Working capital management practices and financial performance of tea processing firms in Kenya.

Abstract

The tea sector is the most important agricultural sub-sector in Kenya contributing about 26 percent of the total foreign exchange earnings. The sector has been listed by the government as one of the pillars of achieving Vision 2030. Despite the great contribution, the performance of the tea processing firms has not been satisfactory to the farmers due to wide variation of bonus payment from one firm to another. KTDA attributes this variation to working capital management among other factors. Management of working capital aims at maintaining an ideal balance between each of the components of working capital which include cash, receivables, inventory and payables. Therefore, the objective of this study was to determine the effect of working capital management practices on the financial performance of the tea processing firms in Kenya. The study employed a cross-sectional descriptive research design. The target population was 54 tea processing firms in Kenya managed by KTDA. A sample of 48 tea processing firms was used in the study. Stratified random sampling method was used to select the sample. Primary data was collected by use of a questionnaire whereas the secondary data was collected by use of a record survey sheet. Pretesting was done to determine the reliability and validity of the questionnaire. The data collected was analyzed using Statistical Package for Social Sciences (SPSS). The study utilized both descriptive and inferential statistics. In descriptive analysis, mean, standard deviation and percentages of the responses were calculated. Under inferential statistics, Pearson’s correlation, regression and ANOVA analyses were adopted. The findings of the study indicated that working capital management practices significantly affected the financial performance of tea processing firms. In particular, receivables and inventory management practices had a negative and significant effect on the financial performance of tea processing firms. Similarly, payables and cash management practices had a positive and significant effect on the financial performance of tea processing firms. The study therefore recommends tea processing firms to minimize the number of days accounts receivable is outstanding and inventory turnover in order to increase profitability. The firms should also lag creditors’ payments and increase the cash conversion period in order to improve the financial performance. Managers and policy makers should also come up with desirable working capital management practices that will enable the firms to hold optimal levels and maximize the shareholders’ interests