Effect of cash flow risk management on financial stability of companies listed at the Nairobi Securities exchange in Kenya

Abstract

Financial stability is a problem that a number of firms in Kenya have faced. This can be attributed mainly to cash flow problems whereby companies struggle to pay their debts as and when they become due. These cash flow problems affect the going concern assumption of these firms, with some ending up in insolvency. The main objective of this study therefore was to ascertain the effect of cash flow risk management on financial stability of companies listed at the Nairobi Securities Exchange. The specific objectives of the study were to determine; the effect of operating, investing and financing activities cash flow risk on financial stability. The study was guided by Baumol theory, free cash flow theory, Miller-Orr theory, cash conversion cycle theory and Keynesian theory of money. This study employed an explanatory research design to determine cause and effect relationship between the dependent and independent variables. The target population constituted all the 65 companies listed at the Nairobi Securities Exchange as at 31st December 2017. Inclusion/exclusion criteria was used whereby 40 firms met the inclusion criteria. The study used secondary data obtained from Nairobi Securities Exchange, Capital Markets Authority and the respective websites of the companies from the published financial statements for a period of 9 years, 2009 to 2017. Panel data regression was carried out on the data to determine the effects between components of cash flow risk management and financial stability. The study found out that operating activities cash flow risk (β=-12.2138, p<0.05) had a statistically significant effect on financial stability. This means that low or negative operating activities cash flows in highly geared companies reduces their financial stability. This implies that firms that have more operating activities cash flows are in a position to generate higher profits since they can effectively pay their short term obligations on demand or over a short notice, and hence have a strong financial stability. Investing activities cash flow risk (β=0.58351, p=0.361) and financing activities cash flow risk (β=0.62706, p=0.540) were found not to have a statistically significant effect on financial stability. Companies will greatly gain from this study since cash flow risk management is a key determinant of the success or failure of any business entity. The study will also be useful to both academicians and researchers as they will use this research as a guide for carrying out research studies in this area. The researcher recommends that a similar study be carried out for companies which are not listed in Nairobi Securities Exchange most of which are privately owned. The rationale for this is to find out whether similar findings as established in the above study will hold for privately owned entities. The conclusion of this study is that cash flow risk management affects the financial stability of companies.