EFFECT OF CASH FLOW MANAGEMENT ACTIVITIES ON

FINANCIAL PERFORMANCE OF MANUFACTURING COMPANIES IN

NAIROBI

BY

WYCLIFFE MOTENDE AND LILIAN MOGIKOYO

JUNE 2019
 ABSTRACT

Cash flow shortfall has proved to be one of the issues facing manufacturing companies in
Nairobi. Companies with cash flow problems have witnessed a lot of struggle when it comes to
settling their credit commitments whenever they fall due. In some cases, the effect has resulted
into extreme losses, low profits, business operation difficulty and high financial costs due to
excessive borrowing. The general objective of this study is to determine the effect of cash flow
management activities on the financial performance of manufacturing companies in Nairobi. To
achieve this objective this study will examine how the three main components of cash flow
statement component impact on the financial performance of companies under the scope. Cash
flow activities according to Kew e al (2016) are cash flow from operating activities, cash flow
from investing activities and cash flow from financing activities. To measure the financial
performance of manufacturing companies, the study will apply two key financial ratios which
include Return on Equity (ROE) and Return on Assets ROA). Independent variables will be
measured using net values of each activity as reported in the cash flow statement. The study will
adopt a descriptive research design. The study will target 735 manufacturing companies divided
into 14 categories located in Nairobi. A stratified sampling method will be used to determine the
population sample guided by Naasiuma (2000) Model to come the sample size. Secondary data
will be collected based on the financial statements as well as data from KAM website. Collected
data will be prepared and then analyzed by use of STATA software. Diagnostic tests will carried
out to ensure that the classical linear modeling assumptions are not violated. Collected data will
then be subjected to various analytical tools like Mean, Standard deviation, Correlation and
Regression analysis so as to achieve the objective of the study. Finally the analyzed information
will be presented in tables, charts and figures to aid in recommendation and future decision
making.

Key Words: Cash flow activities, Financial performance, Return on Equity RoE), Return on
Asset (RoA)

ii
 ACKNOWLEDGEMENT

I wish to acknowledge my supervisor Dr. Abraham Rotich for unending guidance and patience

throughout this research proposal. I also wish to acknowledge my colleagues for their peer

consultation support. My special thanks go to KCA University for availing the necessary staff to

assist in completion of the proposal.

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 TABLE OF CONTENTS

ABSTRACT.................................................................................................................................................. ii
ACKNOWLEDGEMENT ........................................................................................................................... iii
TABLE OF CONTENTS ............................................................................................................................. iv
DEDICATION .............................................................................................................................................. v
LIST OF FIGURE AND TABLES .............................................................................................................. vi
CHAPTER ONE ........................................................................................................................................... 1
1.1 Background of the Study ................................................................................................................... 1
1.2 Statement of the Problem .................................................................................................................. 9
1.3 Research objective ........................................................................................................................... 11
1.4 Research Questions .......................................................................................................................... 11
1.5 Justification of study ........................................................................................................................ 11
1.6 Scope of the study ............................................................................................................................ 12
CHAPTER TWO ........................................................................................................................................ 13
2.1 Introduction ....................................................................................................................................... 13
2.2 Theoretical Review ........................................................................................................................... 13
2.3 Empirical Review.............................................................................................................................. 17
2.4 Knowledge Gap ................................................................................................................................ 26
2.5 Conceptual framework ...................................................................................................................... 27
2.6 Operationalisation of Variables ........................................................................................................ 27
CHAPTER THREE .................................................................................................................................... 28
3.1 Introduction ....................................................................................................................................... 28
3.2 Research design................................................................................................................................. 29
3.3 Target Population .............................................................................................................................. 30
3.4 Sampling and sampling procedure .................................................................................................... 31
3.5 Data Collection Instrument ............................................................................................................... 33
3.6 Data collection procedure ................................................................................................................. 35
3.7 Data Processing and analysis ............................................................................................................ 35
3.8 Research Ethics ................................................................................................................................. 37
REFERENCES ........................................................................................................................................... 37

iv
 DEDICATION

I dedicate this research proposal to my family members and in particular to my sister for the
encouragement and support she has given me throughout my study. To my employer who
provided appropriate environment to study through flexible moments and finally and most
importantly to my supervisor Dr. Abraham Rotich for the valued time and guidance offered
throughout the process.

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 LIST OF FIGURE AND TABLES
FIGURE1: Effect of Cash Flow Activities on Financial Performance …………………….. 27
TABLE 1: Operationalisation of Variables………………………………………………… 28
TABLE 2: Target Population of the study………………………………………… ……….30
TABLE 3: The Table of sample size for the study is tabulated……………………………..32

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 CHAPTER ONE

1.1 Background of the Study

Cash is a medium of exchange and basis through which measurement of accounting for all

financial statement components. Cash must be available to enable organizations settle their

obligations in time to avoid contractual obstacles that may lead to incompliance (Ernest & Young

LLP, 2018). Cash flow is also referred to as the amount of money that is disbursed and received

from different daily activities but excluding solid inventory in store, receivables not yet settled by

customers and assets owed or possessed (Kakuru, 2003).

Cash flow management has become an important aspect of the operational strategies and

planning of many organizations. Availability of cash plays an important role in the operational as

well as financial well being of organizations. Managers of many companies look at cash flow

management as the core to the going concern mainly with great emphasis on the financial

objectives (Okello and Uwondo, 2013). It is therefore important for organizations to align to cash

flow management policies that can properly manage the working capital which include cash sales

and debtors collection from stock holdings, to customer account and release of payments to

suppliers in order to boost financial performance (Okello and Uwondo, 2013). In accounting and

finance perspective, cash flow includes the amount of money in the business at the start of the

financial period vis-a-vis cash balances at the closing date of company’s financial period

(Faulkender, Flannery, Hankins, & Smith, 2012). According to (Frank and James 2014), cash flow

is the net liquid amounts put together with the equivalents of cash that come into and move out of

an organization.

Cash flow management activities on the other hand are the determination and evaluation

that is used by organizations in monitoring, summarizing and utilizing the net cash payments

1
receipts to achieve fewer cash disbursements and expenditure. Financial performance of a firm is

the subjective kind of measure of how well a business entity makes use of its owned or assets in

possessions through value addition. Manufacturing companies are deemed to be companies that

use parts and components or convert raw materials both useful and recycled to make value added

finished products used by end users (Frank and James, 2014)

In line with the above literature, maintaining of optimal cash amount therefore requires

good cash flow management activities (Okello and Uwondo, 2013). Organizations with good cash

management systems and planning have always stood out to be better placed to make investments

decisions which are necessary to achieve better competitive edge (Okello and Uwondo, 2013).

Holding of cash kind of management or cash flow in accounting has proven to be more costly to

most manufacturing companies. Optimal cash management is critical because keeping idle cash

results into diminished yield, increased cost on finances through insurance cover and risk of

holding cash as the most volatile asset of an organization. Even though some companies are still

involved in carrying out cash flow budgets there still exists effects that can either affect financial

performance of an entity in good or adverse way.

Globally, cash flow and cash flow management has attracted attention just like in the local

commercial undertakings. In Poland, issues relating to cash flow have in the recent past raised

concerns especially cash management which affects the day to day operations of the organization

which is important to achieve better financial performance (Darek, 2012). In China, cash flow is

looked at from an accounting perspective referring to expenditure and receipts within a firm in

relation to its performance (Zhous, 2012). There is an increased need for regulators to come up

with cash management controls for all deposits aimed at increasing cash flows hence contribute to

better financial performance of organization (Zhous, 2012). For adequate cash management

2
policies in the American economy for instance, financial sector ensures optimal financial

performance of organizations because there is desire to achieve economic growth. Essentially, cash

is critical resource for the purchase of assets and organization operations which is a priority for

market return to cover interests of its stakeholders (Miles, 2010).

In Nigeria, the decrease in cash flow management is based on determining how much an

organization is not efficient to rise and this is an indication of its financial performance troubles

(Nwanyanwu, 2015). Usually, company financial performance is very important because investing

cash flow is valued more than gains in its financial statement. Investors are likely to focus more

on risk exposure when making investment decisions, asset solvency and financial performance

volatility and mortality or decline is indicated. Cash flow is among standards and parameter that

financial statement consumers depend on while making financial and investment decisions rather

than accounting standards which are sometimes misused and manipulated by managers

(Nwanyanwu, 2015). Closer home, in Tanzania, free cash flow does not necessarily impact on

financial performance of firms. However, operating activities of cash involve high cost of raw

materials and other items for manufacturing companies, cash paid for salaries and wages paid to

human resources related costs, cash paid to suppliers of goods supplied, fees paid out for licenses

and government revenue, fines & penalties charged to organizations and tax paid not forgetting

interest and other financial costs (Simpasa 2014). Many firms consider operating cash flow as a

factor that boosts their financial good standing. This makes them avoid interest costs and avoid

credit traps. In addition, in the event that a firm fails to make enough operating cash, it may to be

forced into committing in credits to finance its investment plans. High operating cash flow tends

to attract a low credit risk (Simpasa, 2014).

3
 In Kenya, the sector of manufacturing is ranked the second largest sector driving the

economy of the country contributing approximately 10% of the GDP. The sector serves both local

and regional market across east and central Africa region (Mong’o, 2010). Importance of

manufacturing sector in Kenya in particular is highlighted by provision of considerable level of

employment to the country (KAM ,2018). Manufacturing activities in Nairobi in particular is 80%

of the sector due to among other factors ease of accessibility to infrastructure and support services.

1.1.1 Cash Flow Management Activities

Cash flow management activities comprise of the components of cash flow statement. Authors like

(Kew, Mettler, Walker & Watson, 2006; Powers and Needles, 2011 and Miles, 2010), have

indicated that cash flow involve three main elements or activities. These activities include

operating, financing and investment activities. According to (Farshadfar and Monem, 2013), cash

flow is classified into three main components namely cash flow emanating from operating

activities, investing activities and financing activities. Operating cash flow is said to be amount of

money paid for the acquisition of merchandise, tax settlements, payments made to vendors,

payments of wages and other operation expenditures (Gordon, Henry, Jorgensen, & Linthicum,

2017). Operating activities provide the management with an idea on how much cash an

organization must make available or is generated from its daily undertaking of business activities.

Cash inflows comprise of cash received from sales of merchandise and services or rather the

normal business activities, cash receipts from the collection from sold goods or services, cash

interest and dividends received from investments and other cash receipts not directly recognized

with financing of operations or investing activities (Kew at al 2006). Operating activities also

involves cash out flow which include cash payments for acquisition of items for trading or

processing and conversion or consumptions on the production floor, cash payments to vendors and

4
service providers for services received, payments to employees in terms of salaries and incentives,

cash settlement for tax liabilities and interest (Kew et al 2011).

Many researchers have described the various components of cash flow statements and what

they entail with a lot of consistence. Taillard (2012) described financing activities as the process

of procuring capital to finance start up or expansion or any other engagement the company may

need that necessitate additional funding from what would be internal or external sources.

Financing activity indicates whether and how much of the operational and investments funds have

been procured from outside or within. This can also mean obtaining resources from stockholders

and providing them in return with dividends for their investments, and borrowing money from

creditors and repaying the amount borrowed according to obligation terms of reference (Powers

&Needles, 2011). Kemboi (2010) notes that cash flow from financing activities includes proceed

of cash from issued shares and loan borrowings. Cash payment for financing activities includes

the following; money spent to repay the principal loan amounts, redemption amount paid for

ordinary and preference shares. Wanja (2011) observed that the main intention of accounting

information is to provide relevant and satisfactory financial information that help both internal and

external consumers to make sound decisions as regards company’s operations and performance.

Normally net cash flow from financing activity should be negative in most of well managed

businesses because it is an indication that such company has been spending on business growth

and expansion.

The third category is investing cash flow activities. It details how much of the monies the

business made and used on investments in other entities such as procurement of shares, bonds and

securities from other organization in line with viable investment decisions. Acquisition of property

and sale of long life assets entails the component of monies from investing events (Keown, Matrin

5
and Titman, 2011). Money received is associated with sale of assets with long life characteristics

like buildings and machinery whereas cash outflows occur when long term assets are procured by

an organization (Berry, 2011). According to (Power and Needles. 2011) this category may also

include the purchase and sale of production assets such as manufacturing equipment whereas cash

in flow from investing category comprise collections of principal amounts on loans given out to

other entities, cash received through sales of company investments and cash received from the sale

of manufacturing assets. In some other cases, assets which have completed their economic life

may be removed from organization register by disposing them. However it is important to highlight

the fact that assets disposal may also arise with aim of funding the company operations or

settlement of credit (Jeter, 2005).

1.1.2 Financial performance

The association between cash flow management activities and financial performance of

organizations has not been well established. Most of the studies carried out before focused on the

relationship between investing, financing and operating activities in terms of organizational

performance. However, it is quite evident that cash flow in a way or other affects an entities’

profitability though there is not enough evidence to support. According to (Miles, 2010) cash flow

management activities have to be a result of investment, financing, operating, equity investment,

cash collection, plant investment and or debt repayments. This study will focus on manufacturing

companies by looking at the cash flow management from investing, operating as well as financing

activities.

Efficiency in performances of manufacturing companies and their weaknesses are

sometimes a result of failure and lagging of their respective cash flows management

identifications. Cash flow management is mainly born out the process of cash accumulation,

general business transaction and other events. Cash flow remains the principle of the financial

6
performance of any organization and the circular manifestation as the aim of law that has to be

decided by the shareholders. This implies that cash flow management will always be the core of

financial performance (Mong’o, 2010).

There are various ways of determining measure of financial performance of a company.

Athanase (2015) indicated that the measure of financial performance has been made by applying

possible indicators in most businesses by evaluating returns on asset and returns on equity as the

appetite of shareholders. The entity’s financial performance can also be measured by applying

financial ratios depending on the actual environment and the targeted aim being the most common

measures in relation to accounting. These measures include net profit, return on asset, return on

equity, current ratio, liquid ratio and credit ratios (Dukes, Davis and Dyckman, 1998; Gullet and

Hicks, 1981 and Nwanyanwu, 2013a). Components of cash flow may be measured by adding all

the line items that appear under respective cash flow activities component (Collins, Hribar, & Tian,

2014). Therefore, this study will take this dimension to research and evaluate the association and

interdependence of variables.

The assumption of this research is grounded stability of monies coming in to any

organization and that it is an indicator to the opportunity for financial presence and profitability.

The performance of an entity can also be determined by the use of return on equity (ROE) and

return on assets (ROA). Cash flow and profits of an organization are much related. A sound cash

flow standing is reflected in the cash levels of an organization. When an entry continues in trend

of making profits, then it is assumed that has stable cash flow hence has enough cash for investment

decisions. It is evident that profit, in turn is always a reflection of the image in its cash flow

soundness or bottom line of cash flow statement (Panigrahi, 2013).

7
1.1.3 Manufacturing Companies in Nairobi
The sector of manufacturing is ranked in line with driving of economic prosperity of the country

contributing approximately 10% of the GDP. The sector serves both local and regional market

across east and central Africa region (Mong’o, 2010). The importance of manufacturing sector in

Nairobi in particular cannot be underestimated because of provision of considerable level of

employment opportunity to the county (KAM ,2018). Due to the importance of sector, the

government has earmarked the sector as one of its big four-agenda and has set out strategies, targets

and regulations to enhance growth and economic prosperity in the country. These plans highlight

the government focus that will boost fish processing, agricultural produce processing, leather and

textiles sub-sectors among other areas. (KNBS, 2018). The economic survey of 2019 indicates that

the sector of manufacturing grew by 4.2 per cent in 2018 compared to statistics of 2017 where

growth witnessed was 0.5 per cent lower. The report also indicated that manufacturing output

volume expanded by 5.1 per cent in 2018 from a revised contraction of 0.8 per cent in 2017. This

is also reflected in employment which shows the impact of manufacturing to the economy (KNBS,

2019).

The sector has many divisions which include transformation and value addition on

agricultural products, fruit and meat canning, Cornmeal, wheat and barley milling factories and

sugar refineries (economic Survey, 2018). Other sub sectors include Electronics processing,

assembly of vehicles and processing of soda ash. Assembly of computers, Textiles, ceramics,

cement, shoes, aluminum, steel, glass, wood, cork and plastics are other sub sectors of

manufacturing in Kenya, (KAM, 2015). Most manufacturing activities are concentrated within

three major urban centers in Kenya. These are Nairobi, Mombasa, and Kisumu with potential

location for Industrial Parks to be designed in Nairobi due to its proximity to most important

markets and enhanced infrastructure.

8
 The study will exclusively be done on the manufacturing entities dealing with transforming

raw materials as well as semi-finished products to forms that are consumable by consumers.

According to (KAM, 2015) more than 80% of the manufacturing companies are domiciled in

Nairobi. Therefore Nairobi as the scope of study will ensure easy access and collection of data

from target population following large number of manufacturing companies operating in the

county.

1.2 Statement of the Problem

Management of cash flow of manufacturing companies has proved to be a challenge in against

steps by organization to achieve super financial performances. Most of the companies are currently

struggling to settle their obligations as a result of cash flow issues. This has made some of

manufacturing companies to issue profit warning in pursuant to the provision of fifth schedule of

the Capital Markets (Securities) Public offers, listing and Disclosures Regulations, 2002. Elayan

and Pukthuanthong (2009) defined profit warning as a prior announcement released by

organizations and it indicates that the profits of that particular organization will be lower than

expected. Since the enactment of the law, Kenya has witnessed many listed companies issue profit

warning. In 2019 for example, manufacturing companies like African Portland Cement, Bamburi

Cement, Carbacid, Crown Paints and Sameer Africa issued profit warnings for the 2018 financial

reports (sokodirectory.com). Majority of factors that have been attributed to contribute to the

reduction in profits are macro-economic environmental factors and other factors that are unique to

individual firms (NSE, 2016). The Uchumi Supermarket and Mumias Sugar Ltd in particular

issued profit warning announcements stating that working capital and cash flow problems were

their main challenges. Economic Survey (2012) showed that growth in sector of manufacturing

declined from 3.4% in 2011 to 3.1% in 2012. The survey further highlighted that most of the strong

9
firms have less outstanding debt as compared to companies that experienced cash flow problems.

On average 37% percent of the assets of these firms are financed through debt (World Economic

Forum, 2013). And therefore decline in growth is attributed to numerous factors including wrong

ways of managing the available cash and planning of expected cash.

Studies have confirmed that there is some relationship between cash flow activities and

entity’s financial performance. Mbula, Memba, and Njeru (2016) did examine what is the effect

of receivable on the firm’s profitability and found out that the two variables positively relate.

Akumu (2014) study was on free cash flow and how it affects the financial performances of

companies listed on the Nairobi Securities Exchange. Njuguna (2013) focused on cash flows

activities and the effects on the financial performance of medium firms in Nyeri. The study

purposed to examine how sensitivity of investment, cash balances, account receivables, and

company size affects profitability. The study did not use operating cash flows as well as financing

cash flows beside the two variables being the main component of cash flows statements activities.

Owino (2014) studied the effects of cash flow management on the profitability of manufacturing

companies operating in Nairobi County. The main objective of his study was investigating the

effect of using current assets on profits of an organization, the relationship between cash

receivables and profitability as well as the effect of management of incurred costs on the

profitability of the firm. Scope of the study fall short of representativeness of the total population

of the Nairobi because it narrowed down to current assets rather than the entire components of

cash flow statement

No previous study has specifically focused on evaluating the effect cash flow management

on the financial performance of manufacturing companies in Nairobi. This particular study

therefore will purpose to fill this gap. In view of the shortcomings raised above and the knowledge

10
gap revealed, this study seeks to establish the effect of cash flow management activities to the

financial performance of manufacturing companies in Nairobi.

1.3 Research objective

The study is aimed at establishing the effect of cash flows management activities on the financial

performance of manufacturing companies in Nairobi.

1.3.1 Specific objectives

The specific objectives for this study are:

i. To establish the effect of operating cash flow management activities on financial

performance of manufacturing companies in Nairobi.

ii. To examine the effect of investing cash flow management activities on the financial

performance of manufacturing companies in Nairobi.

iii. To find out the effect of financing cash flow management activities on the financial

performance of manufacturing companies in Nairobi.

1.4 Research Questions

i. What is the effect of operating cash flow activities on the financial performance of

manufacturing companies in Nairobi?

ii. To what extend does investing cash flow activities affect the financial performance of

manufacturing companies in Nairobi?

iii. What is the impact of financing cash flow activities on the financial performance of

manufacturing companies in Nairobi?

1.5 Justification of study

This study is important to the management of different manufacturing companies in Nairobi for

planning and making financial decision. It is also valuable to the country’s economic profile for

better fiscal planning. On completion the results will be beneficial to policymakers when making

11
decision in areas of managing cash and situations relating to handling of cash in manufacturing

sectors. Investors who are interested in investing in the manufacturing sector in Nairobi may use

the findings of get more information on matters cash flow management activities while making

investment decisions as well as other business processes. The national and county governments

may also use findings to determine tax performance of the manufacturing sector considering that

manufacturing is one of the big four agenda that the government pledge to concentrate on to

achieve future economic prosperity. Researcher can use the findings of this study for other studies

in future. Other researchers who have interest in this area can also use the findings of the study or

use the study in their literature review.

1.6 Scope of the study

The focus of this academic research is on the effect of cash flows management activities on the

financial performance of manufacturing companies in Nairobi. The study is based on

manufacturing entities in Nairobi. The study will use data from financial statements of entities as

published or reported between 2011 to 2016. The respondent are guaranteed that data collected

will only be used for research purposes and treated with the highest possible level of

confidentiality.

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 CHAPTER TWO

2.1 Introduction

This chapter looks at theories, empirical areas of cash flow management activities and

determinants of financial performance, conceptual framework, and operational of variables.

2.2 Theoretical Review

2.2.1 Cash Conversion Cycle Theory

The theory was introduced by Richards and Laughlin (2008). These two researchers were looking

at issues managing cash flow plus its distinct components. Elmore, (2011) stated that Cash

Conversion Cycle can be referred to as complete circle of period of time quantified in days that it

takes for resources to be converted to liquid cash. The cash conversion cycle is a good measure of

the Working Capital management of an organization which determines the difference between

expenditure together with payments when we make commitments through purchasing against

revenue (Jordan, 2003; & Padachi, 2006). Cash conversation cycle is very important to any

organization because organizations are better placed to know the amount of cash needed for

smooth operation. That way, management is able to control the functions of company since Cash

Conversation Cycle determines how long a company is able to convert cost incurred on purchase

into liquid cash. A rapid cash conversion cycle is necessary for the stability and prosperity of the

firm. The components of cash conversion cycle include accounts receivable days, accounts payable

days, and inventory days (Biger and Gill, 2013). This theory focuses on the time the organization

takes to acquire required raw materials and the inflow of cash after disposing its final products.

Cash conversion cycle for manufacturing entities can be obtained by simulating the

following parameters: [days of debtors plus days of stock conversion less days of creditors]

(Deloof, 2003; Lazaridis & Tryfonidis, 2006). When the cycle is shorter, organization will need a

13
little less resource for operations. However, when the cycle is lengthy, then sales growth of the

organization will be high, translating to higher profits and consequently, improved financial

performance. Cash conversion Cycle theory is important to this research because it amplifies

operating cash flow activities as one of the variable in the study.

However, this theory has been criticized by Akinsulire (2003) claiming that for purposes

of value addition to the shareholders, the cycle has to be as short as possible. He asserts that success

of any organization is also based on how the managers plan and takes control of cash flows. Olowe

(2008) states that managing cash should be anchored on the effectiveness of controlling cash by

managers to ensure the desired balances and optimum levels of liquid assets is achieved.

2.2.2. The Miller-Orr Model Approach

Miller Orr cash management model was put forward by Morton Miller and Daniel Orr. According

to (Miller and Orr, 1961), businesses can determine the return point and upper limit of cash

balances that affect their financial performance. This model provides for transactional balances

that are more efficient and is assumed that balances in cash will always be fluctuating or stochastic.

For example, if the company cash balances goes beyond the upper bound, such a firm may procure

security stocks which are profitable so as to help reduce the balance to what the management has

predetermined (Michalski, 2014). The assumption here is that there are no specific underlying

trend in cash balances over time and the optimal cash balances value depends on the opportunity

costs and market dynamics. According to this theory, an optimal bound of cash results in better

financial performance.

Miller and Orr model took the assumption that the distribution value and standard

deviation of cash flow is zero and that the distribution of cash takes a normal distribution curve

(Premachandra, 2004). The application of this model requires managers to put in place procedures

which include establishing cash flows level that are optimal for the company then look at the

14
interest rates and the deviation effects on returns to be able to make sound decisions. The firm

must also be able to identify the prices at which marketable securities can be purchased and sold

as investment activities, (Da Costa, Moraes, Nagano, & Sobreiro, 2015).

By observing the lower and upper bound, an organization is able to meet the operating cash

demand. Together with that manufacturing companies are able to engage in investing activities by

offloading excess balance when the cash balances exceed the upper bound target. The relevance

of this model therefore is in support of key variables applied in the study. These variables include

investing activities and operating activities.

2.2.3 The Keynesian Theory of Money

The money theory by Keynesian (Keynesian Theory of Money) states that there are three reasons

for holding money in cash form. The reasons include the need to maintain liquidity for the

transaction and for precaution as well as speculative motive. This theory was initially stated by

Keynes in 1936 and is based on the assumption that motive of speculation is the main reason to

keep hard money with the intention of improving organizational performance when the need arises

for favorable exchange or for purpose of value addition. The motive of precautionary is key reason

to maintain liquid cash to be used for unexpected events. The transaction motive refers to the need

to have cash on hand to be used to settle daily expenses (Ali, 2013). A company should have cash

available so that incase of profitable investment opportunities an investment decision is made for

future profitable gains (Ali, Kadir, Nayan, and Yusof, 2015). Keynes asserted that speculative

motives can be achieved by a firm applying for credit to have the ability in invest marketable

securities. Precautionary motives involve holding money for reasons which are not readily

identified (Keynes, 2016).

The relevance of this theory to the study is highlighted in all variables under study;

operating cash flows is aligned to transactional supporting activity which is one of the motives of

15
holding cash to meet the operating commitments of the company. The theory also amplifies the

financing cash flow activities variables through speculative and precautionary motive. From an

investment point of view, the variable is clearly visible in Keynesian theory through the motive of

speculation. It is the need for having liquid cash to arbitrate on profitable investment chances that

may fall through (Deleplace, and Nell, 2016).

Criticism has been put forward to highlight the shortfall of this theory. Richardson (2016)

whose take on the theory is that organizations that have surplus cash in ventures translate to

profitability situation and this means that cash flow management depends on the organization

resources at the discretion of apportionment by the managers. The theory can, however, be used

to examine the way an organization make use of its cash flow to invest in the resources that are

available. This therefore justifies cash flow management activities which entails receiving and

giving cash and hence the significance of cash to any organization.

2.2.4 The Free Cash Flow Theory

Free cash flow theory states that surplus of funds can only be made available if an organization is

profitable. Jensen (1986) states that the notion behind free cash is excess of what is needed for

running a projects with favorable present value (NPV). The theory talks about there being more

internal cash that enables the managers to avoid controlling markets. This means that net income

of the organization accrued from capital expenditure which in the end affects its profile. The theory

assumes that a manager having idle cash is likely to be less carefully on which projects to invest

hence might decrease firm’s value. Cash flows that are above what an organization need for capital

expenditure for investments have a positive impact on the net current value and are what is referred

to as free cash flows. A firm utilizing its cash float is likely to minimize unnecessary cost.

Maximizing income depends on the cash control techniques that aimed at expanding organization

whereas the increase in costs leads to positive growth. However, firms with free cash flow tend to

16
get exposed to greater agency problems because free cash flow tends to heighten the conflicting

and integrity hence leading to battles between managers and shareholders (Thiruvadi, Huang,

Wheatley, & Thiruvadi, 2016). Free cash flow theory fits in this study because it supports the

reasoning behind why cash flows value of shareholders is important and the directors should

ensure that shareholders wealth is maximized. By identifying how cash flow should be managed

to ensure that shareholders gain desired value for their investments in a company (Richardson,

2006)

This theory has been criticized by Derek (2012) claiming that maximizing wealth of

shareholders are not the only reasons why the organization needs to expand their sizes. Expanding

cash flow is not a reflection of an increase in organization resources and it may lead to more pay

because pay relates positively to growth. This theory has the gross implication that cash flows

should be maintained for investment activities and should either be deficit or surplus to the cash

budget.

2.3 Empirical Review

2.3.1 Operating Cash Flows and Financial Performance

Numerous studies have been carried out to determine the relationship between operating cash flow

and the financial performance of an organization. Studies carried out by (Frank and James 2014;

Nwanyanwu 2015; Abasi, Ghanbari, Haidari and Nazarzadeh, 2015; and Amah, Ihendinihu and

Micheal, 2016) has indicated that operating cash flow activities exhibit positive interaction on the

financial performance of a company. However studies by (Mong’o 2010; Guda 2013; and

Ahmadzadeh, Faal and Gheshlaghi, 2014) made a conclusion that there exist negative relationships

on operating cash flow activities of entity’s financial performance. This divergent opinion is the

point of reference that justifies the need for this study.

17
 Operating cash flow as a mix of cash flow component has varied impacts in different

industries world over. This has attracted interests from scholars and researchers. Research

conducted in banking sector has revealed positive relationship on the dependant variable under

this study. Amah et al (2016) researched in this area on listed banks in Nigeria. The study was

conducted on 4 specific banks. Findings from the research showed a strong and justified positive

relationship among the two variables on Nigerian Banks. A research by (Bingilar and Oyadonghan,

2014) in food and beverages industry in Nigerian companies supports both the theoretical and

empirical findings of previous studies which supported the view that operating and financing cash

flow activities have positive relationship on the financial performance of corporate bodies in food

and beverages industry in Nigeria. Ahmadzadeh, Faal and Gheshlaghi (2014) on the other hand

found out that the relationship between cash flow from operating activities and financial

performance is significantly negative. Munasinghe Wijewaradana (2015) in their study findings

suggested that operating cash flow is not supported with business performance indicators because

in the first step operating activity cash flow are excluded in analysis. Nguyen and Thanh (2013)

studied on the impact of operating cash flows on bank performance in Vietnam indicated that bank

performance decreases as the amount of operating cash increases. Ali, (2013) and Chikashi (2013)

in different and separate studies researched on the relationship between operating and firm profits

made the same conclusion.

Other studies have been conducted in hospitality industry in Nigeria. Nwanyanwu (2015)

study was interested with the influence of operating cash activities on the performance of

organizations targeting the hospitality industry in Nigeria. The objective was to examine whether

operating component of cash flow exhibit some level of association with performance of an entity.

The sample size was 45 firms from hospitality and print media sectors, the study concluded that

18
operating cash flow affects organization performance in relation to their cash flow statements.

Franks and James (2014) in their study on how operating cash activities affects financial

performance of corporate bodies in the food and beverages industry in Nigeria, made a conclusion

that there exist positive and significant correlation between financial performance and operating

component of cash activities. Aghaei and Shakeri (2010) study was on the application of operating

cash movement and the effect to the growth of the firms. This was a descriptive kind of study. The

study conclusion was that cash flow components and accrual components have visible positive

predictor ability when evaluated together with determination of growth of firms.

Studies done on Stock exchange have eliciting mixed outcome. Ghanbari, et al (2015) did

an investigation on cash flow effects on financial performance of companies listed on Tehran Stock

Exchange. The research sampled out 183 companies where data was collected between 2009 and

2013. Tools like efficiency, mean, standard deviation and regression analysis test, Student t test

and Fisher F test was used to evaluate the effect of Return on Assets as a measure on dependent

variables under study. The researchers made conclusion that there is visible relationship on cash

from operating component and the performance of entities on Tehran stock exchange. Mehtari

(2016) looked at the effects of operating cash flow on profitability of organizations in Toronto

Securities Exchange (TSE). Findings of the study indicated that organizations which are leveraged,

have low total assets, little equity balance, diminished retained profits, and unqualified auditor

opinion tend to have better cash flow performance in relation to the cash dividend disbursements.

Abyak and Ghodrati (2014); and Habib (2011) in their findings they explained that there exists

positive interaction on profitability in association with operating cash flow and the returns

attributed to the stakeholders as well as positive profitability in relation to stock return. Khalaf and

Mari’e (2011) had an empirical study which approved the notion that profitability ratios and cash

19
flow from operating activities like sales and creditors ratios have effect on EPS of a company.

Libby, Libby and Short (2014); Berry (2011); Atrill and McLaney (2014); Askari, Jabbari and

Sadeghi (2013) concluded that operating cash component oppositely interact with stock’s price in

their analysis on firms listed on Tehran Stock Exchange. The data in this study related to period

from 2006 to 2010. Amir and Parsian (2013) conducted a research on the impact of operating cash

flow on entity’s profit for companies listed on Tehran stock exchange. The study was done to

determine the relationship of different component of cash flows on growth of profits. They

concluded that the use of cash flows from operating activities has a great influence on profitability

with negative effect. In the study by Muchiri (2014) who researched on the operating cash flows

and how it affects financial performance of companies on Nairobi Securities Exchange. After

applying multiple regressions analysis on sales growth, cash flows and the Tobin Q, he concluded

that operating cash flow from non fixed assets and short term liability remains a significant

measure of level and size of the organization and revenue growth has influence to the performance

of an organization. Adelegan (2013) carried out an empirical study on the interaction between

operating cash flows activities and variation in dividend payout in Nigeria. The conclusion was

that there is a positive and significant relationship between firm performance and operating cash

flow activities. From the foregoing literature review and findings it is clear that there exist a

relationship between operating cash flow management activities and financial performance of a

company. In that case this study proposes to apply the following hypothesis:

H01: Operating cash flow management activities have no statistical significant

effect on the financial performance of manufacturing companies in Nairobi.

2.3.2 Investing Cash Flow and Financial Performance.

A number of studies have been done in relation to investing cash flow activities. Some of the

studies have indicated a positive association between financial performances and investing

20
activities while others showed negative. Studies by (Ghanbari et al 2015; Guda 2013 and Mong’o

2010) confirmed positive relationship while other studies conducted by (Frank and James 2014;

Gheshlaghi et al 2014; and Amah et al 2016) showed that the relationship is negative.

Studies done in food and beverage industry exhibited negative relationship. A research by

Frank and James (2014) investigated the impact of investment cash flow on corporate financial

performance in food and Beverages industry in Nigeria. The data used in the study were obtained

from the Nigerian Stock Exchange. The data was collected between 2007 and 2011 and subjected

to regression evaluation. The findings showed that there is a significant adverse relationship

between company financial performance and the various investing cash flow activities of the

company. Hina, Mba and Mphil (2014) carried out a similar study where their findings were more

or less the same in which case the investing cash flow management activities showed a negative

relationship as impacted on the financial performance of organizations.

Similar research in the sector of manufacturing has been done by various researchers.

Manyo (2013) researched on the effect of investing cash flow activities on the performance of

Nigeria’s manufacturing entities. Rehaman (2017) did a research by investigating the effect of cash

flow on the profitability of firms in Pakistan. The study covered all components of cash flow

statements. Both studies obtained a positive correlation between financial performance and

investing cash flow activities of an organization. Akoto (2013) and Enqvist (2013) both agreed

that cash flow from investment activities ought to be managed and disclosed and that investment

in cash flow may be solid in which case acquire the sales proceeds in the form revenue. Alloy and

Velnampy (2014) researched on the effects of investment activities on company profits. The main

objective of the study was to analyze what influence has the net cash flow of investments and the

size of the firm on the profits of an organization. The population under the study was thirty-three

21
manufacturing entities listed on Sri lanka Stock Exchange. In their summary they stated that

investment cash flows are considered as a means of analyzing weakness and strengths in improving

financial performance.

Several researches have been done in securities exchange markets. A study by Asif (2015)

majored his study on the effects of investment cash flows on the profitability of companies on

Karachi securities exchange where the findings were that current assets form a very crucial part

of cash flow for investment, and therefore there is need for management to control investment

activities efficiently to boost profitability and growth. Research by Ghanbari, et al (2015) also

found out that there exists reasonable relationship between the components of cash flow statement

with the financial performance of companies trading on the Tehran Stock Exchange. Same

sentiments have been raised by Tariverdi et al (2014). Gheshlaghi et al (2014) in their research on

the cash flows statements components what impact it has on the management performance using

138 companies listed on the Tehran Stock Exchange. The study covered data of 5 years, 2008 to

2012. They concluded that there is a negative interrelation between cash flow from investment

activities and return on equity. Kemboi (2010) investigated how listed firms undertake investing

activities in relation to financial performance on Capital Market Authority (CMA) in Nairobi. The

objective was to investigate ways in which listed companies fund their investment activities on

Capital Market Authority in Nairobi. The study recommended that investing cash flow is a good

thing in line of improvement of performance. There is need to purchase new assets by cash, but it

is not a good thing since cash flow from investing activities and leads to be negative cash balances.

However, the study did not analyze the investing cash flows through the purchase and the impact

of new assets to financial performance. Njuguna (2013) analyzed the influence of investment

management as behaviors of incurring agency costs are likely evidence from Nairobi Securities

22
Exchange. The study recommended that there is need to increase long term or fixed assets in

improving performance, but the study did not include daily returns from investing cash flows

which was determined by least square model.

Studies generally conducted on performance of organizations have also showed some

relationship with investing activities. Brush, (2010) investigated the influence of investment cash

flow activities on the sales growth and firm performance where the study recommended that cash

flow from investing activities basically reflects the company’s purchase or disposal of asset

appearing in the financial reports but having longer useful life of more than one year. Amar

Chtioui, Lakhal and Nekhili (2014) were interested in the relationship between investing activities

and earning by managers. The main aim was to find out the effect of investing cash flow activities

on the earnings management on the company by managers. Tobin’s Q was used to test whether

the selected firms had positive investment cash flow projection from their current values to be

relied on in determining earnings management. The study concluded that organizations with higher

investing activities coming from their cash flows tend to achieve lower earning management.

Collins, Hribar, and Tian (2014) stated that the growth and expansion of an organization can only

be achieved if the companies consider capital investment expenditure that enhances the firm’s

performance. Investing cash flow measured by putting together all the line items that appear in

investing cash flow activities.

In banking sector, investing cash flow activities have showed notable impact on the

financial performance of financial institution. Mong’o (2010) for example evaluated the impact of

investing cash flows on profitability of commercial banks in Kenya. The observation was that

investing cash flows have statistical positive influence on the profitability of commercial banks

and concluded that investing cash flow influences profits of commercial banks. In light of the

23
above finding, this study proposes to apply the following hull hypothesis to determine the effect

of investing cash flow activities as predictor to firm’s financial performance:

H02: Investing cash flow management activities have statistical significant effect

on the financial performance of manufacturing companies in Nairobi.

2.3.3 Financing Cash flow and financial performance

Financing cash flow management activities and firms’ financial performance has positive

relationship. That is according to studies by (Mongo 2010; Guda 2013; and Frank and James 2014).

However, according to (Ghanbari et al (2015; and Amah et al 2016) the two variables have

negative relationship. External funding plays an important role in increasing the future productivity

of companies for future viable growth (Gomis and Khatiwada, 2016).

Some research conducted to determine the impact of financing activities on performance

has exhibited diverse association. Rehaman (2017) did investigation on relationship between cash

flow and firm’s performance. The results demonstrated that financing cash flows clearly have

positive and statistically tested impact on performance of an organization. Gravetter (2016) studied

the relationship between financing cash flow and profits targeting SMEs business in California.

The conclusion of this study was that an increase in debt or long term liabilities, a reduction of

debt or term liabilities, a rise or decrease of owner’s capital, and an increase in dividends affect

organization’s financial performance. According to (Libby, Libby and Short 2014), firms with

ability to access long term loans or find resource on long term agreements are presumed to be

financially strong. The effect of such funding can be seen in the financial statements. Wanja (2011)

looked at factors that determine financial cash holding and what impact they have on the

performance of both SME businesses in Nairobi. The aim of study was to establish financing held

cash determinants and what effect it has to cash levels of SMEs in Nairobi. Sample population of

the study was 14 SME businesses in Nairobi. Findings of the study indicated that cash flow from

24
financing activities affects the performance of small and medium firms financially and concluded

that financing cash flow has a very important role in the process of making investment decisions

of an organization. The study recommended the need for future studies to analyze financing cash

flows due to the fact that it has become mandatory for organizations to come up with cash flows

statements to the financial information users. The study did not address the role of cash receivables,

cash payment, and net change related to cash in hand. The study was meant to establish the effect

of financing cash flow on the financial profitability of manufacturing companies by applying

multiple regression methods.

More research on financing activities in food and beverage sectors of various economies

has been done. Frank and James (2014) in their study on how financing cash flow management

activities affects corporate performance in food and beverage sector in Nigeria. Data used was

obtained from the Nigeria Stock Exchange running 2007 to 2011 was collected and subjected to

regression. This study found out that cash flow from financing activities has significant

relationship with corporation performance. Ebrahimpour, Mirfakhraldini and Moeinaldin (2009)

investigated the effect of accrual earnings, funding cash flows activity, investment cash flows on

predicting future in and out flows. Financing and investment cash flows and current earnings plus

depreciation expense had meaningful and positive relationship with performance an organization.

In stock exchange market studies have indicated that there is positive relationship between

funding activities and company’s profits. Research by Bragg (2014) investigated whether there is

a relationship between corporate performances against funding cash flow of firms quoted on

London Securities Exchange. Main objectives of this research were to establish the effect of

accruing of equity and effect for using debt issue on the performance of organizations together

with other predictor like the impact of payment of dividends on organization’s performance, the

25
impact of debt repayment on company performance, plus the impact of repurchase of shares to the

firm’s performance. The research population was eight companies listed on the London Securities

exchange and data was collected from the published financial statement and records of selected

companies. The relationship between corporate performance and financing cash flow was

established using component analysis. The findings concluded that there exists a statistically

significance relationship between corporate financial performance and investing cash flow

management activities. This study concluded that financing cash should be used in reference to

cash accruing from debt issue, equity, debt repayment, payment of dividends, and repurchase of

shares. The study recommended the need to establish the effect of loans, debts, and dividends that

have been accounted for in the form of cash flow. Changes in cash and cash related, increase in

capital, derived from financing is referred to as cash in, while payment of dividends is cash out.

The move by organizations to issue bonds to its members increases its cash inflow. This study will

apply the following null hypothesis questions to study this variable in relation to performance of

organizations in financial terms.

H03: Financing cash flows management activities have statistically significant

effect on the financial performance of manufacturing companies in Nairobi.

2.4 Knowledge Gap

The above literature has been reviewed in relation to the effects of cash flow management activities

on the financial performance of organizations in various industries, the studies focused on several

cash flows management activities associated with financial performance of organizations.

However, these studies have not examined some aspects of cash flow management activities from

point of view of investing, operating cash, and financing activities of cash flows in the scope under

26
this study. The studies did not examine the effect of cash flow management activities on financial

performance using manufacturing companies in Nairobi.

2.5 Conceptual framework

The dependent variables of this study are operating cash flow activities, investing cash flow

activities and financing cash flow activities. Financial performance of companies is the dependent

variable.

FIGURE1
EFFECT OF CASH FLOW ACTIVITIES ON FINANCIAL PERFORMANCE
Operating Cash flows

Net cash flows from operating

activities

Financial Performance of a firm

Investing Cash flows
Return on Equity (ROE)
Net cash flows from investing
activities Return on Asset (ROA)

Financing Cash flows

Net cash flows from financing

activities

Independent Variable Dependent Variable

2.6 Operationalisation of Variables

TABLE 1
OPERATIONALISATION OF VARIABLES
Scale of
Type Variable General Measure Specific Measure
Measure
Operating cash flows activities:
Adjusted net profit
Independent Change in receivables Net operating cash
Ratio
Variables Change in payables flows
Change in Inventory
Interest and Taxes paid

27
 Investing cash flows:
Cash paid for purchase of properties.
Cash receipts from sale of properties. Net investing cash
Ratio
Cash paid for investing in entities flows
Cash receipts of disposed
Investments.
Financing cash flows:
Cash from issued shares and equity
Net financing cash
Cash from redemption of shares. Ratio
flows
Cash from issued debt instruments
Cash repayment for debt settlements
Dependent Financial performance of
 Return on equity
Variables: manufacturing companies in Ratio
 Return on assets
Nairobi

CHAPTER THREE

3.1 Introduction

This chapter provides the methodology that will be applied to carry out this study. The chapter

specifies the design of research, population targeted, sample and sampling procedure that will

used, the research instruments, reliability and validation of instruments, data collection procedure

and finally data processing and analysis.

28
3.2 Research design

The research design is referred as the plan or scheme of outlines that will be based on generating

answers to the research questions. Durrheim (2004) defined research design as framework strategy

for actions that serves as a go between research questions and the execution, or implementation of

the research strategy. This research will apply a descriptive research design. This is because

descriptive approach involves studying or analyzing the frequency with which some things or

events happen. The main objective of descriptive research design is to describe the state of affairs

as it happens in the current environment. The design gives room for quantitatively describing

trends in events, attitudes or opinions exhibited in population in the form of who, what, when,

where and how of the topic (Burns and Bush, 2010). It enables the discovery of associations among

different variables under study (Cooper and Schindler, 2003). In this regards, the research design

method will be appropriate for this study because the study itself involves one set if dependant

variable with its characteristic being compared to three other variables assumed to be independent.

Another characteristic of descriptive approach research design is that it permits for accurate

analysis and estimation of the population parameters and then subsequent generalization of facts

(Churchill and Brown, 2007). It is versatile study design which allows for collection of large

sample size within a short time. Moreover the use of correlation evidence has proved to be more

important when following up the unique practices with the objective of quantifying the effects,

measurements, in effort to avoid common misstatements during the analysis of data and applying

some levels of confidence while describing range of the effects that are possible and the accuracy

of the effects estimates (Cooper &Schindler, 2011).

The research design will be applied to describe and demonstrate the strength of

relationships and dependability between dependant and independent variables and analyze the

29
identified variables of cash flow management activities that affect the financial performance of

manufacturing companies in Nairobi.

3.3 Target Population

The population target refers to the whole group of events, individuals or items that share similar

characters conforming to a set of given specification (Mugenda & Mugenda, 2004). The study will

target manufacturing companies registered with KAM and based in Nairobi County. The scope

has been selected due to the concentration of manufacturing companies. The study is interested in

a population that constitute 735 manufacturing company in Nairobi County (KAM 2016). The

companies are categorized into 14 sectors which include: building, mining and construction sector,

chemicals and allied, energy sector, electrical and electronics sector, fresh produce, food and

beverage sector, leather and foot ware sector, metal and allied sector, paper and board sector,

pharmaceutical and medical equipment sector, plastics and rubber sector, services and consultancy

sector, textiles and apparels sector, and timber, wood and furniture sector. The target population is

advised by the fact that manufacturing companies are members of Kenya Association of

Manufacturer (KAM).

The focus of the study will be exclusively on the manufacturing companies dealing with

transforming raw materials as well as semi-finished products to forms that are consumable by final

consumers. According to KAM, more than 80% of the manufacturing companies in Kenya are

located in Nairobi County. Nairobi County is targeted to ensure fast and accurate access to

information with ease because most of manufacturing activities are domiciled there.

30
 TABLE 2
TARGET POPULATION OF THE STUDY
Sector Of Manufacturer No. of Companies Percentage
Buildings, Mining And Construction Sector 32 3
Chemicals And Allied Sector 70 10
Energy, Electrical And Electronic Sector 39 5
Fresh Produce sector 2 0
Food And Beverages Sector 172 22
Leather And Foot Ware Sector 10 1
Metal And Allied Sector 71 10
Motor Vehicle And Accessories Sector 40 5
Papers And Boards Sector 64 9
Pharmaceuticals And Medical Equipments Sector 24 3
Plastics And Rubbers Sector 64 9
Services And Consultancy Sector 75 10
Textiles And Apparels Sector 60 8
Timbers, wood and furniture Sector 17 2
Total 735 100

3.4 Sampling and sampling procedure

A sample is a representative and manageable subset of the entire population where significant

estimates and inferences pertaining to the whole population can be obtained (Saunders, Lewis, &

Thornhill, 2012). It is required that the sample size should not be less than 10% of the population

targeted in the study. Such a sample size is large enough to allow for reliable data analysis and

provide the desired accuracy levels to estimate large populations (Kerlinger, 1973). The samples

size for this study has been determined using the Naasiuma (2000) model. The model applies a

formula to determine the sample size and has been used in several research and become acceptable.

The model applies the following formula.

N(Cv2)
n = (1)
(Cv2+(N−1)e2)

Where: n = Expected sample size

N = Population targeted

31
 Cv = Co-efficient of variation put as determined as 0.5

℮ = the desired level of tolerance determined as 0.05 with 95% confidence level

Expected Sample size will be determined as

735((0.5)2
n=
((0.5)2+(735−1)(0.5)0.05)2)

n = 88.13 companies which about 12% of population targeted.

TABLE 3

THE TABLE OF SAMPLE SIZE FOR THE STUDY IS TABULATED

Sector No.of Sample

Companies
Buildings, Mining And Construction Sector 32 4
Chemicals And Allied Sector 70 10
Energy, Electrical And Electronic Sector 39 6
Fresh Produce sector 2 1
Food And Beverages Sector 172 13
Leather And Foot Ware Sector 10 1
Metal And Allied Sector 71 8
Motor Vehicle And Accessories Sector 40 5
Papers And Boards Sector 64 8
Pharmaceuticals And Medical Equipments Sector 24 5
Plastics And Rubbers Sector 64 7
Services And Consultancy Sector 75 10
Textiles And Apparels Sector 60 6
Timbers, wood and furniture Sector 17 4
Total 735 88

Sampling procedure is an approach through which the researcher intends to get to the

respondents that are most qualified to respond to the questions of the study (Babbie, 2010). A

sample technique and procedure that will make the research determine size of the sample that is

reliable and can be managed well by the researcher while collecting required information.

This study will use a stratified technique of sampling by grouping the targeted sector of

manufacturing companies in different sectors. By sampling according to strata, the study will make

32
sure that the samples will be at least pick samples from all sectors of population. The

manufacturing companies under KAM are categorized into 14 sectors where 12 are in processing

and value addition while the other two offer essential services to enhance the formal industry. The

study will use a sample size of 88 manufacturing companies.

3.5 Data Collection Instrument

Data on cash flow activities and financial performance will be collected from secondary sources

of manufacturing firms in Nairobi. The study will apply panel data which will be constructed from

the financial statements of manufacturing firms in Nairobi. These financial statements will be

obtained from the Kenya Association of Manufacturer data base. In addition researcher will

subsequently visit sampled manufacturing companies to interview the finance officers. That way,

the researcher will use questionnaires to collect more data from the selected respondents. In

research, a questionnaire refers to a research instrument that has been included with a series of

questions and prompts for the purpose of collecting information from the respondents (Mugenda

& Mugenda, 2004). This tool will enhance speedy and accurate collection of data since it allows

for an opportunity for confirmation of data and re-verification. The method is cheap and easier

compared to other methods. Data collected will be within a period of five years covering the

financial period between 2011 and 2016.

3.5.1 Validity and Reliability of the instrument

Validity refers to whether the tool used to collect data is correctly measuring what it is meant to

measure (Bryman, 2008). To make sure there will be content validity, the questionnaire will be

subjected to examination by two people who are independent of the study. Preferably, the

individuals will be members of the Institute of Certified Public Accountants of Kenya. Their role

33
will be to evaluate the structure and content of the questionnaire for relevance and if they are clear

and meaningful.

Despite the fact that most of the secondary sources of data are reliable, there might be some

inaccuracies and inconsistencies. Therefore, there will be a need for the researcher to examine the

sources that will be based on collecting secondary data and determine if they are valid to the study.

To assess the validity of the documents, the researcher will assess the sources of data and

reputation or authority of the source. Because records are believed to reflect the original

information as collected from primary sources and are always audited, the instruments used to

collect secondary data will, therefore, be considered to have validity, following their nature. In

addition, there will be need to test the construct and criterion related to validity. The test is meant

to justify the measurements method of variables under study and determine whether the instrument

score on concurrence and predictive characters. To achieve this data will be subjected to

correlation and correlation coefficient tests.

Reliability of data can be related to consistency if the information. If the level of

consistency within a given measure is less, then the data is deemed less meaningful to the analysis.

According to Cooper and Schindler (2006), a measure is reliable to the degree that it supplies

consistent results. To achieve the reliability threshold, Cronbach coefficient alpha will be applied.

Cronbach’s alpha is applied to reveal important characteristic about the consistency within a set of

items measures of construct. Field (2005) argument is that Cronbach’s alpha determines the

reliability of a give set by summarizing a group of test to answer the measures of underlying

attribute in the data. Cronbach’s alpha coefficient provide information on a scale of 0 to 1 with a

scale of less than 0.7 regarded as not appealing to conform to internal consistency reliability. The

research is convinced that this will be appropriate to establish the reliability of data collected.

34
3.6 Data collection procedure

Data will be collected from the stratified sample of 88 manufacturing companies in Nairobi

County. The processes of collecting data will involve administering of questionnaires to the

selected respondents. A survey sheet will be used to collect secondary data from the financial

statements of the selected companies, their websites, and offices or KAM website. Copper and

Schindler (2011) affirmed that self-administered questionnaires are a preferred method because

they cost less. They may be delivered to the respondents electronically by sending them to their

respective email addresses, post them to respondents who return them after completing through

the same means, or deliver them in person to each respondent and then later collected after they

have been completed. In this study, the researcher will drop the questionnaires to each respondent

and collect them later. This approach is cheap, convenient, easier and quicker to administer. It is

also convenient to the respondents because they can complete the questionnaire in their own

convenient time when they do not have a lot of work.

3.7 Data Processing and analysis

Once the data has been collected, it will be prepared before analysis. This will involves editing,

coding, transcribing and cleaning. The data will then be subjected to classical linear model to

ensure that the assumption not violated. These include Linearity tests, Multi-collinearity tests,

Homoskedasticity and Heteroskedasticity test as well Normality tests on the data. The descriptive

and inferential statistics analysis will be done. Descriptive statistic technique will be used to

describe the definitive nature of the study variables and this will be achieved through means,

percentages, frequency distribution, and standard deviation. Inferential statistics to be applied

includes correlation and linear aggression analysis. The data will be analyzed using STATA

35
software. After data analysis, the findings will be presented in the form of bar graphs, tables, pie

charts, charts and frequency tables (Bryman & Cramer, 2011).

Correlation will be used to measure the relationship between the independent variables and

the dependent variables, while regression analysis used further to find out the strength of the

relationship between the study variables. The correlation analysis will be used in this study to

measures the relationship between cash management practices and financial performance of

manufacturing companies in Nairobi. Linear regression analysis will be used to find out the

direction and strength of the correlation between cash management practices and financial

performance of manufacturing companies in Nairobi. This method will be appropriate since it is

better placed to explain the characteristics in the relationship among the variables in a manner that

is more efficient clearly bringing out the relationship between the main variables in the study

(Bryman & Cramer, 2011).

Linear regression analysis will be done on operating cash flows, investing cash flows and

financing cash flows to investigate the relationship between cash flow management activities and

financial performance of manufacturing companies in Nairobi using the general regression

formula:

Y= β0 + β1X1+ β2X2+ β3X3 + ε, (2)

Where; Y: Financial performance of manufacturing companies in Nairobi as expressed by

return on equity & return on assets

β0: Intercept, which is the value of Y when X values are zero.

X1: Operating Cash Flows

X2: Investing Cash Flows

X3: Financing Cash Flows

36
 ε: Error term

β1, β2, and β3 are coefficients for Operating Cash flows, Investing Cash flows, and

Financing Cash Flows respectively.

3.8 Research Ethics

The protection of privacy, rights and welfare of the respondents and participants is paramount to

all parties involved in the study (Mugenda, 2015). The main aim of observing ethics in the study

is that the right procedure of data collection, analysis and presentation is done without infringement

on the rights of parties involved. In this study, the researcher will observe high level of ethical

behavior. Before conducting the study there will be a pre-visit to the selected organization. This is

meant to have a general understanding of the environment of study and pick out areas which have

an effect on the ethics of the research. Other ethical issue to be observed will include seeking

authorization letter from the university to conduct study and collect data as well as seeking

permission in the selected population to collect data from the organization.

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Adelegan, O. J. (2017). Investment, financial factors and cash flow from Nigerian panel data.
Journal of African Development, 11(1), 77-108.

AgalaMutende. M, Mwangi J.M, Njihia and D.E Ochieng (2017). The moderating role of firm
Characteristics on the relationship between investing free cash flows and financial
performance of listed firms at the Nairobi securities exchange. Journal of finance and
investment analysis, 6(4) 566-677.

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