Analysis of Working Capital Management Practices on Financial Performance of Public Owned Sugar Firms in Western Region, Kenya

Abstract

Working capital is a financial metric which represents operating liquidity of entity. Working capital management being the administration of accounts receivables, accounts payables, inventory and cash, enables continued operation and provision of sufficient cash flow to satisfy both maturing short term debt and recurrent operational cost. This enhances business' capital security, investment and performance. Sugar factories employ close to 60% of western region's working population and accounts for about 15% of agricultural GDP contribution. It is a dominant employer and source of livelihoods for most households in the Western Kenya. Despite working capital management practices being part of these firms' financial management, the sugar firms have continued to register less than optimum performance level as evidenced by frequent call for financial intervention by the government. No study has been carried out in Kenya to analyze the effect of working capital management practices on financial performance public owned sugar firms in Kenya, this study therefore sought to analyze working capital management practices on financial performance of public owned sugar firms in western region. The specific objectives of the study were; to establish the effect of accounts receivable(ARP), determine the effect of accounts payables period(APP), analyze the effect of Cash Conversion Cycle(CCC) and examine the effect inventory turnover period (ITO) on financial performance(ROA) of public owned sugar firms. The study anchored on pecking order theory of financing. The study used cronbach Alpha to test for internal consistency of the variables and cronbach Alpha of 0.725 was established. The population of study comprised of the four public owned sugar firms within western Kenya. The study used secondary data consisting of working capital elements extracted from audited financial reports using data schedule for a period of 10 years between 2005 and 2014.The data was analyzed using correlation and regression (OLS) analysis method using SPSS software. The study established a negative and significant effect of APP(,B = -0.129, P=O.OOO);CCC (,B =-0.041, p=0.037) while ITO was negative and insignificant (jJ =0.131, P=0.062).ARP had positive and insignificant effect (,B =0.030,P=0.293) on Return on Assets (ROA) as a measure of financial performance; implying that a unit change in APP, CCC and ITO results into a negative effect on ROA while a unit change in ARP has a positive effect on ROA. R square value was established at 0.724, showing that independent variables had a higher effect on financial performance (ROA) hence the model was found suitable for the study. The result of this study generally support most of the findings of previous studies done on this subject matter, however there is need for a comparative study on both private and state owned sugar firms in western region, Kenya The results were useful to managers for decision making and for academic purpose.