Effect of trade receivables on profitability of manufacturing and allied firms listed at Nairobi securities exchange

Abstract

The three main ways of financing a firm are issuing of equity, retention of earnings and issuing of debt capital. Trade receivables securitization is another upcoming avenue of raising capital that brings the benefit of low cost and enables firms to streamline their financial statements and utilize the raised capital in a more prudent way to improve its credit rating and have better financial ratios which improves profitability of the firm.This study analyzed the effect of trade receivables on the profitability of 24 Kenyan listed Manufacturing and allied firms for the period 2008-2012. Return onAssetswas used as the measure of profitability.The target population of the study was all the twenty four manufacturing and allied listed firms at NSE between 2008 to 2012. Comparable datafor this period on Debtors Collection Period (DCP), Cash Conversion Cycle (CCC), and Accounts Receivable Turnover (ART) was used to have an analysis on their relationship with the return on assets. The study utilized panel data where profitability for each of the 24manufacturing firms for each year over the 5 year period was related to the trade receivables variables.Secondary data was obtained from Audited financial Statements of the firms as well as the NSE handbooks over the five year period. Pearson correlation was used to establish the relationship between the variables under consideration. The study is expected to give policy direction on the management of trade receivables as a key accounting item for the manufacturing firms. The study found out that the trade receivables, Debtors Collection Period, Cash Conversion Cycle and Accounts receivable turnover (ART) had an insignificant effect on the return on assets of manufacturing firms. Using the return on assets as the measure of profitability, the three variables do not have a significant impact on the profitability. Further studies may consider using assessing the effect of the trade receivables on other measures of profitability or financial performance such as liquidity.