Determinants of Working Capital Requirements Listed Companies in East Africa: An Empirical Study Using Generalised Method of Movements

Abstract

Effective working capital management is essential to a company’s survival.
Working capital management helps managers in the value creation of the
company and prevents the possibility of insolvency. This leads managers and
researchers to make an effort to identify variables that affect working capital
management. The main focus of this study is to examine the determinants of
working capital requirements of non-financial firms listed in East African stock
markets. Working capital requirement as a dependent variable was presented by
the ratio of current assets less current liabilities over total assets and cash
conversion cycle. However, the independent variable was represented by return
on assets, sales growth, firm size, leverage and operating cash flow, while the
country's gross domestic product growth rate was used as a control variable. For
the company to be financially successful, it depends much on how financial
managers use their skills to ensure that management of working capital is
maintained at an optimal balance. The study used both a descriptive and a
quantitative research design. Listed non-financial companies in East Africa,
covering the period of 8 years from 2016 to 2023, were selected to represent the
sample. Data analysis was done by eView12 using the panel generalised method
of movement to establish the relationship between dependent and independent
variables. This study concluded that there is a significant positive influence of
return on assets, growth, firm size and operating cash flow on working capital
requirement. This indicates that if the firm wants to grow and improve
profitability it must increase the level of working capital. Furthermore, leverage
and firm size were revealed to have a negative and significant influence on
working capital requirement. Then, if the firm is highly geared, it leads to a
reduction in the level of working capital. Moreover, GDP growth rate impacts
working capital requirement positively, meaning that when the country's GDP
increases, the company demands more cash to finance their working capital.