Working Capital Management, financial leverage and financial performance of listed manufacturing firms in the East Africa Community

Abstract

The manufacturing sector plays a critical role in the economy as it is the major driver of the economy. Therefore, its financial performance is vital. However, there is evidence that the financial performance is wanting. Many firms have been shut down owing to poor working capital management hence the need to conduct this study. Studies show that working capital management affect financial performance and this has been less documented therefore the purpose of this study was to assess working capital management, financial leverage and financial performance of listed manufacturing firms in East Africa community. The study was guided by the following specific objectives: to; determine the effect of cash conversation cycle, inventory holding period, accounts receivable period and accounts payable period on the financial performance of listed manufacturing firms in East Africa community. Also to assess the moderating role of leverage on the relationship between cash conversation cycle, inventory holding period, accounts receivable period, accounts payable period and financial performance of listed manufacturing firms in East Africa community. Keynesian liquidity preference theory and trade off theory guided the study. The study adopted an explanatory and a longitudinal research design. A 16 years’ period data was collected from 15 manufacturing firms in Kenya, Uganda and Tanzania and therefore a total of 240 observations of data formed the target data for the study. This includes data from 2007 – 2022. A census was conducted and hence 240 complete cases was selected as the sample size for the study. Data sheets were used to collect data. Panel data from the audited financial statements of the individual listed manufacturing firms was collected. Descriptive statistics such as measures of central tendency and measures of dispersion was used to summarize and profile the pattern in each firm. In addition, panel regression analysis was employed to assess the nature and significance of the relationship between independent variables and dependent variable. Hierarchical regression analysis was used to determine the moderating effect of leverage on the relationship between the independent and the dependent variables in a stepwise approach. The results indicate that cash conversion cycle (β= 0.42; p > 0.05, p = 0.170) and accounts receivable period (β= -0.20; p > 0.05, p = 0.186), have no significant impact on financial performance, while inventory holding period (β= -0.29; p < 0.05, p = 0.004) and accounts payable period (β= 0.29; p < 0.05, p = 0.000) have significant effects. The moderation results show that financial leverage moderates the relationship between Cash Conversion Cycle (β= 0.04; ρ<0.05), Inventory Holding Period (β= 0.03; ρ<0.05), Accounts Receivables Period (β= -0.08; ρ<0.05) and Accounts Payables Period (β= 0.13; ρ<0.05) to financial performance. The study concluded that financial leverage moderates the relationships between working capital and financial performance. Based on the findings, it is recommended that manufacturing firms in East Africa to focus on optimizing inventory management and accounts payables to enhance their financial performance. Additionally, careful consideration of financial leverage can help strengthen the impact of inventory holding period and accounts payable period on financial outcomes