The effect of working capital management on financial performance of manufacturing and construction firms listed at the Nairobi securities exchange

Management of working capital which aims at maintaining an optimal balance between each of the \nworking capital components, that is, cash, receivables, inventory and payables is a fundamental \npart of the overall corporate strategy to create value and is an important source of competitive \nadvantage in businesses (Deloof, 2003). The objective of the study was to establish the effect of \nworking capital management and financial performance of manufacturing and construction firms \nlisted in NSE.The research used both descriptive and quantitative research design. The population \nof interest in this study constituted all manufacturing and construction companies quoted at the \nNSE for the period of ten years from 2005 to 2014.The quantitative research approach was \nemployed to arrive at the findings of the study. \nThe study found average collection period, inventory turnover period, cash conversion cycle, \nliquidity, leverage and sales turnover had positive effects on return on equity of manufacturing and \nconstruction firms listed at NSE. However, the effects of average collection period, inventory \nturnover period, cash conversion cycle and liquidity were insignificant at 5% level, while leverage \nand sales turnover was significant at 5% level. Based on the key findings from this study it has \nbeen concluded that the management of a firm can create value for their shareholders by increasing \nthe number of day’s accounts receivable. The management can also create value for their \nshareholders by increasing their inventories to a reasonable level. Firms are capable of gaining \nsustainable competitive advantage by means of effective and efficient utilization of the resources \nof the organization through a carefully reduction of the cash conversion cycle. In so doing, the \nprofitability of the firms is expected to increase.