School Of Business and Public Management at KCA University
The three main ways of financing 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 25 Kenyan
listed Manufacturing and allied firms for the period 2008-2012. Return on Assets was
used as the measure of profitability. The target population of the study was all the
twenty five manufacturing and allied listed firms at NSE between 2008 to 2012.
Comparable data for 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 25 manufacturing
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.