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Working capital management practices on financial performance of public owned sugar firms in western region, Kenya

Author: 
Dr. Benjamin Owuor Ombok, Judith Auma Omanga and Grace Ivy A. Odongo
Subject Area: 
Social Sciences and Humanities
Abstract: 

Working capital as a financial metric representing operating liquidity of entity, whose management involves 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 absorbs up to 60% workforce of western region and accounts for about 15% of agricultural GDP contribution. It is therefore 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. Limited empirical information on this situation set the basis for this paper; through establishing effect of accounts receivable (ARP), determining effect of accounts payables period (APP), analying effect of Cash Conversion Cycle (CCC) and examining effect inventory turnover period (ITO) on financial performance (ROA) of the four (4) public owned sugar firms. Using Cronbach Alpha test for internal consistency of the variables with a coefficient of 0.725 validity was established. Analysing working capital elements extracted from audited financial reports for a period 2005 to 2014, using correlation and regression (OLS) analysis method the output established a negative and significant effect of APP (= -0.129, P=0.000); CCC (=-0.041, p=0.037) while ITO was negative and insignificant (=0.131, P=0.062). ARP had positive and insignificant effect (=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) thereby confirming model suitability. Whereas the result largely support most of the findings on this subject matter, there is need for a comparative study on both private and state owned sugar firms.

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