Mediating Effect of Operating Cash Flow on the Relationship between Working capital and Financial Performance of Tea Firms in Kenya.

Abstract

Purpose: Many corporate firms incorporating those in the tea sector are normally interested in their corporate financial performance. This is particularly in regard to the manner in which their activities pertaining financing, investing and operating assignments, not only aid in generating incomes but similarly on how to maintain and manage the expenditures and costs of all these activities to their very minimal, with an objective of optimizing on firm’s profitability. Notwithstanding the agitation for corporate financial performance generally and in particular profitability, still it is unclear on how the management of operating cash flow influence the corporate financial performance of firms in the tea industry in Kenya. The divergence in the management of operating cash flow policies across the tea industry is depicted in the discrepancy in the operating cash flow fluctuating from very high of these ratios to low current asset to total asset ratios.

Methodology: Regardless of the fluctuation in the management of operating cash flow management policies, still there is inadequacy of theoretical and empirical explicitness on the manner in which management of operating cash flow influences profitability of these corporate firms.

Findings: Empirically, numerous research studies arrives at varied findings on how operating cash flow is correlated with to the corporate financial performance. Theoretically, whereas the Miller- Orr model (1966) and Baumol model (1956) suggest optimal structuring of operating cash flow to enhance risk minimization and thus uplift financial performance. On the other hand, the Jensen and Meckling agency theory (1976) shortfall  in pointing out an explicit relationship between the operating cash flow  collection period and  corporate financial performance. The stewardship theory of Gitman (1974), showcased an inverse association between operating cash flow collection period and profitability. The present research study is developed as a correlational research designed study employing the 40 multinationals and KTDA managed tea companies in tea sector in Kenya over a 6 year period covering 2014 to 2019. This forms 240 firm-year observations. Random-effects model regression model was employed after conducting specification tests for the model. The hypothesis testing was analyzed by employing the t-statistic at 95% confidence interval.

Unique contributor to theory, policy and practice: Having the foundation on the philosophy of positivist research design, the research results established that operating cash flow as measured by the ratio of cash and cash equivalent to current liabilities showed that it does not mediate the relationship between working capital management decisions and financial performance as measured by earnings before interest and taxes to total assets. This research study was confined to the tea factories under multinational and KTDA managed tea firms in Kenya and recommendation thereof is an increased sample for all tea firms in Kenya could be included in order to check out how it will influence the robustness of the findings.