Effect of Cash Conversion Cycle Management Practices On Performance of Firms Listed At Nairobi Securities Exchange, Kenya

Abstract

The subject of cash conversion cycle management has in the ,recent past received attention both locally and internationally. Prior studies report 'that cash conversion cycle management may have an important influence on the firm's profitability. It's important to note most of the studies were done in foreign economies and are skewed towards general working capital management practices. A few researches have been carried out on the perspective of developing countries. Hence, it is hard to say whether conclusions from theoretical and empirical research carried out in developed economies are also applicable for less developed countries and in particular the Kenyan economy. This study was done in the context of a developing capital market, Nairobi Securities Exchange. Furthermore, there are inconclusive and inconsistent results with regard to the role of cash conversion cycle management on firms' financial performance. The purpose of the study was therefore to establish the effect of cash conversion cycle management practices on performance of firms listed at the Nairobi Securities Exchange. The objectives of the study were to: establish the level of cash conversion elements of firms listed at the Nairobi Securities Exchange; determine the relationship between stockholding period and performance of firms listed at the NSE; establish the relationship between creditors' repayment period on performance of firms listed at the NSE and ascertain the relationship between debtors' collection period and performance of firms listed at the NSE. The study was guided by an adapted conceptual framework with cash conversion cycle management practices as independent variables, firm performance as the dependent variable. The population of the study was all the 54' companies listed at the Nairobi Securities Exchange for a period of seven years between 2006 and 2012. A purposive sampling. technique was used to obtain a sample of 41 companies. The study adopted a , correlational research design and secondary data from the annual reports of the listed companies. The Pearson correlation analysis and descriptive statistics were used to analyze the data.The study findings revealed the average debtor's collection period (DP) is 74.97 and the firms at the NSE on average take a minimum of 17 days to collect their receivables from the purchasers but take a maximum of 179 days to collect their receivables. In addition, the firms take about 8 days to sell their entire inventories, as minimum and 601 days as maximum. The mean days to sell the inventory are 110.913 with standard deviation of 105.623 days. About the average payment period (CP), the firms had a minimum time 11 days to pay its purchases on account and 565 days as a maximum time. It takes an average 107.817 days to pay its purchases. In addition, the results revealed that the stock holding period (SP) and debtors collection period (DP) relates negatively with ROA with a coefficients of (- 0.596, p<O.OI) and (-O.702,p<0.01) respectively and are significant while the correlation between the creditors repayment period (CP) and ROA is positive with a coefficient of (0.68,p<0.O 1) and is insignificant. The study concludes that there is a significant relationship between cash conversion cycle management practices and firm performance measured by ROA. The results of this study may be of great importance to managers and major stakeholders, such as investors, finance managers and academic scholars.