Effects of Liquidity Management on Profitability of quoted Manufacturing Firms in Kenya

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Effects of Liquidity Management on Profitability of quoted Manufacturing Firms in Kenya

Journal Title: IOSR Journal of Economics and Finance (IOSR-JEF) - Year 2018, Vol 9, Issue 6

Abstract

In corporate finance literature, liquidity and profitability tops in the most pertinent issues. The main objective for any firm is to maximize profitability. Too much attention to profits by corporate managers may dilute a firm’s liquidity level and thereafter severe financial hardship. Insolvency or bankruptcy in firms may come as a result of little or no attention to both liquidity and profitability. A decade ago, the firms in manufacturing sector have been struggling to growand companies like Eveready East Africa and Cadbury Kenya have wound up operations. This may be as a result of poor liquidity management. The firms may be attaining very high profits but undergoingliquidity levels problems. The quandaryin liquidity management is to balance the desired liquidity level and increase profitability. The study investigated effects of liquidity management on profitability of the12 quoted manufacturing companies in Kenya. Both descriptive and inferential data tools to analyze the data were used. In descriptive data analysis, mean, standard deviation, minimum and maximum values were computed. In inferential data analysis, correlation, regression and ANOVA were used. Correlation and regression analysis were used to examine the effect of the independent variables on the dependent variables. The ROA was used as measure for companies' profitability and the companies' liquidity was measured using the current ratio, quick ratio, and cash ratio and cash conversion cycle. Effect of current ratio, quick ratio, cash ratio, cash conversion cycle on profit was found to be statistically insignificant. The findings of the analysis revealed that all the independent variables had a significant combined effect R-square of 0.094 on profitability of manufacturing firms in Kenya. The study rejected three and accepted two null hypotheses. Null hypotheses that current ratio, quick ratio and cash ratio do not have statistically effect on profitability of manufacturing firms in Kenya were rejected because they were found to have a significant effect. Cash conversion cycle and the combined joint independent variables were found not to have a significant effect on profitability of manufacturing companies of quoted companies in the Nairobi securities exchange. Therefore, the two hypotheses were rejected. The study recommends that the manufacturing firms should increase their cash flow through reduction of supplier repayment period, engaging experts in management of their receivables. The government should regulate the manufacturing sector to prevent some companies from falling into liquidity difficulty.

Authors and Affiliations

Felix Asete, James N. Kung’u

Keywords

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EP ID EP414981
DOI 10.9790/5933-0906015461.
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