WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE OF MANUFACTURING AND ALLIED FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
Purity Njagi - Department of Business Administration, Tharaka University, Kenya
Dr. Collins Sitienei (Ph.D) - Department of Business Administration, Tharaka University, Kenya
Dr. Evans Geoffrey Mogeni (Ph.D) - Open University of Kenya, School of Business and Economics, Kenya
ABSTRACT
Working capital management remains one of the most persistent short-term financial management challenges facing manufacturing enterprises operating in emerging capital markets. Manufacturing and Allied Firms listed at the Nairobi Securities Exchange (NSE) have continued to record declining profitability, recurring losses and unstable cash flows despite operating within a regulated and relatively mature capital market. This study examined the effect of working capital management, operationalized through the Accounts Receivable Period (ARP), Inventory Period (IP) and Accounts Payable Period (APP), on the financial performance of Manufacturing and Allied Firms listed at the NSE, measured using Return on Assets (ROA). The study was anchored on the Cash Conversion Cycle Theory, the Trade-Off Theory of Liquidity and the Working Capital Management Theory. A longitudinal panel causal research design was adopted, and a census of all ten Manufacturing and Allied Firms listed at the NSE was undertaken over an eleven-year period (2015-2025), yielding a firm-year panel data set extracted from audited annual financial statements. Data were analysed using descriptive statistics, Pearson correlation and panel regression estimated in STATA 18, following standard diagnostic tests for normality, multicollinearity, heteroskedasticity and model specification. The panel regression results indicate that Accounts Receivable Period (β = -0.0012, p = 0.002) and Accounts Payable Period (β = -0.0007, p < 0.001) exerted a statistically significant negative effect on Return on Assets, while Inventory Period (β = 0.0004, p = 0.042) exerted a statistically significant positive effect. The model explained approximately 95.3 percent of the within-firm variation in financial performance (F(3,85) = 568.14, p < 0.001), leading to rejection of the null hypothesis that working capital management has no statistically significant effect on financial performance. The findings imply that prolonged customer collection periods and delayed supplier settlement erode profitability, whereas adequate inventory holding supports operational continuity and revenue generation among manufacturing firms. The study recommends that management teams of listed manufacturing firms strengthen credit assessment and collection systems, maintain inventory at levels that balance holding costs against stock-out risk, and adopt supplier payment policies that preserve liquidity without damaging supplier relationships. Regulators, including the Capital Markets Authority and the Central Bank of Kenya, should encourage disclosure practices that improve the visibility of working capital efficiency among listed firms.