The role of working capital management on financial performance of small-scale coffee processors in Embu County, Kenya

Abstract

Manufacturing is an essential pillar of Kenyan economic development as stipulated in the Vision 2030. Agro-processing play a pivotal role in enhancing economic growth and socio-welfare at large. However, over the last two decades the financial performance of small-scale agro-processing firms including coffee have declined. Robust working capital management approaches have been initiated to improve the financial performance of the small-scale coffee processors. Despite the Kenyan government intervention on coffee sector, information on the small-scale coffee processors as impacted by rigorous financial management is scanty. In this study, we evaluated the effects of working capital management on the financial performance of 41 small-scale coffee process in Embu County, Kenya. We anchored our study on Keynesian liquidity preference theory. We used financial data from 2014 to 2018 among the sampled small-scale coffee processors. We employed a multivariate regression modelling to evaluate the impacts of working capital management on financial performance of the processors. We established that current ratio and average payment period had a significant impact on return on assets and return to farmers of the small-scale coffee wet mills. Subsequently, the wet mill processors could bring down their payables period and current ratio to improve return on assets. The analysis uncovered that the firm's size and age additionally had a positive and negative effect, respectively, on return on assets of the small-scale wet mills. Both average payment period and current ratio positively affected return to farmers. We reason that working capital measurements, that is, average payment period and current ratio, adversely impact return on assets while they positively impact return to farmers. Policymakers should therefore initiate a ceiling on payables period for small-scale coffee wet mills to enhance optimal return on assets while keeping up appetising return to farmers for sustainable processing.