The effects of working capital management on profitability of public listed energy companies in Kenya
Musau, Januaris Wangoma
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The Kenyan energy sector is highly regulated by the government such that, among other things, the government sets all prices of energy products. This challenges attaining profits by only focusing on the external factors, thus, the need for internal measures like working capital management. The purpose of this study was to assess the effect of working capital management on the profitability of listed energy firms in Kenya. To achieve this purpose the study investigated the role of inventory management on the profitability; how cash conversion cycle affects profitability; the effect of account receivable days on profitability; and effect of account payable days on profitability of public listed energy companies in Kenya. An explorative design was used to conduct the study. Both secondary data and primary data were collected. In primary data, the researcher targeted senior managers concerned with working capital management, and employees from the accounts/finance department who interact with the variables of working capital. Stratified random sampling method was used to arrive to a sample size of 36 who were interviewed using a questionnaire. Secondary data was collected from financial statements of the four target companies for 7years (2006-2013). The study used descriptive analysis and random effects regression to analyze data using STATA 12. Tables and graphs were used in presentation. The findings show that listed energy companies take 48.63 days to sell their inventory and they sell it 9.353 times a year. The companies have a cash conversion cycle of 1.1333 and take long to pay their creditors than they take to collect payment from their debtors. Inventory turnover ratio is not used by these companies to determine profits (P=0.464). The companies implement shorter cash conversion cycles to enhance their profits (P=0.027). Accounts receivable days has no effect on the profits of listed energy firms (P=0.126) while the companies take long to pay their creditors to enhance their profits (P=0.031). The study concludes that listed energy companies do not use inventory turnover ratio and accounts receivable days as determinants of net profit-related decisions and that managers of these companies reduce the number of days for converting assets into cash as well as take long to pay their creditors to enhance profits. The study recommends that managers of listed energy companies aspire to eliminate the time it takes to convert non-cash assets into cash by, for instance, introducing services that allow customers to pay in advance-for instance using pre-paid cards and enhancing efficiency in billing. The companies should develop better relationships with their suppliers which will enable them make favourable agreements concerning the accounts payable and accounts receivable days.