The Association between working capital management and financial distress by listed firms in Kenya

Abstract

The objective of this study was to assess the association of working capital management practices and financial distress of firms publicly listed at the Nairobi Security Exchange (NSE). The specific objectives of the study was; to establish the influence of cash management practices on financial distress of firms publicly listed in the Nairobi Security Exchange (NSE), to determine the extent to which receivable management practices influence the financial distress of firms publicly listed in the Nairobi Security Exchange (NSE), to investigate the influence of payable management practices on the financial distress of firms publicly listed in the Nairobi Security Exchange (NSE) and; to determine the influence of inventory management practices on financial distress of firms publicly listed in the Nairobi Security Exchange (NSE). The total population of this study will be all the 67 publicly listed in Kenya. Purposive sampling was adopted in selection of 25 firms listed in manufacturing and related sectors. Collected data was analysed through descriptive and inferential statistics. Descriptive statistic included mean, minimum, maximum, standard deviation, skewness and kurtosis. Inferential statistics included Pearson correlation and regression modelling. Data was analysed using Stata 14. Study findings documented that cash conversion period had negative association with financial distress of listed companies in NSE. ARP had inverse and significant influence on financial distress of listed non-financial companies in NSE. Inventory conversion period had negative and significant association with financial distress of listed companies in NSE. Accounts payable period had positive and significant association with financial distress of listed companies in NSE. Control variables had mixed association with financial distress of listed companies with firm size, tangibility and annual growth rate affecting financial distress negatively while leverage and board size had positive association with financial distress. The study concludes that there is need for listed companies in NSE should increase their accounts payable periods should to minimize likelihood of facing financial distress. This approach would release financial resources to meet urgent needs, should decrease their inventory conversion period. This would aid in management minimizing storage costs though it may lead to stock-outs in situations when there is an increase in lead time. To enhance prompt payments of good and services listed companies should provide discounts and appealing terms to those paying in cash. There is need for listed companies to develop measures aimed at managing accounts receivables through creation of avenues for earlier repayment by invoice discounting and delayed payment to allow the company make short term investments which would be beneficial to respective companies. Prompt receipt of payments would enable listed company’s opportunities to purchase short term treasury bills and corporate bonds which would diversify their investment portfolio and minimize risk. There is need for development of mechanism aimed at minimizing attributes of cash conversion cycle or increase of financial health status of listed companies. Listed companies should be encouraged on acquisition of assets, decrease in reliance with borrowed capital and decrease of their board size.