The Impact of Working Capital management And Profitability of Construction Firms Listed on the Nairobi Securities Exchange

Abstract

The study aimed to investigate the relationship between working capital management and profitability of construction firms listed on Nairobi Securities Exchange. The study sough to address the following key questions: What is the effects of Average Collection Period on profitability on the firm in the construction industry? What is the impacts of Inventory Conversion Period (ICP) on profitability of firms in the construction industry? And lastly, what is the effect of Cash Conversion Cycle (CCC) on profitability on firms in the construction industry? The research applied descriptive research design and this was the most appropriate as it allowed for the reporting of the data summary by use of measures of central tendency including the mean, standard variation, percentage, and correlation between variables. The population comprised of 180 employees of the construction firms listed at the Nairobi securities exchange. A sample size of 124, representing 68.89% of total population was used. After the analysis using Excel and SPSS, the results were presented in the forms of tables. The findings revealed a positive significant relationship between the average collection period and firm profitability at a beta value -0.258 with a T-Value being 1.955. As a result, the firm‟s practices such as effective management of credit mechanisms, sufficient average collection period, effective credit standards, undertaking of customers‟ credit analysis, best collection periods indirectly influenced the firm‟s profitability. Furthermore, a correlation of 0.665** indicated that decrease in average collection period leads towards increase in profitability and vice versa. The findings indicated a correlation of .604*. As a matter of fact, large raw material piles, efficient record maintenance, frequent stock taking, proper inventory control systems, and rapid inventory turnover, as well as holding of minimal inventory with aim of reducing costs influence profitability of construction firms. The correlation of .701** that shows that low cash conversion cycle of construction firms is resulting into higher profitability and vice versa. Therefore, lack of funds, insufficient inventory, and acquisition of good on credit, regular budgeting for future firm‟s expenditure, as well as meeting of both short-term and long-term obligations had a bearing on the overall firm‟s profitability. The study concludes that there exists a strong positive relationship between average collection period and profitability of construction firms listed on Nairobi Securities iv Exchange. The study also concluded that construction firms need to reduce the duration of converting cash. The cash conversion cycle has to be reduced to the minimum as well. Therefore, the study suggests that decreasing cash conversion cycle is a measure of effective working capital management and it is appraised by companies. However, the firm should use effective policies that would neither result into bad debts nor loss of customers to the firm. The study also recommended that construction firms should keep the receivable collection period at minimum in order to enhance financial performance, profitability. In addition, the construction firms should ensure that stock levels stocks are sufficient to meet customer demands at all times. At the same time, the firms should avoid holding onto dead stock as it ties up finances hence negatively impacting on the firm‟s financial performance. It is recommend that construction firms should adopt effective measures of ensuring the cash conversion cycle is reduced. There is need to examine why construction firms should pursue small inventory conversion period, low average collection receivable period and small Cash conversion cycle.