The use of working capital management as a financial Strategy: (A Case study of Uchumi Supermarket Limited)

Abstract

Working capital management is the main life blood of any organization. It deals with the management of the businesses’ current assets and liabilities. It is important for the survival and sustainability of profitability and liquidity position of a firm. A firm must therefore ensure that it maintains a balanced level of liquidity and profitability while undertaking the day to day operations of business because inefficient working capital management reduces the profitability of business and can lead to financial crisis (Chowdhury and Amin, 2007). The purpose of this study was to explore and analyze the working capital management approaches and policies as applied by Uchumi Supermarket Limited. It also analyzed how working capital management dynamics can be used as financial strategy. Therefore, in this perspective, this study aimed at determining the working capital investment and financing policies adopted by Uchumi Supermarket Limited. It also aimed at analyzing the operating effectiveness, efficiency and financial performance of the supermarket through ratio analysis. This study investigated the working capital management approaches and policies and financial performance of Uchumi Supermarket Limited for the period of 2002-2013. The period was divided into pre-financial crisis (2002~2006) and post-financial crisis (2007~2013) periods. It also analyzed secondary data obtained from the financial reports of Uchumi Supermarket Limited published on the Nairobi Securities Exchange, annual reports, textbooks and journals. The tools used in this study included ratio analysis, trend analysis and percentage method. Ratios such as current ratio, quick ratio, cash conversion cycle, accounts payable days and collection days were used for analysis. The major recommendation of this study is that working capital management should be the concern of all the managers conduction of the day to day operations of the all retail chains in Kenya and hence must be given due importance. A very close monitoring and review of collection and payment policies of the firms in the retail sector should always be done. The supermarket must also strategies on the how to use debt optimally to its benefit to avoid bankruptcy and insolvency. Therefore these findings indicate that Uchumi Supermarket’s managers should reduce its cash conversion cycle, net operating cycle, and the number of days in inventories to a reasonable minimum in order to enhance its performance.