Effect Of Working Capital Management Practices On Financial Performance Of Hotels In Nyeri County Kenya

Abstract

Business success is largely dependent on proper management of its working capital. To ensure a smooth running of the business, a sound working capital policy must be put in place and adhered to. In the hotel industry, inadequacies among financial managers leads to increased amounts of bad debts, high inventory costs among other effects creating a unfavorably effect on the financial performance of the firm. In Nyeri County, lack of proper working capital management has not only led to decline in financial performance but has as well led to the closing of several hotels. In this regard, the researcher sought to examine the effects of working capital management practices on the financial performance of hotels in Nyeri County Kenya. Specifically, the study aimed at achieving the following; to study the effect that cash flow management practices has on the financial performance of the hotels, to analyze account receivables management influence on financial performance, to assess the influence of inventory management on financial performance, and finally establish account payables management effect on the financial performance. The study was anchored on four theories namely:-agency theory, liquidity theory, economic order quantity model and the net trade cycle theory. The study embraced descriptive research design. All hotels in Nyeri county Kenya formed the target population of the study. A purposive sample of two respondents in the management level in each hotel was used. One general manager and one financial manager from each hotel selected. The researcher collected primary data in each of the independent variables with the use of semi structured questionnaire. A pilot study was conducted to enhance the validity and reliability of the data collection instrument. Cronbach alpha coefficient of 0.7 was used to ascertain test the reliability of the data collection instrument. Inferential statistics was also carried out to establish the nature of the relationship that exists between variables. Data was interpreted with the help of 0.05 significance P-values. Model fitness R2, ANOVA statistics and regression coefficient were generated. Prior to running a regression model, multicollinearity test and normality test were conducted. Data that was analyzed was obtained from 65 respondents out of the targeted 72 achieving 90.3% response rate. Frequencies and percentages were generated from the data and presented using frequency distribution tables while multiple regression analysis was done to establish relationship of each parameter of the independent variables in the study. The results indicated that cash flow management practices and inventory management practices had positive and statistically significant effect on financial performance of the Hotels at the 0.05 level of significance when considered singly and when combined with other variables. Account receivable management practices and account payable management practices had positive but there effect was not statistically significant on financial performance when considered singly and when combined with other variables. The study recommends that Hotels should come up with cash management policy with a view to enhance maintain optimal level and to control cash with a view to ensure that there is smooth running of the day-to-day operations. In addition, Hotels should ensure a balance between their account receivable and account payables as too much of either may be harmful in the long run and this will ensure balance between liquidity and profitability. Future research could focus on the challenges Hotel industry face when they focus on working capital management practices.