The influence of working capital management components on corporate profitability

Abstract

This study examined the influence of working capital management components on corporate profitability. A sample of 30 firms listed on the Nairobi Stock Exchange (NSE) for the periods 1993 to 2008 was used. Both the pooled OLS and the fixed effects regression models were used. The key findings from the study were: (1) there exists a highly significant negative relationship between the time it takes for firms to collect cash from their customers (accounts collection period) and profitability (p<0.01). This means that more profitable firms take the shortest time to collect cash from their customers; (2) there exists a highly significant positive relationship between the period taken to convert inventories into sales (the inventory conversion period) and profitability (p<0.01). This means that firms which maintain sufficiently high inventory levels reduce costs of possible interruptions in the production process and loss of business due to scarcity of products. This reduces the firm supply costs and protects them against price fluctuations; (3) there exists a highly significant positive relationship between the time it takes the firm to pay its creditors (average payment period) and profitability (p<0.01). This implies that the longer a firm takes to pay its creditors, the more profitable it is.