capital management and profitability of the firm. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. The study found that there was a significant negative relationship between liquidity and profitability. The research also found that there was a positive relationship between size of the firm and its profitability. There was also a significant negative relationship between debt used by the firm and its profitability.

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