Contribytions of Working Capital Management Pracrices

ANALYSIS ON THE EFFECT OF WORKING CAPITAL MANAGEMENT
PRACTICES ON THE FINANCIAL PERFORMANCE OF MUMIAS SUGAR

COMPANY, KENYA
BY
MARK KIPKEMBOI TOO
MBA/GC/529/12/13
ARESEARCH THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE CONFEREMENT OF DEGREE OF MASTERS OF
BUSINESS ADMINISTRATION (MBA)
CATHOLIC UNIVERSITY OF EASTERN AFRICA
AUGUST, 2015
DECLARATION
Declaration by the Candidate
I, the undersigned, declare that this thesis is my original work and that it has not been
presented in any other university or institution for academic credit.
MARK KIPKEMBOI TOO:
Sign……………………………. Date………………………
MBA/529/12/13
SUPERVISORS
This thesis has been submitted for examination with our approval as University
supervisors
DR. BITANGE BOGONKO:
Sign……………………………… Date…………………………….
MR. ROBERT SIMIYU:
Sign……………………………… Date…………………………….
ii
DEDICATION
I dedicate this thesis to my wife Nelly Too, My son Trevor Kigen Kemboi, my brothers
and sisters, friends and finally to my parents for their overwhelming support and prayer
throughout my studies
iii
ACKNOWLEDGEMENTS
First and foremost I thank the Almighty God for giving me strength and favour and life to
accomplish this study.
I wish to sincerely acknowledge the assistance given to me by my Supervisors Dr.
Bogonko and Mr. Simiyu in writing this thesis. I am grateful for the hours they put into
proof-reading, amending, and correcting errors and putting forward constructive
criticisms in the writing of this thesis.
iv
ABSTRACT
This study sought to analyze on the effect of working capital management practices on
the financial performance at Mumias Sugar Company. The study looked into the
commitment of the organization in terms of working capital management practices and
other resources and the sub sequent output. The specific research questions of this study
were: In what way do receivables management practices influences the financial
performance of Mumias Sugar Company? How does cash Management influences
financial performance of Mumias Sugar Company? What is the effect of inventory
management on the financial performance of Mumias Sugar Company? How can trade
payables influence the financial performance of Mumias Sugar Company? This study was
prompted by the fact that Kenya sugar industry is an important component of the national
economy, sustaining the livelihoods of millions and contributing significantly to the gross
domestic product. However, the sector has remained hostage to different debilitating
conflicts, pitting in some cases companies against out-growers, investors against
communities, and business rivals against each other. At the same time, lack of clear and
effective regulations and policy guidelines has made it difficult to resolve some of these
issues. The study adopted correlation research design to establish relationship between
working capital management practices and firm financial performance. The target
population was 753 respondents and was drawn from organization management and
employees from various departments. Structured questionnaires were the main data
collection tools. Validity and reliability of these instruments were established through
conducting a pilot study and, getting expert opinions. The scores obtained from
respondents were then correlated using SPSS where Cronbach’s Coefficient Alpha was
computed. The result of this test was .082, which was deemed appropriate for study.
Descriptive and inferential statics were used in data analysis with the aid of Statistical
Package for Social Scientists (SPSS) version 21.0. The study found out that there was a
significant correlation between receivables management and financial performance
(P=0.00), cash management (P=0.001), and payables management (P=0.0486) at 95%
level of significance. The study concluded that that receivables management was the most
important role of management that could assist in financial management performance.
The study recommended that there should be a sound credit policy to ensure efficient
collection of debt by reducing the credit period. In order to enhance cash management,
there is need for firm managers to set a trade-off between liquidity and profitability of the
firm so that the company may experience exponential growth in returns. Firms should
also endeavour to keep thin debts low, since as debt financing increases profitability
decreases. It is therefore important for firms to embrace efficient working capital
management practices in order to improve thin financial performance.
v
TABLE OF CONTENTS
DECLARATION...............................................................................................................II
DEDICATION.................................................................................................................III
ACKNOWLEDGEMENTS............................................................................................IV
ABSTRACT.......................................................................................................................V
TABLE OF CONTENTS................................................................................................VI
LIST OF TABLES...........................................................................................................IX
LIST OF FIGURES..........................................................................................................X
ACRONYMS...................................................................................................................XI
OPERATIONAL DEFINITION OF TERMS.............................................................XII
CHAPTER ONE................................................................................................................1
INTRODUCTION.............................................................................................................1
1.1 BACKGROUND OF THE PROBLEM 1
1.2 STATEMENT OF THE PROBLEM 4
1.3 RESEARCH QUESTIONS 6
1.3.1 RESEARCH HYPOTHESIS………………………………..
…………………………..6
1.4 SIGNIFICANCE OF THE STUDY 7

1.5 SCOPE AND DELIMITATION OF THE STUDY 8
1.6 CONCEPTUAL FRAMEWORK 8
LITERATURE REVIEW................................................................................................10
2.0 INTRODUCTION………………………………………………………………10
2.1 REVIEW OF THEORIES 10

2.1.1 AGGRESSIVE THEORY 10
2.1.2 CONSERVATIVE PLAN THEORY 11
2.1.3 HEDGING PLAN THEORY 12
2.3 EMPIRICAL REVIEW 13
2.3.1 CASH MANAGEMENT PRACTICES AND FIRM PERFORMANCE 13
2.3.2 INVENTORY MANAGEMENT PRACTICES 15
2.3.3 RECEIVABLES MANAGEMENT PRACTICES AND FIRM PERFORMANCE 16
vi
2.3.4 MANAGEMENT OF TRADE PAYABLES 17
2.4 KNOWLEDGE GAP 19
CHAPTER THREE.........................................................................................................21
RESEARCH DESIGN AND METHODOLOGY.......................................................21
3.1 INTRODUCTION………………………………………………………
...................................................................................................…………………………22
3.1 RESEARCH DESIGN 21
3.2 TARGET POPULATION 22
3.3 DESCRIPTION OF THE SAMPLE AND SAMPLING PROCEDURES 22
3.4 DESCRIPTION OF RESEARCH INSTRUMENTS 24
3.4.1 QUESTIONNAIRE 25
3.5 DESCRIPTION OF DATA COLLECTION PROCEDURES 25
3.6 VALIDITY AND RELIABILITY 26
3.7 DESCRIPTION OF DATA ANALYSIS PROCEDURES 26
3.7.1 MODEL SPECIFICATION AND HYPOTHESIS TESTING………………….27
CHAPTER FOUR...........................................................................................................29
PRESENTATION, DISCUSSION AND INTERPRETATION OF FINDINGS.........29
4.0 INTRODUCTION……………………….
…………………………………………………29
4.1 PRESENTATION OF THE FINDINGS 29

4.1.1 RESPONSE RATE 29
4.1.2 DEMOGRAPHIC INFORMATION 29
4.1.3 RECEIVABLES MANAGEMENT PRACTICES 32
4.1.3.1 LEADING SOURCE OF YOUR RECEIVABLES 32
4.1.3.2 COMPANY’S RECEIVABLES 33
4.1.3.3 COMPANY IN TERMS OF ITS CREDIT UPTAKE 35
4.1.4 CASH MANAGEMENT 36
4.1.5 INVENTORY MANAGEMENT 38
4.1.5.1 DAYS IT TAKE TO RECEIVE ORDERED GOODS FROM SUPPLIERS 39
4.1.5.2 COMPANY’S KEY CONSIDERATION LEADING TO INVENTORY ORDERING
40
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4.1.5.3 INFLUENCE OF INVENTORY SITUATIONS ON THE COMPANY FOR THE PAST 6
YEARS
…………………………………………………………………………………41
4.16 PAYABLES INFLUENCE 42
FIGURE 4. 4: RANK OF CREDITORS DEPENDING ON THEIR CREDIT VOLUME
ADVANCEMENT TO THE COMPANY PREFERRED PERIOD (DAYS) FOR CREDIT PAYMENT
42
4.1.5.3 HOW SIGNIFICANT ARE THE FOLLOWING PAYMENT TECHNIQUES TO THE
COMPANY…………… 43
4.2 FIRM PERFORMANCE 44
4.2.1 GROSS PROFIT GROWTH………………………………………………….…44
4.3 DESCRIPTIVE STATISTICS FOR ALL THE VARIABLES 47

4.4 INFERENTIAL STATISTICS 47
4.4.1 CORRELATION RESULTS 47
4.4.2 MODEL SUMMARY 48
4.4.3 ANOVA MODEL 49
4.4.4 HYPOTHESIS TESTING 49
4.5 DISCUSSION OF THE FINDINGS 51
4.6 INTERPRETATION OF THE FINDINGS 53
CHAPTER FIVE.............................................................................................................55
SUMMARY OF THE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
...........................................................................................................................................55
5.0 INTRODUCTION 55
5.1 SUMMARY OF FINDINGS 55
5.2 CONCLUSION 56
5.3 RECOMMENDATIONS 57
5.4 FURTHER RESEARCH RECOMMENDATIONS 58
REFERENCES................................................................................................................59
APPENDIX I INTRODUCTION LETTER..................................................................64
APPENDIX II: QUESTIONNAIRE..............................................................................65
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LIST OF TABLES
Table 4. 1: Demographic Information................................................................................31
Table 4. 2: Company’s receivables....................................................................................35
Table 4. 3: Cash Management............................................................................................38
Table 4. 4: Days it take to receive ordered goods from suppliers......................................40
Table 4. 5: Company’s key consideration leading to inventory ordering..........................41
Table 4. 6: Influence of Inventory situations on the company for the past 5 years...........42
Table 4. 7: How significant are the following payment techniques to the company.........44
Table 4. 8: Firm Performance............................................................................................46
Table 4. 9: Descriptive Statistics for all the Variables.......................................................47
Table 4. 10: Correlation results..........................................................................................48
Table 4. 11: Model Summary.............................................................................................49
Table 4. 12: ANOVA Model..............................................................................................49
Table 4. 13: Coefficient of Estimate..................................................................................51
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LIST OF FIGURES
Figure 1. 2: Conceptual Framework....................................................................................9
Figure 4. 1: Leading source of your receivables................................................................33
Figure 4. 2: Company in terms of its credit uptake...........................................................36
Figure 4. 3: Inventory Management..................................................................................39
Figure 4. 4: Rank of creditors depending on their credit volume advancement to the

company preferred period (days) for credit payment........................................................42
x
ACRONYMS
COMESA: Common Market for Eastern and Southern Africa
ECM: Efficiency in Cash Management
ERM: Efficiency in Receivables Management
EU: European Union
FP: Financial Performance indicator
IGAD: Inter-Governmental Authority on Development
ISE: Islamabad Stock Exchange
JIT: Just-In-Time
KSB: Kenya Sugar Board
NSE: Nairobi Securities Exchange
CCC: Cash Conversion Cycle
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OPERATIONAL DEFINITION OF TERMS
Capital investment decisions: This is long-term corporate finance decisions relating to

fixed assets and capital structure.
Cash Management: Refers to the collection, concentration and disbursement of cash.
Financial performance: This is a substantive measure how well a firm can use assets
from its primary mode of business and generate revenue that is measured
by operating profit margin, return on assets and return on equity.
Inventory: this is the Percentage measure of a firm's capability to finance its

inventories from its available cash.
Payables: is an amount billed to a company by its suppliers for goods delivered to or

services consumed by the company in the ordinary course of business.
These billed amounts, if paid on credit, are entered in the accounts payable
module of a company's accounting software, after which they appear in
the accounts payable aging report until they are paid.
Receivables: This is the money owed by customers (individuals or corporations) to

another entity in exchange for goods or services that have been delivered
or used, but not yet paid for. Receivables usually come in the form of
operating lines of credit and are usually due within a relatively short time
period, ranging from a few days to a year.
Working capital: It is a financial metric which represents operating liquidity available to

a business, organization or other entity. It can also be defined as to the
cash a business requires for day-to-day operations, or, more specifically,
for financing the conversion of raw materials into finished goods, which
the company sells for payment.
xii
CHAPTER ONE
INTRODUCTION
1.1 Background of the problem
Business entities exist for purposes of enhancing owners’ investment value.
Realization of this objective requires finesse in financial strategy and entrenchment of
responsive adoption systems. As a result, a firm is required to maintain a balance
between liquidity and profitability while conducting its day to day operations.
Liquidity is a precondition to ensure that a firm is able to meet its short-term
obligations and its continued flow can be guaranteed from a profitable venture
(Gitman, 2008).
Management of working capital is a fundamental part of the overall corporate strategy
to create value and is an important source of competitive advantage in businesses
(Deloof, 2003). In practice, it has become one of the most important issues in
organizations with many financial executives struggling to identify the basic working
capital drivers and the appropriate level of working capital to hold so as to minimize
risk, effectively prepare for uncertainty, and improve the overall performance of their
businesses (Lamberson, 2005).
Van Horne and Wachowicz (2004) provide that companies seek to minimize risk
and improve the overall performance by understanding the role and drivers of
working capital management. Consequently, a firm may adopt an aggressive
working capital management policy with a low level of current assets as percentage
of total assets or it may also be used for the financing decisions of the firm in the
1
form of high level of current liabilities as percentage of total liabilities. Excessive
levels of current assets may have a negative effect on the firm’s profitability whereas a
low level of current assets may lead to lower level of liquidity and stock-outs
resulting in difficulties in maintaining smooth operations. They conclude by
emphasizing that the main objective of working capital management practices is to
maintain an optimal balance between each of the working capital components.
Financial performance can be described as the measurement of the results of a firm’s
policies and operations in monetary terms. This term is also used as a general measure
of a firm’s overall financial health over a given period of time, and can be used to
compare similar firms across the same industry or to compare industries or sectors in
aggregation. Financial performance evaluation represents one of the key functions of
any business owner or manager. The most valuable information to most users of
financial statements, however, concerns what probably will happen in the future. The
purpose of financial statements analysis is to assist statement users in predicting the
future by means of comparison, evaluation and trend analysis (Filbeck & Krueger,
2005).
The concept of evaluation of financial performance has become a great concern to the
shareholders, managers, potential investors, creditors and other stakeholders. This
explains why auditors are hired by companies to give an independent opinion on their
performance and financial status. The government has also taken a step towards
monitoring financial performance of its ministries and state corporations by having
financial targets as part of the performance contracts introduced in the recent reforms.
2
The timely preparation and availability of financial statements assists top management
in the process of examining the condition and performance of a company. This process,
known as Financial Performance Evaluation, serves to identify the company’s
strengths and weaknesses in terms of shillings and percentages (Van Horne and
Wachowicz, 2004).
The financial performance evaluation is designed to provide answers to a broad range
of important questions, some of which include whether the company has enough cash
to meet all its obligations; is it generating sufficient volume of sales to justify recent
investment; does the company collect outstanding accounts from customers without
creating burden on its cash flow; does the company make timely payments to suppliers
to take advantage of discounts; does the company utilize the inventory in an efficient
manner; does the company have sufficient working capital; does the company maintain
an adequate profit margin; and does the company produce sufficient return on
investment? An effective financial performance evaluation system should be able to
attain the goals of promoting goal congruence and coordination, communicating
expectations, motivating, providing feedback and benchmarking (Horgren, Harrison &
Oliver, 2009). In summary, every business, just like human beings, needs an annual
“physical” check-up.
The development of the sugar industry in Kenya started with private investments at
Miwani in 1922, followed by Ramisi Sugar Company in 1927 (KSB, 2010). After
independence, six additional companies were established namely Muhoroni (1966),
Chemelil (1968), Mumias (1973), Nzoia (1978), South Nyanza (1979), West Kenya
3
(1981), Soin (2006) and Kibos (2007). The establishment of the Parastatals was driven by
a national desire to accelerate social economic development, address regional
economic imbalances, increase Kenyan citizen’s participation in the economy,
promote indigenous entrepreneurship and promote foreign investments through joint
ventures
1.2 Statement of the problem
Large numbers of business failures have been attributed to the inability of financial
managers to plan and control properly the current assets and current liabilities of their
respective firms (Nazir & Afza 2008). Most public and private companies such as Pan
Paper Mills and Uchumi Supermarkets that has been put under statutory management had
liquidity problems and were unable to pay their short term financial obligations as and
when they fall due. Filbeck & Krueger (2005) asserts that business success depends
heavily on the ability of financial managers to effectively manage the components of
working capital.
The goal of WCM is to ensure that the firm is able to continue its operations and that it
has sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash. Implementing an effective
working capital management system is an excellent way for many companies to improve
their earnings (Ganesan 2007).
4
Mumias Sugar Company for the past two consecutive financial years has posted negative
results. Its share price at the Nairobi Security Exchange has been on free fall, having been
expunged from NSE 20-share index that measures blue-chip firms with superior
profitability and dividend records. A company that once enjoyed monopoly over sugar
production in Western Kenya is a real wonder that new and smaller entrants are beating it
at its own game in the field of sugar production. Its sugar products that dominated shelves
in the supermarkets and retail shops have not been available for consumers.
Mumias Sugar Company is an important component of the national economy, sustaining
the livelihoods of millions and contributing significantly to the gross domestic product.
However, the company has remained hostage to different debilitating conflicts, pitting in
some cases against out-growers, investors against communities, and business rivals
against each other. At the same time, lack of clear and effective regulations and policy
guidelines has made it difficult to resolve some of these issues. Despite all these, there is
an increasing demand in sugar consumption coupled with rapid increase in population
and diversifying export potential, which calls for advanced intents to strengthening of key
industry institutions.
In spite of all these there have been scanty research studies on the relationship between
working capital management practices and financial performance in the manufacturing
sector, especially sugar sub sector; a gap this study sought to address. Specifically, the
question guiding this study was “what effect does working capital management practices
adopted by Mumias Sugar Company influence on their financial performance?”
5
1.3 Research questions
i. In what way do receivables management practices influences the financial
performance of Mumias Sugar Company?
ii. How does cash Management influences financial performance of Mumias Sugar
Company?
iii. What is the effect of inventory management on the financial performance of
Mumias Sugar Company?
iv. How can trade payables influence the financial performance of Mumias Sugar
Company?
1.3.1 Research Hypothesis
HO1: There is no relationship between receivables management practices and financial
performance at Mumias Sugar Company.
HO2: There is no relationship between cash management practices and financial
HO3: There is no relationship between inventory management practices and financial
HO4: There is no relationship between payables management practices and financial
6
1.4 Significance of the Study
The findings of the study is useful to various stakeholders first it provides information to
management and employees of Mumias sugar company on how to improve the
management of working capital and in choosing the best policy in managing working
capital. The financial institutions will also use the findings of the study in accessing the
liquidity position of Mumias Sugar Company before advancing credit.
Customer of Mumias Sugar Company will use the finding of the study in accessing the
credit worth of the company before supplying goods to the company. Farmers who supply
cane to the company will use the finding of the study to access the ability of the company
to pay on time for the cane supplied.
The study’s findings was anticipated to contribute in solidifying scholarly contributions
towards establishing an ideal working capital management in the context of
performance on related companies serving vast interests. Scholars will also use the
findings of the study as a source of information
In addition, it is imperative that stakeholders are consistently updated and made to
understand institutional weaknesses in order to factually design a responsive policy. An
output of this study was therefore important to players both in the industry and outside
especially government agencies (Kenya Sugar Board, Vision 2030, and EMU), other
industry institutions, individual farmers, out-grower companies, and researchers in
advocating and adopting policy guidelines aimed at protecting sugarcane farmers.
7
1.5 Scope and delimitation of the Study
The study focused on analysis of working capital management practices on the financial
performance of Mumias Sugar Company, Kakamega County in Kenya. The study
targeted the employees of various department of Mumias Sugar Company namely
General managers, finance, agriculture, factory, sales and marketing and transport by
using questionnaires as the research instrument. The study was guided by the following
variables; Receivables Management; Cash Management, Payables Management and
Inventory Management. The data analysis was conducted within a period of six years
from 2009 to 2014.
1.6 Conceptual Framework
The study developed a conceptual framework to show the relationship between the
dependent and independent variables. The independent variables were components of
working capital management. These included receivables management practices, cash
management, trade payables and Inventory Management. The dependent variable was
financial performance. This was determined in terms of levels of employee job
satisfaction, revenue collection and customer service delivery. This conceptual
framework is shown on figure 2
8
Independent Variable Dependent Variable
(Working capital management practices)
Receivables
Management
Financial Performance
Cash Management
Practices  Revenue collection
 Improved customer delivery
 Growth in profits
 Growth in total assets
Inventory
Management
Payables
management
Figure 1. 1: Conceptual Framework
Source: (Author, 2015)
9
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter review theories that form the basis of the study. It also reviews empirical
evidence regarding working capital management practices and firm financial
performance
2.1 Review of Theories
2.1.1 Aggressive Theory
This theory is applied where the firm plans to take high risk and where short term funds
are used to a very high degree to finance current and fixed assets. Aggressive working
capital management is described as maximizing the profitability of the firms. Firms
prefer more aggressive working capital management than conservative working capital
management to manage the inventories, accounts receivable and accounts payable.
Because aggressive working capital management is defined as minimizing the current
assets, inventory and accounts receivables as well as holding less cash and cash
equivalents and stretching the accounts payable, but firms has been observed increasing
cash holdings instead of reducing the cash levels which implies the characteristic of
conservative financial policy. Weinraub & Visscher (1998) suggest that aggressive
liquidity policy combine the higher levels of normally lower cost short-term debt and less
long-term capital. Although capital costs are reduced, this increases the risk of a short-
term liquidity problem. It is arguable that aggressive working capital management
generates more internal cash reserve, but it arise greater liquidity risk. Moreover, firms
10
have to reserve cash to secure the risk due to the lower level of inventories and accounts
receivable which are the most liquid and cash convertible assets as well as the hedge
against the risk aroused from the shortage of these assets and increased exposure to trade
credit risk to suppliers
2.1.2 Conservative Plan theory
This theory explains that the cost of financing working capital is equal to the cost of long
term fund that is annual average loan multiplied by long term rate of interest. Fixed and
part of current assets are financed by long term funds as permanent and long term sources
are more expensive leading to lower risk return. (Horne and Wachowitz, 1998); A
conservative theory means lower return and lower risk, while an aggressive policy
produces higher return and higher risk. The two important aims of the Working Capital
Management are profitability and solvency. Solvency refers to the firm’s continuous
ability to meet maturity obligations. To ensure solvency, the firm should be very liquid,
which means larger Current Assets holdings enabling in meeting its obligations towards
creditors so as to fill all sales orders resulting in smooth production operations.
11
In this approach permanent capital is being used to finance all permanent assets
requirements and also to meet some or all of the seasonal demands. In view of
conservative approach to working capital management, a company will keep a large
quantity of current assets in relations to the total assets of the company. The
implication of this approach is that it yields a lower expected profitability resulting
in a lower risk. This type of policy will also increase the company’s networking
capital situation but the firm will be short of funds to be used in other productive
sectors. This option means that the company’s finance is going to be relatively high
cost (that is sacrificing low cost finance) but low risk; this will make the company’s
profit to be low but does not run the risk of being faced with liquidity problem as a
result of withdrawal of its source of finance. The conservative method is where a
company predominantly finance all its permanent current assets and most of its
fluctuation current assets using long-term source of finance and it is only a small
proportion of its fluctuating current assets that is financed using short-term source
of finance
2.1.3 Hedging plan theory
This theory indicates that no long term funds are used to finance short term seasonal
needs; that is current assets are equal to current liabilities. It is a moderate policy that
matches assets and liabilities to maturities. Finnerty (1993); Jose, (1996) Current acid test
and cash ratios are balance sheet measures that cannot provide detailed and accurate
working capital and effectiveness.
12
Hedging theory is a risk as it almost full utilization of the firm’s capacity to use short
term funds and in emergency situations it may be difficult to satisfy short term needs.
Firm uses long term sources to finance fixed assets and permanent current assets and
short term funds to finance temporary current assets. Richards and Laughlin (1989),
Gentry (1990), Schilling (1996) and Boer (1999) have insisted on using ongoing liquidity
management. Ongoing liquidity management refers to the inflows and outflows of cash
through the firm as the payment and collection takes place over time.
Based on the above it can be criticized that a firm needing to have additional inventories
for two months will to seek short term funds to match the inventory purchase. Limited
access to short term working capital sources which include bank financing and suppliers’
financings provides a hindrance to the hedging approach.
2.2 Criticism of theories
These three theories are plotted on a number line of risk and profitability. Conservative
plan theory is on the side of lower profitability and lower risk. On the contrary,
aggressive theory is on the side of higher profitability and higher risk. Hedging plan
theory is somewhere between the two. Executing the hedging plan theory in its true sense
is not practically possible. It is dependent on the management attitude towards risk and
other factors where on this number line they wish to land. A firm may be said to be
adopting an aggressive policy when it used more of short-term financing than warranted
by the matching plan. Under this approach, the firm finances a part of its permanent
Current Assets with short-term financing. Some extremely aggressive firms may even
finance a part of their fixed assets with short-term financing. Relatively more the use of
13
short-term financing makes the firm more risky. A conservative financing policy uses
more long term debt and capital. In an aggressive financing policy, a firm uses high levels
of short term liabilities and low level of long term debt (Weinraub & Visscher, 1998)
2.3 Empirical Review
2.3.1 Cash Management Practices and firm performance
There exists a significant relationship between CCC and profitability, Gill (2010). Cash
management refers to optimizing the benefit and cost associated with holding cash. The
objective of cash management is best achieved by speeding up the WC cycle, particularly
the collection process and investing surplus cash in short term assets in most profitable
avenues. Cash management is the process of planning and controlling cash flows into and
out of the business, cash flows within the business, and cash balances held by a business
at a point in time (Pandey, 2004). Efficient cash management involves the determination
of the optimal cash to hold by considering the trade-off between the opportunity cost of
holding too much cash and the trading cost of holding too little (Ross, 2008).
Gitman (2008) advocates for cash budget as another cash management tool. It is used by
the firm to estimate its short term requirement with particular attention being paid
to planning for surplus cash or for cash shortages. Kirkman (2006) arrived at the
same idea highlighting that as a component of implementing an effective cash
management program, a cash flow statement called a cash budget may be prepared.
Chastain (2008) asserts that budgets are the financial road map companies’ use, when
planning business expenses and tracking the cash flow throughout the business year.
14
Nyabwanga (2011) focused on the effect of working capital management on financial
performance with specific reference to Small Scale Enterprises (SSE’s) in Kisii South
District Kenya. Consequently, the findings of the study were that, cash management
practices were low amongst SSEs as majority had not adopted formal working capital
management routines and their financial performance was on a low average. The study
also revealed that SSE financial performance was positively related to efficiency of cash
management (ECM), efficiency of receivables management (ERM) and efficiency of
inventory management (EIM).
Maathai (2010) sought to establish the relationship between working capital management
and profitability of retail supermarket chains in Kenya. Her study consisted of 6 retail
supermarket chains in Kenya. The objective of the study was to determine whether there
exists a relationship between WCM and profitability. The study showed that in the retail
sector, WCM has a significant impact on profitability of firms and plays a big role in
value creation for Shareholders as longer cash conversion cycle and average collection
period have a negative impact on net operating profitability of a firm.
2.3.2 Inventory Management Practices
Managers act rationally in managing their inventory efficiently if they are convinced that
the practice enhances firm performance. Traditionally, inventories of raw materials,
work-in-progress components, and finished goods were kept as a buffer against the
possibility of running out of needed items. However, large buffer inventories consume
valuable resources and generate hidden costs. Inventory management leading to
inventory reduction has become the primary target, as is often the case in just-in-time
15
(JIT) systems, where raw materials and parts are purchased or produced just in time
to be used at each stage of the production process. This approach to inventory
management brings considerable cost savings from reduced inventory levels. As a result,
inventories have been decreasing in many firms (Cannon, 2008).
Deloof (2003), Garcia-Terual and Martinez-Solano (2007), Samiloglu and Dermigunes
(2008) and Falope and Ajilore (2009) found that there is a negative relationship between
liquidity and inventory conversion period. This implies that the longer the time inventory
is tied in the company, the less the amount of working capital available and hence, the
lower the profit. At the same time , holding inventories for a longer period of time in
the company may lead to increased transaction cost in the company .This has a
negative effect on the liquidity of the company. By holding inventories for too long,
agency problems may arise since the company is not maximizing the return on the
shareholders’ investment. However, Lazaridis and Tryfonidis (2006) found the negative
relationship between the inventory period and liquidity not being statistically significant.
Raheman and Nasar (2007) found that the coefficient of inventory turnover in days is
negative and highly significant. They further deduce that if inventory takes more time to
sell, it will adversely affect firm performance. Deloof (2003) explained that the negative
relation between inventory and liquidity can be caused by declining sales, leading to
lower profits and more inventories
2.3.3 Receivables Management Practices and firm performance
Provision of trade credit is normally used by businesses as a marketing strategy to expand
or maintain sales (Pandey, 2004). Efficient receivables management augmented by a
16
shortened creditor’s collection period, low levels of bad debts and a sound credit policy
often improves the businesses’ ability to attract new customers and accordingly increase
financial performance hence the need for a sound credit policy that will ensure that value
is optimized (Lazaridis and Dimitrios, (2005). Costs of cash discounts and costs of
managing credit and credit collections constitute the carrying costs associated with
granting a credit which increase when the amount of receivables granted are increased.
Lost sales resulting from not granting credit constitute the opportunity cost which
decrease when the amounts of receivables are increased (Lazaridis and Dimitrios, 2005).
Mathuva (2010) conducted a study on the influence of working capital management
components on corporate profitability within the listed firms in Kenya. The study
revealed that there exists a highly significant negative relationship between the receivable
management and profitability hereby reflecting that more profitable firms take the
shortest time to collect cash from their customers. The study also revealed that there
exists a highly significant positive relationship between the period taken for inventory to
be converted into sales vis a vis profitability.
Mutungi (2010) analyzed the relationship between working capital management and
financial performance of oil marketing firms in Kenya. The study observed that oil
companies in Kenya had huge investments in inventory and high level of borrowings and
consequently, low net of investments in current assets. Findings indicated that receivables
for a large percentage of the net operating profit.
17
2.3.4 Management of trade payables
Accounts payable management has been explored in depth by various studies .Most
studies suggest that paying payables closer to the due date is the best practice (Deloof,
2003; Lazaridis and Tryfonidis, 2006; Sayaduzzaman, 2006; Garcia-Teruel and Martinez-
Solano, 2007; Raheman and Nasr, 2007; Falope and Ajilore, 2009). These findings are
pegged on the belief that shortening the accounts collection period improves company
firm performance. Companies may also opt to the accounts collection period due to
competition. This is as a result of intense competition in the industry where companies
are forced to grant discounts to their customers to encourage early payments. Conversely,
if the bargaining power of customers is high, then a company may be forced to relax its
credit policy by lengthening the time it takes to collect payments from its customers.
Zinger (2009) called for a careful and an effective analysis of the credit policy especially
during periods of credit crisis.
Raheman and Nasr (2007) found that the coefficient on accounts receivable was negative
and highly significant. In order to reduce agency problems, the management of a
company may strive to minimize the time it takes to receive cash from customers.
Sayaduzzaman (2006) also established that the accounts collection period is negatively
correlated with all liquidity ratios except the net profit margin although not statistically
significant. All these results show that there is a negative relationship between liquidity
and accounts receivables.
Lazaridis and Tryfonidis (2006) explained that these findings show that managers can
improve liquidity and reduce agency problems by reducing the credit period granted to
18
their customers. These models imply that the higher the profits should lead to more
accounts receivable, because companies with higher profits have more cash to lend to
customers. This is confirmed by Deloof and Jegers (1996), who found that Belgian
companies with a shortage of cash reduces their investment in accounts receivable.
Mutungi (2010) sought to find out the relationship between working capital management
and financial performance of oil marketing firms in Kenya registered with the petroleum
institute of East Africa within Nairobi and its environs. Her sample consisted of 59
registered oil marketers in Kenya. She noted that management of trade payables decisions
have a huge effect on the company’s risk, return and share price.
Kiilu (2010) conducted a survey on the working capital management practices among
large building construction firms in Kenya. The survey revealed that a majority of
surveyed firms had a written statement of leading the amount of cash to hold. i.e. both
petty cash and cash at bank. The companies that didn’t have a written statement said that
the cash requirement at a given time determined the amount of cash to hold. One of the
main working capital management practices that was observed was the use of cash
budgets.
2.4 Knowledge Gap
Prior studies reported that working capital management may have an important effect on
the firm’s financial performance. Shin and Soenen (1998), Lazaridis and Tryfonidis
(2006),Raheman and Nasr (2007), among others, measured working capital with cash
19
conversion cycle, which consists of stockholding period, debtors’ collection period and
creditors’ payment period.
These researchers supported that greater investment in working capital (the longer cash
conversion cycle) leads to reduction in the firm’s profitability (Banos-Caballero, 2010,
and Nazir and Afza, 2009).
Deloof (2003) used a sample of Belgian firms and found that firms can increase their
profitability by reducing the debtors collection period and the days-in-inventory period.
He also found that less profitable firms wait longer to pay their bills. Wang (2002) used a
sample of Japanese and Taiwanese firms and found that a shorter cash conversion cycle
would lead to a better firm’s operating performance. Teruel and Solano (2007) took
samples of small to medium-sized Spanish firms for the 1996-2002 periods and found
that the firms can create value by reducing the days in inventory period and the debtors
collection period, thus leading to the reduction in the cash conversion cycle.
On the other hand, though, other researchers support that investing more in cash
conversion cycle (conservative policy) may lead to increased profitability since
maintaining high inventory levels is expected to increase sales, reduce supply costs,
reduce cost of possible interruption in production and protect against price fluctuations
(Blinder and Maccini, 1991).
A higher debtors’ collection period may also strengthen the relationship with customers
and hence may lead to an increase in sales revenue (Ng et al, 1999).
20
Deloof (2003) showed that a relatively huge amount of firms’ assets are reserved for
working capital. Summers and Wilson (2000) also stated that more than 80% of the daily
business transactions in the UK corporate sector is on credit terms.
As it can be seen from the aforementioned empirical evidence, there are inconclusive and
inconsistent results with regard to the role of working capital management on firms’
financial performance. This is due to the fact that researchers used either the conversion
cycle as it relates to the firm’s profitability or they examined only part of the components
of the conversion cycle
21
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.0 Introduction
This chapter presents the research methods that the researcher used to facilitate execution
of the study to satisfy research questions. They include research design, target population,
description of sample and sampling procedures, research instruments, data collection and
data analysis procedures.
3.1 Research Design
A research design is defined as a framework or blueprint for carrying out any form of
research. It details the procedures necessary for obtaining the information needed to
structure or solve research problems. The function of a research design is to ensure that
the evidence obtained enables the researcher to answer the initial questions as
unambiguously as possible Yin (2003).This study adopted correlation research design to
establish the relationship between working capital management practices and financial
performance.
According to Wasiam (2011), a correlation design is used to examine a relationship
between two or more concepts, since this study sought to analyze the relationship
between working capital management practices and financial performance. Correlation
research design was deemed appropriate since it determines the strength and direction of
association between two or more variables.
22
3.2 Target Population
The study targeted employees’ of Mumias Sugar Company. The population comprised of
General Managers, heads of departments, administrators, divisional accountants and
some support staff at the organization. This enhanced reliability and relevance of data
collection. This population was selected for this study because they were directly
involved in the financial implication of the organization.
Table 3. 1: Target Population
Strata Target Population

General managers 14
Finance 48
Agriculture 138
Factory 233
Sales and marketing 94
Human resource 37
Transport 189
TOTAL 753
(Source: Mumias Sugar Company database, 2015)
3.3 Description of the Sample and Sampling Procedures
The researcher employed stratified sampling techniques. Stratified sampling was used to
put the population into different categories. According to Oso and Onen (2005), stratified
sampling technique is a technique that identifies subgroups in the population and their
proportions and select from each subgroup to form a sample.
23
The target population for the study is <10,000 and thus the final sample size was
obtained through adjustment (finite population correction) formula developed by
Cochran, 1963. This is because a given sample size provides proportionately more
information for a small population than for a large population.
n0= pqz2
e2
Where
n0= required sample size = 95% confidence interval
p= was assume to be 50%
q= 1-p = 50%
e= acceptable error= .05 (5%)
Therefore n0 = 50 x (100-50) x (1.962) / (5)2 = 384. The sample size was 384 respondents.
Finite population correction for proportions
Employees of Mumias Sugar Company was stratified into seven strata’s namely, General
Managers, Finance, Agriculture , Factory , Sales and marketing, Human resource and
Transport where the sample size was distributed according to Neyman allocation formula
(1934). The purpose of the method is to maximize survey precision, given a fixed sample
size. With Neyman allocation, the best sample size for stratum h would be:
24
Where,
nh - The sample size for stratum h,
n - Total sample size,
Nh -The population size for stratum h,
N - The total population
Hence, distribution will be as follows;
Table 3. 2: Sample and Sampling Procedures

Strata Target Population sample size
General Managers 14 7
Finance 48 24
Agriculture 138 70
Factory 233 119
Sales and marketing 94 48
Human resource 37 19
Transport 189 96
TOTAL 753 384
Source: Research study, 2015
3.4 Description of Research instruments
This study used questionnaire to collect data. In most cases, questionnaires are utilized
for obtaining fundamental information from the sample population. According to
Mugenda & Mugenda (2003), an explicit hypothesis, research question or objective is
addressed by each item contained in the questionnaire. The delivery of the questionnaires
to the respondents was done through hand during working hours at their stations.
25
3.4.1 Questionnaire
This is a collection of items, to which a subject is expected to respond to in writing. It
was designed in questions format and was distributed to the respondents. This method
was highly reliable in collecting a considerable amount of information over a short period
of time. The method is suitable when the information needed can be easily described in
writing (Oso and Onen, 2005; Kasomo, 2007). Questionnaire was developed from the
research questions of the study.
3.5 Description of Data Collection procedures
Data was collected using questionnaires. In this study, the questionnaires were hand
delivered to the respondents in their various work station during working hours and they
were given enough time to complete the questionnaires before returning them for data
analysis. The questionnaires included both structured and semi structured questions. This
allowed the respondents to give their opinions where necessary.
Respondents were assured of confidentiality in that their identities were hidden to avoid
any form of misunderstanding with the management. This method was to enable the
researcher to obtain unobtrusive information at his own pleasure without interruptions,
but within his own convenient time. It was enabled the researcher to obtain thoughtful
data, in that the informants was have given attention to compiling them; and save time
/expense in transcribing.
26
3.6 Validity and Reliability
Although the data collection methods selected above was appropriate for the study, there
was need to ensure they are valid and reliable. Validity is the extent to which a research
instrument measures what it is intended to measure (Nsubuga, 2000; Mugenda, 2008).
Reliability on the other hand is the extent to which a given instrument yields consistently
the same results when repeated measurements are taken from the same subjects in a
research under the same conditions (Kombo and Tromp, 2006; Mutai, 2006; Saunders,
2009).
To ensure reliability of the study, respondents were randomly selected to give each
member of the target population an equal chance of participating in the study. The study
then conducted a pilot study at the Mumias Sugar Company. The scores obtained from
respondents were then correlated using SPSS where Cronbachs Coefficient Alpha was
computed. The result of this test was 0 .082, which was deemed appropriate for study.
For validity, the study reviewed relevant literature to identify different concepts and
dimensions related to working capital management and financial performance. Expert
opinion was also sought from senior researchers at The Mumias Sugar Company Limited
and suggestions on the improvement of the research instruments got from them.
3.7 Description of Data analysis procedures
At the end of data collection process, all completed questionnaires was thoroughly coded
and organized for computer analysis. The data was analyzed with the aid of Statistical
Package for the Social Sciences (SPSS) version 21.
27
The researcher used both descriptive and inferential statistics to analyze the data.
Descriptive statistical tools that used were frequency, percentages, mean and standard
deviation whereas inferential statistical tools that used were multiple regression and
correlation techniques.
3.7.1 Model Specification and hypothesis testing.
Multiple Regressions was used because of its ability to use multiple independent
variables to estimate their effect on a single dependent variable.
The regression model which assumed linearity, normality, constant and independence was
used as follows:-
Y = The dependent variable (firm performance measured as return on asset
β0 = Constant
β1, β2, β3, β4, – will be the regression coefficients in Y by each variable of X
= Receivables Management
X2 = Payables management
X3 = Inventory Management
X4= Cash Management Practices
= Error term
To compliment regression analysis, correlation analysis was carried out to analyze the
relationship between working capital management practices and financial performance at
Mumias Sugar Company. Test of significance was carried out for all variables using t-test
28
at 95% level of significance. To examine the relationship among these variables, Pearson
correlation coefficients were calculated.
29
CHAPTER FOUR
PRESENTATION, DISCUSSION AND INTERPRETATION OF FINDINGS
4.0 Introduction
This chapter covers presentation of the findings, discussion and interpretation of the
research findings
4.1 Presentation of the Findings
This chapter presents data collected using the questionnaire. The corresponding
interpretations also follow each presentation. The results of the study are presented
according to the research questions and research hypothesis. The findings in this
chapter were also arrived at by analyzing and interpreting the available data with the aid
of SPSS software version 21. All the responses are presented in terms of frequencies
and percentages which are displayed in tables.
4.1.1 Response Rate
The preliminary section of this study was done by administering a questionnaire. Out of
the targeted 384 respondents, 275 respondents were accessed by the researcher. Thus, the
study showed that respondent turnout was 71.6%. This response rate is adequate for
analysis and reporting.
4.1.2 Demographic Information
The demographic information of the respondents was considered necessary because the
ability of the respondents to give satisfactory information on the study variables may be
30
affected by their background. This information was about the respondents’ gender, age,
level of education, position in the company and job tenure.
The study put into account the gender of the respondents. As evidenced in table 4.1
below, majority 53.1% (146) of the respondents are female and 46.9% (129) are male.
The results imply that most of the respondents interviewed in the study were female as
depicted in table 4.1.
In reference to the age bracket of the respondents, 41.5% (114) of the respondents are
between 41 and 45 years,32% (88) of them are between 31 and 40 years,10.9% (30) are
between 26 and 30 years,10.9% (30) are 45 years and above while 4.7% (13) of the
respondents are between 26 and 30 years.
The study also sought to establish the level of education of the respondents. From the
findings, 57.8% (159) of the respondents have a Bachelor’s degree, 39.6% (109) Diploma
level of education, 2.2% (6) Diploma level of education and 0.4% (1) Master’s degree.
With reference to respondents’ position in the company, 73.5% (202) of them are
accountants, 24.4% (67) procurement officers and 2.2% (6) General Managers.
Finally, the job tenure of the respondents was also sought by the researcher. From table
4.1 below, 32.7% (90) of the respondents have worked for a period of 5 to 6 years, 25.5%
(70) 7 to 8 years, 21.8% (60) more than 8 years and 13.1% (36) of the respondents have
worked for a period of 3 to 4 years.
31
Table 4. 1: Demographic Information
Frequency Percent
Gender Male 129 46.9
Female 146 53.1
Total 275 100
Age bracket 18-25 13 4.7
26-30 30 10.9
31-40 88 32
41-45 114 41.5
45 and above 30 10.9
Total 275 100
Level of education Certificate 6 2.2
Diploma 109 39.6
Bachelors degree 159 57.8
Masters degree 1 0.4
Total 275 100
Position in the company General Managers 6 2.2
Finance officer/accountant 202 73.5
Procurement manager/officer 67 24.4
Total 275 100
Job tenure Less than 2 years 19 6.9
3-4 years 36 13.1
5- 6 years 90 32.7
7-8 years 70 25.5
More than 8yrs 60 21.8
Total 275 100
32
4.1.3 Receivables Management Practices
4.1.3.1 Leading source of your receivables
This section focuses on the leading sources of receivables. From figure 4.1 below, 80.4%
of the receivables are loans and interests, 16.7% sales, 1.8% are returns from other
investments while 1.1% of the receivables are subscription and fines.
33
Figure 4. 1: Leading source of your receivables
4.1.3.2 Company’s receivables
The researcher also put into account how the various tools have contributed to the
company’s receivables. The results are illustrated in table 4.2 below. As evidenced in the
table,54.9% (151) of the respondents have low preference of debt collection services,
41.1% (113) moderately prefer while only 4% (11) of the respondents highly prefer debt
collection services. The mean for the item is 1.24 and the standard deviation is 0.562.
In relation to insistence on cash payment, 27.3% (75) of the respondents have a low
preference of cash payments, 52.7% (145) of them moderately prefer cash payment while
20% (55) of the respondents highly prefer cash payment. The results summed up to a
mean of 2.07 and standard deviation of 0.685.
Further, 24% (66) of the respondents have a low preference of prompt invoicing, 67.3%
(185) of them moderately prefer prompt invoicing while 8.7% (24) of the respondents
34
have a high preference of prompt invoicing. The mean for the item was 2.15 and the
standard deviation was 0.552.With reference to sending overdue notices, 36.4% (100) of
the respondents have a low preference, 52.4% (144) of the respondents moderately prefer
sending overdue notices while 11.3% (31) of them highly prefer sending overdue notices.
Additionally, 12.4% (34) of the respondents have a low preference of asset attachment
while 78.9% (217) of them moderately prefer asset attachment and 8.7% (24) of the
respondents highly prefer asset attachment. In general, the item had a mean of 2.04 and
standard deviation of 0.459.In regards to additional charges, 65.1% (179) have a low
preference of additional charges, 30.2% (83) of them moderately prefer additional
charges while 4.7% (13) of them highly prefer additional charges. The results summed up
to a mean of 2.6 and standard deviation of 0.579.
Finally, the results on debt collection services revealed that 54.9% (151) of the
respondents lowly prefer debt collection services, 41.1% (113) moderately prefer while
4% (11) of the respondents highly prefer debt collection services. The mean for the item
was 2.51 and the standard deviation was 0.575.
35
Table 4. 2: Company’s receivables
Highly Moderately Lowly Std.

preferred preferred preferred Mean Deviation
Debt collection
services Freq. 11 113 151 1.24 0.562
% 4 41.1 54.9
Insistence on cash
payment Freq. 55 145 75 2.07 0.685
% 20 52.7 27.3
Prompt invoicing Freq. 24 185 66 2.15 0.552
% 8.7 67.3 24
Sending overdue
notices Freq. 31 144 100 2.25 0.644
% 11.3 52.4 36.4
Asset attachment Freq. 24 217 34 2.04 0.459
% 8.7 78.9 12.4
Additional charges Freq. 13 83 179 2.6 0.579
% 4.7 30.2 65.1
Debt collection
services Freq. 11 113 151 2.51 0.575
% 4 41.1 54.9
4.1.3.3 Company in terms of its credit uptake
The respondents were also asked to classify the company in terms of its credit uptake.
The result are presented in figure 4.2 below. The results were such that 74% of the
respondents classified the company as a moderate credit consumer,16% low credit
consumer while 10% high credit consumer.
36
Figure 4. 2: Company in terms of its credit uptake
4.1.4 Cash Management
The researcher also found it necessary to establish how cash management influences the
financial performance of the company on a five point Likert scale. The results of the
findings are presented in table 4.3 below. Based on the findings in the table,82.5% (227)
of the respondents agreed that there is a well-defined policy on minimum liquidity and
13.5% (37) of the respondents strongly agreed on the same.However,3.6% (10) of the
respondents were undecided while 0.4% (1) disagreed. This summed up to a mean of 1.91
and standard deviation of 0.422.
37
Further, 74.2% (204) of the respondents agreed that there are regular cash flow
projections, 3.3% (9) of them strongly agreed on the same while 10.9% (30) of the
respondents were undecided. Nonetheless, 11.3% (31) of the respondents disagreed that
there are regular cash flow projections and 0.4% (1) strongly disagreed. The mean for the
item was 2.31 and the standard deviation was 0.728.Additionally, 38.5% (106) of the
respondents agreed that there are regular bank reconciliations and audits, 2.5% (7) of
them strongly agreed, 48% (132) were undecided and 10.9% (30) of them disagreed. The
mean was 2.67 and the standard deviation was 0.701.
Moreover, 26.2% (72) of the respondents agreed that there are ready investment avenues
for excess cash,4.7% (13) of them strongly agreed,43.6% (120) were undecided25.1%
(69) of them disagreed and 0.4% (1) of them strongly disagreed. This summed up to a
mean of 2.9 and standard deviation of 0.842.Finally, 30.2% (83) of the respondents
agreed that excess cash is held to meet future obligations, 2.2% (6) of them strongly
agreed on the same, 25.5% (70) were neutral, 40.7% (112) disagreed and 1.5% (4) of the
respondents strongly disagreed. The mean for the item was 3.09 and standard deviation
was 0.922.
38
Table 4. 3: Cash Management
Std.
SA A U D SD Mean Deviation
There is a well-defined policy
on minimum liquidity Freq. 37 227 10 1 0 1.91 0.422
% 13.5 82.5 3.6 0.4 0
There are regular cash flow
projections Freq. 9 204 30 31 1 2.31 0.728
% 3.3 74.2 10.9 11.3 0.4
There are regular bank
reconciliations and audits Freq. 7 106 132 30 2.67 0.701
% 2.5 38.5 48 10.9
There are ready investment
avenues for excess cash Freq. 13 72 120 69 1 2.9 0.842
% 4.7 26.2 43.6 25.1 0.4
Excess cash is held to meet
future obligations Freq. 6 83 70 112 4 3.09 0.922
% 2.2 30.2 25.5 40.7 1.5
4.1.5 Inventory Management
This section sought to establish the leading form of inventory in the company. From
figure 4.3 below, it is evident that farm inputs are the leading form of inventory since
they comprise 78.5% of the inventory followed by general merchandise which is
comprised of 21.5% of the total inventory.
39
Figure 4. 3: Inventory Management
4.1.5.1 Days it take to Receive Ordered Goods from Suppliers
The researcher also found it necessary to establish the days it takes to receive ordered
goods from suppliers. The results are as presented in table 4.4 below. From the table,
63.3% (174) of the respondents noted that it takes between 11 to 20 days to receive
ordered goods from suppliers, 30.9% of them stated that it takes between 21 to 30 days,
4% (11) of them affirmed that it takes less than 10 days while 1.8% (5) of the respondents
stated that it takes between 31 to 40 days to receive ordered goods from suppliers.
40
Table 4. 4: Days it take to receive ordered goods from suppliers
Frequency Percent
Less than 10days 11 4
11-20 days 174 63.3
21-30 days 85 30.9
31-40days 5 1.8
Total 275 100
4.1.5.2 Company’s key consideration leading to inventory ordering
The researcher also sought to establish the company’s key consideration leading to
inventory ordering. The results are as shown in table 4.5 below. As evidenced in the table,
58.9% (162) of the respondents noted that demand projections leads to inventory
ordering, 25.1% (69) of them stated that the actual demand leads to inventory ordering
and 14.2% (39) of the respondents stated that stock replenishment leads to inventory
ordering. Finally, 1.5% (4) of the respondents were of the opinion that unpredicted
supply leads to inventory ordering while 0.4% (1) of the respondents stated that no
definite consideration leads to inventory ordering.
41
Table 4. 5: Company’s key consideration leading to inventory ordering
Frequency Percent
Actual demand 69 25.1
Demand projections 162 58.9
Stock replenishment 39 14.2
Unpredictable supply 4 1.5
No definite consideration 1 0.4
Total 275 100
4.1.5.3 Influence of Inventory situations on the company for the past 6 years
This section focuses on the influence of inventory situations on the company for the past
6 years. As evidence in table 4.6, 4% (11) of the respondents noted that stock outs have
been non-existent, 5.5% (15) noted it to be low, 65.8% (181) moderate and 24.7% (68)
high. The mean for the item was 1.89 and the standard deviation 0.671.In regards to
inventory surpluses, 0.7% (2) of the respondents stated that it is non-existent, 19.3% (53)
low, 74.9% (206) moderate and 5.1% (14) high. The mean for the item was 2.16 and
standard deviation 0.499.
In relation to emergency ordering, 1.1% (3) of the respondents stated that it is non-
existent, 32.7% (90) low, 48.4% (133) moderate and 17.8% (49) high. This summed up to
a mean of 2.17 and standard deviation of 0.722.Finally, in regards to supply stoppage,
4.4% (12) of the respondents stated that it is non-existent, 40.7% (112) low, 52.4% (144)
moderate and 2.5% (7) high. The item had a mean of 2.47 and standard deviation of
42
Table 4. 6: Influence of Inventory situations on the company for the past 6 years
Non- Std.
High Moderate Low Existent Mean Deviation
Stock-outs Freq. 68 181 15 11 1.89 0.671
% 24.7 65.8 5.5 4
Inventory
surpluses Freq. 14 206 53 2 2.16 0.499
% 5.1 74.9 19.3 0.7
Emergency
ordering Freq. 49 133 90 3 2.17 0.722
% 17.8 48.4 32.7 1.1
Supply stoppage Freq. 7 144 112 12 2.47 0.623
% 2.5 52.4 40.7 4.4
4.16 Payables Influence
Figure 4. 4: Rank of creditors depending on their credit volume advancement to the
company preferred period (days) for credit payment
43
4.1.5.3 How significant are the following payment techniques to the company
The researcher found it necessary to establish the level of significance of payment
techniques to the company. The results are as shown in table 4.7.As evidenced in the
table, 6.5% (18) of the respondents noted that payment in installments is highly
significant, 64.4% (177) moderately significant and 29.1% (80) not significant. The mean
for the item was 1.77 and standard deviation 0.554.
In terms of negotiations for extensions, 3.6% (10) of the respondents found it to be highly
was 1.41 and the standard deviation 0.563.
With reference to change of payment, 8% (22) of the respondents found it to be highly
for the item was 1.31 and standard deviation 0.611.
When the respondents were asked for their opinion on immediate settlement when cash is
available, 75.6% (208) of them state that it is highly significant, 18.2% (50) moderately
significant and 6.2% (17) not significant. The mean for the item was 2.69 and the
standard deviation was 0.581.
Finally,21.5% (59) of the respondents stated that investing cash to pay at maturity of
grace period is highly significant,59.3% (163) of them noted that it is moderately
significant and 19.3% (53) not significant. The mean was 2.02 and the standard deviation
was 0.639.
44
Table 4. 7: How significant are the following payment techniques to the company
Not Moderately Highly Std.

Significant Significant Significant Mean Deviation
Payment in installments Freq. 80 177 18 1.77 0.554
% 29.1 64.4 6.5
Negotiations for extensions Freq. 171 94 10 1.41 0.563
% 62.2 34.2 3.6
Change of payment Freq. 213 40 22 1.31 0.611
% 77.5 14.5 8
Immediate settlement when
cash is available Freq. 17 50 208 2.69 0.581
% 6.2 18.2 75.6
Investing cash to pay at
maturity of grace period Freq. 53 163 59 2.02 0.639
% 19.3 59.3 21.5
4.2 Firm Performance
This section of the research sought to establish firm performance. As evidenced in table
4.8, 16% (44) of the respondents noted that there has been a very high growth in sales in
relation to their expectations, 37.1% (102) of them noted that the growth in sales has been
high, 26.2% (72) neutral, 14.2% (39) low and 6.5% (18) of the respondents noted that the
growth in sales in relation to their expectations has been poor (mean = 3.42, SD = 1.115).
As well, 12.7% (35) of the respondents stated that growth in sales in relation to
competitors has been very high, 27.6% (76) high, 39.3% (108) were neutral while20.4%
(56) noted that the growth has been low (mean = 3.33, SD = 0.941).
45
Further, 16.7% (46) of the respondents noted that growth in profits in relation to their
expectations has been very high, 9.8% (27) of the found it to be high, 47.3% (130) were
neutral, 8.7% (24) found it to be low while 17.5% (48) of the respondents stated that
growth in profits in relation to their expectations has been poor (mean = 3, SD = 1.248).
Additionally,4% (11) of the respondents found the growth in profit level in relation to
their competitors to be very high,24% (66) high,45.5% (125) neutral,8% (22) low and
18.5% (51) poor (mean = 2.87, SD = 1.1).
Moreover,20.4% (56) of the respondents found the increase in the number of employees
to be very high,16.7% (46) of them found it to be high,39.3% (108) were neutral15.6%
(43) found it to be low and 8% (22) poor (mean = 3.26, SD = 1.182).
With reference to the increase in market size in new markets in relation to
competitors,22.5% (62) of the respondents found it to be very high,30.2% (83)
high,27.3% (75) were neutral,7.3% (20) found it to be low and 12.7% (35) poor (mean =
3.43, SD = 1.269).
Finally,26.9% (74) of the respondents stated that the ability to develop new products has
been very high,29.8% (82) of them found it to be high,20.7% (57) were neutral,12.4%
(34) found it to be low while 10.2% (28) found it to be poor (mean = 3.51, SD = 1.285).
46
4.2.1 Gross profit growth
Year Gross
2009 1,193
2010 2,180
2011 2,647
2012 1,764
2013 -2,223
2014 -3,405
Profit (Kshs.Million)
Source: Mumias Sugar Company published financial statements
Table 4. 8: Firm Performance (for the last five years)
Very Std.
Poor Low Neutral High High Mean Deviation
Growth in sales in relation to your
expectations Freq. 18 39 72 102 44 3.42 1.115
% 6.5 14.2 26.2 37.1 16
Growth in sales in relation to your
competitors Freq. 0 56 108 76 35 3.33 0.941
% 0 20.4 39.3 27.6 12.7
Growth in profits in relation to your
expectations Freq. 48 24 130 27 46 3 1.248
% 17.5 8.7 47.3 9.8 16.7
Growth in profit level in relation to
your Competitors Freq. 51 22 125 66 11 2.87 1.1
% 18.5 8 45.5 24 4
Increase in number of employees Freq. 22 43 108 46 56 3.26 1.182
% 8 15.6 39.3 16.7 20.4
Increased market size in new markets
in relation to your competitors Freq. 35 20 75 83 62 3.43 1.269
% 12.7 7.3 27.3 30.2 22.5
Increased market size in new markets
in relation to your competitors Freq. 47 26 66 91 45 3.22 1.312
% 17.1 9.5 24 33.1 16.4
High ability to develop new products Freq. 28 34 57 82 74 3.51 1.285
% 10.2 12.4 20.7 29.8 26.9
47
4.3 Descriptive Statistics for all the Variables
Table 4.9 below illustrates the means, standard deviations; kurtosis and Skewness values
of cash management, inventory, receivable and payable management. The findings reveal
that receivables had a mean of 2.203, cash management summed up to a mean of 2.4604,
while inventory management had a mean of 2.1609. Finally, payable management scored
a mean of 1.9964.
Table 4. 9: Descriptive Statistics for all the Variables
Mean Std. Deviation Skewness Kurtosis

Firm performance 2.8307 0.87568 -0.537 -0.393
Receivables 2.203 0.40637 -1.126 0.345
Cash management 2.4604 0.58121 -0.574 -0.389
Inventory 2.1609 0.39125 0.531 0.524
Payables 1.9964 0.44079 0.695 0.107
4.4 Inferential Statistics
4.4.1 Correlation results
The correlation model in table 4.10 indicates a significant positive relationship between
receivables (r=0.654 and p-value=0.000<<α=0.01) and firm performance. The correlation
table also shows that there is a significant positive relationship between cash management
and firm performance (r= 0.494 and p-value=0.000<α=0.01).Further, payables showed
positive significant relationship with firm performance(r= 0.330 and p-
value=0.00>α=0.01).As well, there is positive significant relationship between inventory
and firm performance (r= 0.160 and p-value=0.008>α=0.01).
48
Table 4. 10: Correlation results
Firm
Performanc Cash
e Receivables Management Inventory Payables
Firm
performance Pearson Correlation 1
Sig. (2-tailed) 0
275
Receivables Pearson Correlation .654** 1
Sig. (2-tailed) 0.000
Cash
managemen
t Pearson Correlation .494** .539** 1
Sig. (2-tailed) 0.000 0.000
Inventory Pearson Correlation .160** .264** .183** 1

Sig. (2-tailed) 0.008 0.000 0.002
Payables Pearson Correlation .330** .306** .274** .161** 1

Sig. (2-tailed) 0.000 0.000 0.000 0.007
** Correlation is significant at the 0.01 level (2-tailed).
4.4.2 Model Summary
The results from table 4.11 shows that the study multiple regression model had a
coefficient of determination (R2) of about 0.47. This means that 47% variation of firm
performance is explained/predicted by joint contribution of payables, inventory, cash
management and receivables.
Table 4. 11: Model Summary
49
Std. Error of the
R R Square Adjusted R Square Estimate
.686a 0.47 0.462 0.64211
a Predictors: (Constant), payables, inventory, cash management, receivables
4.4.3 ANOVA Model
Table 4.12 reveals that the F-value of 59.897 with a p value of 0.00 significant at 5%
indicate that the overall regression model is significant, hence, the joint contribution of
the independent variables was significant in predicting firm performance.
Table 4. 12: ANOVA Model
Sum of
Squares Df Mean Square F Sig.
Regression 98.784 4 24.696 59.897 .000
Residual 111.324 270 0.412
Total 210.108 274
a Dependent Variable: firm performance
b Predictors: (Constant), payables, inventory, cash management, receivables
4.4.4 Hypothesis Testing
Multiple regression analysis was conducted so as to determine the relationship between
financial performance and the four variables. The regression equation becomes:
Financial performance= (-0.68) +X1 (0.527) + X2 (0.182) -X3(0.032) + X4(0.124) +e
50
According to the regression equation, taking all factors into account (payables, inventory,
cash management and receivables) constant will be -0.68. Hypothesis testing is based on
standardized coefficients beta and p-value to test whether the hypotheses are rejected or
not.
The results of multiple regressions, as presented in table 4.13 revealed that receivables
has a positive and significant effect on firm performance with a beta value of β1 = 0.527
(p-value = 0.000 which is less than α = 0.05). Therefore, the researcher rejects the null
hypothesis. Also, the effect of receivables was stated by the t-test value = 9.653 which
implies that the standard error associated with the parameter is less than the effect of the
parameter.
The results of table 4.13 below also showed that the standardized coefficient beta and p
value of cash management were positive and significant (beta = 0.182, p < 0.05). Thus,
the researcher rejects the null hypothesis. It is accepted that, cash management has a
positive and significant effect on firm performance. Also, for each unit increase in cash
management, there is 0.182 unit increase in firm performance. The effect of cash
management is shown by the t-test value of 3.428 which implies that the effect of cash
management surpasses that of the error by over 3 times.
As shown in table 4.13, p-value is insignificant (p > 0.05), and the beta value of inventory
was negative (beta = -0.032). Therefore, the researcher accepts the null hypothesis and
concludes that inventory has a negative and insignificant effect on firm performance.
Finally, the effect of inventory is shown by the t-test value of -0.698 which implies that
the effect of inventory surpasses that of the error.
51
Finally, payables has a positive and significant effect on firm performance with a beta
value of β4 = 0.124 (p-value = 0.009 which is less than α = 0.05). Therefore, the
researcher rejects the null hypothesis and it is accepted that for each unit increase in
payables, there is 0.124 unit increase in firm performance. Also, the effect of payables
was stated by the t-test value = 2.633 which implies that the standard error associated
with the parameter is less than the effect of the parameter.
Table 4. 13: Coefficient of Estimate
Unstandardized Standardized
Coefficients Coefficients
B Std. Error Beta T Sig.
(Constant) -0.68 0.291 -2.334 0.02
Receivables 1.135 0.118 0.527 9.653 0.000
Cash management 0.274 0.08 0.182 3.428 0.001
Inventory -0.072 0.103 -0.032 -0.698 0.486
Payables 0.247 0.094 0.124 2.633 0.009
a Dependent Variable: firm performance
4.5 Discussion of the Findings
According to the regression results, receivables have no significant effect on financial
performance. However, research findings revealed that receivables has a positive and
significant effect on financial performance basing on β1= 0.527 (p-value = 0.000 which is
less than α = 0.05). Consistent with the results, Pandey, (2004) postulates that the
provision of trade credit is marketing strategy that expands or maintains sales. This
implies that trade credit mitigates customers’ financial friction hence boosting sales.
52
Additionally, Lazaridis and Dimitrios, (2005) echo that the provisions of trade credit
attract new customers’ thereby increasing financial performance.
Further, the study results revealed that cash management has a positive and significant
effect on financial performance as shown by β 2 = 0.182 (p-value = 0.001 which is less
than α = 0.05) hence the hypothesis was rejected. As such, cash management makes it
possible for a firm to prepare for both cash surplus and shortage hence heightening firm
performance Gitman (2008). Similarly, Gill (2010) echoes that there exist a significant
relationship between cash management and firm profitability.
Additionally, inventory showed a negative and insignificant effect on financial
performance basing on β3 = -0.032 (p-value = 0.486 which is less than α = 0.05).In
support of the findings of the study, Flanagan (2005) explained that maintaining large
inventory levels strains cash resources of a business hence impacting negatively on
financial performance. However, having minimum levels of inventory is associated with
lost sales. Cognate to the transaction theory, a balance needs to be struck when managing
inventories so that there is not too much or insufficient inventories held.
In a similar vein, Falope and Ajilore (2009) are of the opinion that the longer the time
inventory is tied in the company the less the amount of working capital available hence
declined profit. Moreover, Raheman and Nasar (2007) found that the coefficient of
inventory turnover in days is negative and highly significant. In a nutshell, the longer
inventory takes to sell, the more adversely it will affect financial performance.
53
Finally, trade payables was found to have a positive and significant effect on financial
performance basing on β4 = 0.124 (p-value = 0.009 which is less than α = 0.05).As such,
the hypothesis does not hold. Consistent with the results, Aminu (2003) alludes that the
management of trade payables is an essential tool in enhancing the financial performance
of a firm. Further, Smith and Sell (2008) note that sufficient cash flow that satisfies both
maturing short term debt and upcoming operational expenses is adequate in enhancing
financial performance.
4.6 Interpretation of the Findings
From the study findings, majority of the respondents were above 30 years and thus were
considered mature and therefore beneficial to the study as they would give reliable
information as sought by the study. Moreover, majority of the respondents have a
Bachelor’s degree implying that the organization employs and retains competent and
qualified staff since most of their activities require the use of knowledge, skills and
abilities.
Further, the researcher targeted accountants, procurement officers and managing
directors. This distribution provided a diversified base of information given the
contribution of the different management levels. Also, majority of the respondents had
been in the organization for 5 years and more which depicts that they had been in the
organization long enough and could therefore offer reliable information as sought by the
study.
54
The study established that the leading source of receivables are loans and interests while
the least being subscription and fines. This implies that there is increased cash flow for
the company making it possible for the company to not only meet its financial obligation
but also be able to invest in short term investment securities. In reference to cash
management, there is a well-defined policy on minimum liquidity as well as regular cash
flow projections. This posts that efficient cash management increases the profitability of
an organization and makes it possible for them to meet their financial needs.
Finally, the results of the regression model show that there is a positive and significant
effect between receivables, cash management and payables with financial performance.
55
CHAPTER FIVE
SUMMARY OF THE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter provides the summary of the findings from chapter four, and it also gives the
conclusions and recommendations of the study based on the research questions of the
study.
5.1 Summary of Findings
The general purpose of this study was to analyze on the effect of working capital
management practices on the financial performance at Mumias Sugar Company. Four
research questions were formulated to guide the study. Research question one aimed at
determining the way receivables management practices influences the financial
performance. Research question two aimed at investigating how cash management
influences financial performance. Research question three investigated the effect of
inventory management on financial performance and the fourth research question
investigated how trade payables influence the financial performance of Mumias Sugar
Company. The target population consisted of employees drawn from Mumias Sugar
Company. Data was collected through the use of questionnaires.
The correlation result show that there was a positive and significant relationship between
receivables and financial performance, cash management and financial performance,
payable and financial performance and inventory management with financial
performance. The finding also indicates that the highest relationship was found between
56
receivables and financial performance, while the lowest relationship was found between
inventory and financial performance.
Furthermore, the multiple regression results showed that except inventory management,
receivables, cash management and trade payables have positive and significant effect on
financial performance. The R square value of 0.47, demonstrates that 47% of variation in
financial performance can be accounted by the independent variables (payables,
inventory, cash management and receivables). The findings of this study also indicated
that receivables were the most important factor to have positive effect on financial
performance, followed by cash management then payables. Inventory management
exhibited insignificant effect on financial performance.
5.2 Conclusion
The findings from the study indicate that receivable management practices have a
positive influence on financial performance. This implies that an increase in accounts
receivables to an optimal level increases the level of profitability. Loans and interests
were found to be the highest source of receivables while the lowest being subscription
and fines. It was also found out that the firm has improved its financial performance by
having a shortened collection period and a sound credit policy.
The study also established that cash management had a positive and significant effect on
financial performance. Particularly, there is a well-defined policy on minimum liquidity.
As well, regular cash flow projections are made so that excess cash is redirected to
57
investment avenues. However, it was not fully established whether there are regular bank
reconciliations and audits.
Additionally, the study established that inventory management had a negative influence
on financial performance. Firstly, keeping inventory means increasing expenditures so the
high inventory leads to high expenses and low profits. Findings also indicate that demand
projections is majorly used as a determinant of inventory ordering. Therefore,
maintaining large inventory levels strains cash resources of a business.
Finally, the study has established that trade payables had a positive and significant effect
on financial performance. This implies that a positive relationship exists between the time
it takes for a firm to pay its creditors and its profitability level. Suppliers are the main
creditors that advance credit to the firm with members advancing the least. There is also
sufficient time given to the firm by its creditors to pay thereby making it profitable for the
firm.
5.3 Recommendations
The study has established that receivable management has a positive and significant
effect on financial performance. As a result, there is need for a sound credit policy that
ensures proper debt collection. This way, there will be efficiency in receivables
management hence improved performance. It is also important for firms to reduce the
number of days of accounts receivables in order to create value.
Also, cash management has a positive influence on financial performance. As a result,
there is need for firm managers to set a trade-off between liquidity and profitability of the
58
firm so that the company may experience exponential growth in returns. As well, firms
must endeavour to reduce their company debts because as debt financing increases,
profitability goes down.
Finally, efficient working capital management practices contribute to improved firm
performance. It is therefore imperative for firms to embrace efficient working capital
management practices as a strategy to improve their financial liquidity and gaining
competitive advantage over other competitors.
5.4 Further Research Recommendations
This study was conducted to analyze the effects of working capital management practices
on the financial performance at Mumias Sugar Company. Future studies could be
extended to analyze working capital management practices and their effect on
performance of manufacturing companies in Uasin Gishu County. A similar study should
also be carried out on the accounts receivables management and financial performance of
firms in the North rift region incorporating more financial and accounting variables and
also taking into account the prevailing macroeconomic situation.
Similar study should be done with an extended scope to cover other components of
working capital management including cash and marketable securities
59
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APPENDIX I INTRODUCTION LETTER
TO WHOM IT MAY CONCERN
Dear Sir/Madam,
I am a student at Catholic University of Eastern Africa (GABA) –Eldoret undertaking a

Degree of Master of Business Administration. As part of the requirements for the award
of the degree, I am required to conduct a research on analysis on the effect of working
capital management practices on the financial performance, Mumias Sugar Company. I
kindly request you to avail the necessary information. Any information obtained in the
connection with this study that can be identified with you will remain confidential. In any
written reports and publications no one will be identified and only group data will be
presented.
A prompt response to the attached questionnaire will be highly appreciated. If there is any
aspect you need to clarification about this research or questionnaire do not hesitate to call
Mark +254723622555
Thank you so much for your cooperation.
Yours Faith full,
Mark Kipkemboi Too
Catholic University of Eastern Africa
65
APPENDIX II: QUESTIONNAIRE
PART 1: SOCIAL DEMOGRAPHIC INFORMATION
1. What is your Gender?
Male
Female
2. What is your Age bracket :
18-25
26-30
31-40
41-45
45- and above
3. Level of education
Certificate
Diploma
Bachelor’s degree
Masters Degree
None
4. What is your position in the company?
General Manager
Finance Officer/Accountant
Procurement Manager/Officer
5. How long have you served in the current position?
66
Less than 2 years
3 – 4 years
5 – 6 years
7 – 8 years
More than 8 years
6. What is your leading source of your receivables?
Loans and interests
Sales
Subscriptions and fines
Return from other investments
Any other Specify…………………………………………………………………
7. From your experience, how would you classify the following tools in terms of their
application to realizing the company’s receivables? (1-Highly Preferred; 2-Moderately
Preferred; 3-Lowly Preferred)
Highly Preferred Moderately Lowly Preferred

Preferred;
Insistence on cash
payment
Prompt invoicing
Sending overdue
notices
Asset attachment
Additional charges
Debt Collection
services
67
8. How would you classify the company in terms of its credit uptake?
High credit consumer
Moderate credit consumer
Low credit consumer
No credit at all
9. Rank the following creditors depending on their credit-volume advancement to the

company.
Suppliers
Lending Institutions
Members
10. What is the company’s preferred period (days) for credit payment?
Less than 2 days
15 days
16 – 30 days
31 – 45 days
46 – 60 days
More than 60 days
11. How significant are the following payment techniques to the company? (1-Not
Significant; 2-Moderately Significant; 3-Highly Significant)
Not Significant Moderately Highly Significant

Significant
Payment in installments
Negotiation for
extensions
68
Change of payment
conditions
Immediate settlement
when cash is available
Investing cash to pay at

maturity of grace period
12. What is the leading form of inventory in the company?
Farm inputs
General merchandise
Any other Specify………………………………………………………………..
13. How long (days) does it take to receive ordered goods from suppliers?
Less than 10 days
11 – 20 days
21 – 30 days
31 – 40 days
More than 40 days
14. What is the company’s key consideration leading to inventory ordering?
Actual demand
Demand projections
Stock replenishment
Unpredictable supply
No definite consideration
69
15. How common do the following inventory situations affect the company (in the past 6
years)?
High Moderate Low Non-Existent

Stock-outs
Inventory
surpluses
Emergency
ordering
Supply stoppage
16. The following statements relate to corporate efficiency in cash management. To what extent
do you agree or disagree with each of them in the context of your entity?
Strongly Agree Uncertain Disagree Strongly

Agree Disagree
There is a well-
defined policy on
minimum liquidity
There are regular cash
flow projections
There are regular bank

reconciliations and
audits
There are ready

investment avenues
for excess cash
Excess cash is held to

meet future
obligations
70
17. What would be your advice to finance practitioners in the industry regarding working
capital management?
…………………………………………………………………………………………….
18. Firm Performance (for the last six years)

Below is statement that your business might have achieved since your started it. Please
rate the following statements according to the best of your knowledge
5= very high; 4= high; 3= Neutral; 2= low; 1=poor
Growth in sales in relation to your expectations

Growth in sales in relation to your competitors
Growth in profits in relation to your expectations
Growth in profit level in relation to your Competitors
Increase in number of employees
Increased market size in new markets in relation to your
Increased market size in new markets in relation to your
competitors
Growth in capital from operations
71

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ANALYSIS ON THE EFFECT OF WORKING CAPITAL MANAGEMENT

PRACTICES ON THE FINANCIAL PERFORMANCE OF MUMIAS SUGAR

MARK KIPKEMBOI TOO

ARESEARCH THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE CONFEREMENT OF DEGREE OF MASTERS OF

BUSINESS ADMINISTRATION (MBA)

CATHOLIC UNIVERSITY OF EASTERN AFRICA

Declaration by the Candidate

presented in any other university or institution for academic credit.

MARK KIPKEMBOI TOO:

DR. BITANGE BOGONKO:

MR. ROBERT SIMIYU:

accomplish this study.

I wish to sincerely acknowledge the assistance given to me by my Supervisors Dr.

proof-reading, amending, and correcting errors and putting forward constructive

criticisms in the writing of this thesis.

1.4 SIGNIFICANCE OF THE STUDY 7

2.1 REVIEW OF THEORIES 10

4.1 PRESENTATION OF THE FINDINGS 29

4.3 DESCRIPTIVE STATISTICS FOR ALL THE VARIABLES 47

Table 4. 1: Demographic Information................................................................................31

Table 4. 2: Company’s receivables....................................................................................35

Table 4. 3: Cash Management............................................................................................38

Table 4. 4: Days it take to receive ordered goods from suppliers......................................40

Table 4. 5: Company’s key consideration leading to inventory ordering..........................41

Table 4. 8: Firm Performance............................................................................................46

Table 4. 9: Descriptive Statistics for all the Variables.......................................................47

Table 4. 10: Correlation results..........................................................................................48

Table 4. 11: Model Summary.............................................................................................49

Table 4. 12: ANOVA Model..............................................................................................49

Table 4. 13: Coefficient of Estimate..................................................................................51

Figure 1. 2: Conceptual Framework....................................................................................9

Figure 4. 1: Leading source of your receivables................................................................33

Figure 4. 2: Company in terms of its credit uptake...........................................................36

Figure 4. 3: Inventory Management..................................................................................39

Figure 4. 4: Rank of creditors depending on their credit volume advancement to the

COMESA: Common Market for Eastern and Southern Africa

ECM: Efficiency in Cash Management

ERM: Efficiency in Receivables Management

EU: European Union

FP: Financial Performance indicator

IGAD: Inter-Governmental Authority on Development

ISE: Islamabad Stock Exchange

KSB: Kenya Sugar Board

NSE: Nairobi Securities Exchange

CCC: Cash Conversion Cycle

Capital investment decisions: This is long-term corporate finance decisions relating to

Cash Management: Refers to the collection, concentration and disbursement of cash.

Inventory: this is the Percentage measure of a firm's capability to finance its

Payables: is an amount billed to a company by its suppliers for goods delivered to or

Receivables: This is the money owed by customers (individuals or corporations) to

Working capital: It is a financial metric which represents operating liquidity available to

1.1 Background of the problem

Business entities exist for purposes of enhancing owners’ investment value.

Realization of this objective requires finesse in financial strategy and entrenchment of

responsive adoption systems. As a result, a firm is required to maintain a balance

Liquidity is a precondition to ensure that a firm is able to meet its short-term

Management of working capital is a fundamental part of the overall corporate strategy

to create value and is an important source of competitive advantage in businesses

businesses (Lamberson, 2005).

working capital management. Consequently, a firm may adopt an aggressive

resulting in difficulties in maintaining smooth operations. They conclude by

emphasizing that the main objective of working capital management practices is to