Effect of Liquidity Management Practices on Profitability of Manufacturing Industry in Kenya

Abstract

Industrial firms require liquid cash for smooth operations. Failure to convert current assets into liquid cash can force a profitable firm into liquidation. The purpose of this study was to determine the effect of liquidity management practices on profitability of industrial firms in Kenya. The study was explained by two cash management models; Baumol’s cash management model and Miller – Orr cash management model. Correlational research design was adopted. Two types of data were collected. Primary data was collected through the use of a questionnaire and secondary data through the use of a record survey sheet. Stratified random sampling technique was used to determine the sample size. Data analysis was through descriptive and inferential data analysis. The inferential data analysis, Pearson’s correlation, regression and ANOVA analysis were applied. The results of the analysis indicated that the correlation coefficient between liquidity cash management and profitability was 0.711 at 0.01 significant level. This showed a positive and significant relationship between liquidity management practices and profitability of industrial firms. R 2 value was 0.5055 which means that 50.55% of the corresponding variation in profitability can be explained by change in liquidity management practices. The rest 49.45% can be explained by other factors that are not in the model. The ANOVA results on liquidity management practices and profitability had an F-value of 90.677 which was significant with a P value = 0.000 meaning that the overall model was significant in the prediction of profitability in industrial firms in Kenya. It is recommended that the finance managers should establish optimal cash targets, lower and upper cash limits in their industrial firms. They should also invest excess cash into productive assets.