Working Capital Management Practices and Financial Performance of tea Processing Firm 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. Management of working capital aims at maintaining an ideal balance between each of the components of working capital which include management of 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 found that tea processing firms have established an inventory and payment management policies to guide the firms in managing their inventory. The Pearson correlation and ANOVA results showed that inventory management has a negative significant relationship with the financial performance of tea processing firms. The study therefore recommends tea processing firms to ensure the total numbers of days taken before inventories are sold is minimized in order to boost the returns of the firms. The longer the period taken to settle account payables therefore increased profitability of a firm. The firms should also prepare inventory budgets and review the budgets in order to maintain adequate inventory for smooth operations of the firm. In addition, the inventory level should be reviewed regularly to ensure optimal stock is maintained at all times. Firms should also set the level of economic order quantity to ensure sufficient inventory is ordered at minimal costs and establish an inventory control system to assists in efficient management of inventory. Firms should regularly review payables management policies to ensure optimal credit is maintained at all times