Effect of working capital management and firm characteristics on financial performance of listed agriculture firms in Kenya

Abstract

The agricultural sector is one of the critical drivers of economic development among nations in Sub-Saharan Africa. However, since the 1990s, profitability in the sector has fluctuated widely. Kenyan listed agricultural firms have been experiencing financial performance concerns, manifested in increased loss-making among several listed firms. For instance, between 2014 and 2018, three out of seven listed agricultural firms reported losses, resulting in the delisting of one of the firms. This shows their extent of risk exposure. This study aimed to examine the effect of working capital management and firm characteristics on the fiscal outcomes of listed agricultural organizations in Kenya. Specific goals were to investigate accounts receivables, accounts payables, and cash management, with the control effect of firm size being considered the moderating variable. The research was grounded on the transactional cost theory and the cash conversion cycle, adopting positivist research philosophy and applying correlation research design. The unit of analysis was the seven listed agricultural firms in Kenya, with observations being made from the firm’s audited financial statements. These were obtained from the Capital Markets Authority for the period between 2010 and 2019. The study used descriptive statistics in presenting results using means, sums, maximum, minimum, and standard deviation. The study used correlational analysis and panel regression in estimating the effect and magnitude of the relationship between variables, respectively. The study utilized tables and charts in the presentation of the research data. The study concluded that working capital management positively and significantly impact return on equity and return on assets of listed agricultural firms. The study concluded that inventory had a positive but insignificant influence on the return on equity and a positive and significant effect on the return on assets of the listed agricultural firms in Kenya. Recommendations were for the firms to improve the working capital management practices through effective cash management policies, better receivables management, and implementing better accounts payable procedures. The firms should further strengthen their liquidity management and maintain adequate capital ratios to cushion the firm against unexpected financial risks. The study also recommends that listed firms optimally manage their assets to help improve the firm value, which is critical to strengthening the financial performance.