Influence of Working Capital Management on Firms Profitability: A Case of SMEs in Kenya

Working capital management plays a significant role in better performance of business entities. This study analyzes the influence of working capital management on firm s profitability Kenya. For this purpose, fixed panel data of 232 firms was used. The results indicate that the average debtors day, stock turnover period and the cash conversion cycle are significantly affecting the profitability of the firms. The manufacturing firms are in general facing problems with their collection and payment policies. Moreover, the financial leverage, ratio of current asset to current liability and firm size also have significant effect on the firm s profitability. The study also concludes that SMEs in Kenya are following conservative working capital management policy and the firms are needed to concentrate and improve their collection and payment policy. The effective policies must be formulated for the individual components of working capital. Furthermore, efficient management and financing of working capital (current assets and current liabilities) can increase the operating profitability of manufacturing firms. For efficient working capital management, specialized persons in the fields of finance should be hired by the firms for expert advice on working capital management in the manufacturing sector.