WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF STATE CORPORATIONS IN THE ENERGY SECTOR IN KENYA
Moses N. Ng’ang’a - Postgraduate Student, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
Dr. Daniel Makori (PhD) - Lecturer, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
In recent years, there has been a concerning trend of declining profitability for state-owned corporations operating within this sector. The research’s general objective was ascertaining the effect of working capital management on profitability in state corporations in the energy sector in Kenya. The explicit objectives were; to ascertain the effect of accounts receivables management, accounts payable management, cash management cycle on profitability and inventory management on profitability of state corporations in the energy sector in Kenya. The research was underpinned on three theories which were cash conversion cycle, Baumol Model of Cash Management and the stakeholder theory. A descriptive survey approach was employed so as to effectively explain the effect of working capital management on profitability. The research’s target population was the nine Kenyan state corporations in the energy sector. Data was collected for a five-year period (2020-2024). The study utilized a census method since population was small. The research analyzed secondary data that was collected from the Office of the Auditor General and the respective state corporations audited financial reports. The study employed panel data method to collect and analyze financial information from the state corporations operating within Kenya’s energy sector. The data was first analyzed descriptively utilizing frequencies, minimums, maximums, means, and standard deviations. Inferential analysis and multiple regression analysis was essential for attaining the research objectives. Diagnostic tests were done. The study suggested that working capital management has a significant positive influence on profitability. The study reported that from the regression model, approximately 68.1% of the variation in ROE among state corporations in the energy sector is explained by the combined effect of the WCM practices. Based on the correlation results, the findings of the current study showed that accounts receivables, accounts payables, cash management and inventory management are positively associated with profitability. Based on the research findings, the research recommended that State corporations in the energy sector should prioritize effective working capital management by closely monitoring cash flow, receivables, payables, and inventory levels. Implementing systematic working capital policies can help optimize liquidity while sustaining profitability. Companies should develop and enforce clear credit policies and efficient debt collection strategies to minimize delays in payment. By strategically timing payments, corporations can use payables as a low-cost source of short-term financing, thereby improving liquidity and profitability. State corporations should avoid holding excessive inventory by adopting modern inventory management techniques such as JIT or EOQ models. This will help reduce holding costs and free up capital for other productive investments. Maintaining an optimal cash balance is crucial. Corporations should forecast cash flows accurately to avoid both cash shortages and idle funds. Surplus cash should be invested in short-term, low-risk financial instruments to generate other income.