Efficientmanagement of Working Capital is fundamental part of overall corporate strategyin creating shareholder value. Firms try to keep an optimal level of workingcapital that maximizes value (Afza &Nazir, 2007). Indeed, in present dayoperating business environment, WCM has become one of the most important issuesin organizations where many managers are struggling to identify the basicworking capital drivers and an optimal level of Working Capital that willfacilitate the firm’s ability to meet its short-term obligations when they falldue.
Severalstudies have been conducted both locally and abroad on how various elementsimpact on profitability. The effectiveness of working capital management canhave significant impact on both the liquidity and profitability of a company(Shin & Soenen, 1998. On the other hand, without sufficient working capitalthe company will not either be able to provide goods and services required bycustomers due to lack of money to buy materials for producing goods. Thecompany’s profitability can be compromised as a result.Lamberson(1995) showed that working capital management is of importance in managingfinancial aspect of a company. Managers are usually unable to identify driversof working capital management that can greatly increase their company’sprofitability Researchers who have done study on similar issue find a negativecause-and-effect relationship between numbers of day’s inventories, number ofdays accounts receivable and cash conversion cycle with the corporateprofitability. (Raheman & Nars 2007); researchers find a positiverelationship between number of day’s accounts payable with the corporateprofitability. Mathuva (2009) discovered that there existed negativerelationship between the time taken by firms to collect cash from theircustomers and profitability.
However, he differed with Raheman and Nasr (2007)when he concluded that there exist highly significant positive relationshipbetween the period taken to convert the inventories into sales, the time takento pay creditors and profitability. It’s the conflict between the findings ofMathuva (2009), and Raheman and Nasr (2007) that motivates the researcher tocarry out this study on the effect of working capital on financial Performance.Therefore, the purpose of this research is to determine the effect of workingcapital management on financial performance of supermarkets in Naivasha town.
1.3Objectives ofthe studyThegeneral objective of this project is to determine the effects of workingcapital on the performance of supermarkets in Naivasha town.1.3.1 Specific objectivesThisresearch project will be guided by the following specific objectives.1.
To examine the influences of the accounts receivables on financial performanceof supermarkets in Naivasha town.2.To determine the influences of cash on financial performance of supermarkets inNaivasha town.3.
To determine the influences of inventory on financial performance ofsupermarkets in Naivasha town.1.4 Researchquestions1.Is there a significant relationship between cash and financial performance ofsupermarkets in Naivasha town?2.Is there a significant relationship between inventory and financial performanceof supermarkets in Naivasha town?3.Is there a significant relationship between accounts receivables and financialperformance of supermarkets in Naivasha town?1.
5 Significanceof the studyThestudy is expected to be of great significance to the following groups1.5.1CustomersTheoutcome of this research project is expected to be of great importanceespecially to the customers in that they will be able to understand theircontributions in the economic growth as measured using profitability ofsupermarkets in Naivasha town. It will help increase the awareness to thecustomers of what the businesses can do to improve operations and utility tothem.1.5.
2 Owners of Supermarket in Naivasha Town.Themain purpose of this study is to provide owners of these supermarkets with ananalytical framework which can be used to estimate the associated effects ofworking capital and also assist them in setting their working policies. It willprovide an informed basis for taking action on working capital in addition tofilling the gap about what is currently known about effects of working capitalon performance of supermarkets in Naivasha town. Potential investors who arecurrently planning to invest in these businesses will from this study haveguidance on the expected effects within their respective investments.
1.5.3 GovernmentTheresults of this study could be used by government agencies involved in policymaking, to design growth-oriented programs and carry out changes that have netpositive effects on the Kenyan economy as the study will bring togethercomprehensive evidence on the determinants of performance of supermarkets inNaivasha town.
It will provide an informed basis for taking action onbusinesses in addition to filling the gap about what is currently known aboutperformance of supermarkets in Kenya. The study will provide an empiricalgroundwork on Kenya’s economic structures upon which performance measures couldbe based.1.
5.4 Scholars& AcademicianInaddition, the study will contribute to the existing literature on effects ofworking capital on performance of supermarkets in Naivasha town. The study willbe of importance to the academic community since it will broaden the knowledgeon effects of working capital on performance of supermarkets in Naivasha town,providing a basis for future research.1.6 Scope of the study.Theresearch will focus on supermarkets where the target group will be accessibleand where all the parties that contribute to the financial performance ofsupermarkets in Naivasha town are concentrated, including individuals andorganizations.
Workingcapital is wide therefore the research will be dealing with inventory, cash andaccounts receivables only. Also, the effects of working capital on the economyare diverse and therefore the research will focus on the effects of workingcapital on financial performance of supermarkets in Naivasha town only andleave out equally important variables such as effects of working capital suchas:· Sales taxes payable. This is theobligation of a business to remit sales taxes to the government that it chargedto customers on behalf of the government.· Payroll taxes payable. This is taxeswithheld from employee pay, or matching taxes, or additional taxes related toemployee compensation.· Income taxes payable.
This is incometaxes owed to the government but not yet paid.· Interest payable. This is interest owedto lenders but not yet paid.· Accrued expenses. These are expenses notyet payable to a third party, but already incurred, such as wages payable.· Accounts payable.
These are the moneyowed to suppliers, usually as evidenced by supplier invoices.· Customer deposits. These are paymentsmade by customers in advance of the completion of their orders for goods orservices.· Dividends declared. These are dividends declared by the board of directors,but not yet paid to shareholders.· Short-term loans.
This is loans that aredue on demand or within the next 12 months.· Current maturities of long-term debt.This is that portion of long-term debt that is due within the next 12 months.1.7 Assumptions ofthe research.Theresearch project will assume the following;1.There will be access to the accounts receivables documents of supermarkets inNaivasha town.2.There will be influences of working capital on performance of supermarkets inNaivasha town.3.There will be access to the inventory documents of supermarkets in Naivashatown.4.There will be access to cash documents of supermarkets in Naivasha town.1.8 Limitations ofthe study.The study is expectedto have some limitations such as lack of available information andprofitability for the whole period, and even limited access to such data may be