Effect of Working Capital Management on Profitability of Sugar Manufacturing Firms in Kenya: A Case of Mumias Sugar Company in Kakamega

Abstract

Despite considerable investment, Kenya’s sugar manufacturing sector, particularly Mumias Sugar Company, continued to experience persistent financial instability, declining profitability, and recurrent government bailouts. These financial challenges pointed to inefficiencies in working capital management (WCM). This study investigated how four key WCM components, inventory management, cash conversion cycle, accounts receivable days, and accounts payable days, affected the profitability of sugar manufacturing firms, focusing on Mumias Sugar Company in Kakamega County. Specifically, the study aimed to determine the impact of inventory management, evaluate the effect of the cash conversion cycle, assess the influence of accounts receivable days, and examine the role of accounts payable days on profitability. Anchored on the Theory of Constraints, Risk-Return Tradeoff Theory, Liquidity Preference Theory, Pecking Order Theory, and Transaction Cost Economics Theory, the study explored how firms manage operational efficiency, liquidity, and cost structures to enhance profitability. A descriptive research design was adopted, targeting 15 purposively selected employees across key departments at Mumias Sugar Company. Data was collected through structured questionnaires and financial records. Instrument reliability was tested using Cronbach’s alpha, and validity was ensured through expert reviews and piloting. Data analysis employed both descriptive and inferential statistics, including correlation and regression techniques. The findings revealed that efficient inventory management and shorter cash conversion cycles significantly enhanced profitability. Firms that maintained optimal inventory turnover ratios and minimized stock holding periods improved liquidity and reduced operational costs, thus increasing return on assets (ROA) and return on equity (ROE). The study found a strong negative relationship between extended cash conversion cycles and profitability, confirming that delayed conversion of working capital into cash inflows impeded financial performance. Extended accounts receivable periods were also associated with cash flow constraints and higher default risks. Additionally, while delayed payments to suppliers temporarily supported liquidity, prolonged delays undermined supplier trust and increased procurement costs. All four null hypotheses (H01 to H04) were rejected, confirming that inventory management, cash conversion cycles, receivable days, and payable days each had statistically significant effects on profitability. The study contributed to new knowledge by offering firm-level evidence from a financially distressed, non-listed sugar manufacturing firm, an area previously underrepresented in WCM literature. It recommended the implementation of real-time inventory systems, stricter credit policies, and strategic supplier term negotiations. The study also proposed future research on macroeconomic influences on WCM and comparative cross-sectoral studies to identify adaptable working capital practices for struggling firms.