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INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
www.ijarke.com
50 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
Effects of Debtors Management on the Financial Performance of
Construction Firms in Mombasa County
Monicah Mueni Muthami, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Peter Ng‟ang‟a, Jomo Kenyatta University of Agriculture and Technology, Kenya
1. Introduction
Business enterprises today use trade credit as a prominent strategy in the area of marketing and financial management. Thus,
trade credit is necessary in the growth of the businesses. When a firm sells its products or services and does not receive cash for it,
the firm is said to have granted trade credit to its customers. Trade credit thus creates account receivables which the firm is
expected collect in future (Kungu, Wangu, & Gekara, 2014). Accounts receivables are executed by generating an invoice which is
delivered to the customer, who in turn must pay within and with the agreed terms. The accounts receivables are one of the largest
assets of a business enterprise comprising approximately 15% to 20% of the total assets of a typical construction firm (Dunn,
2017). Investment in receivables takes a big chunk of organization‟s assets. These assets are highly vulnerable to bad debts and
losses. It is therefore necessary to manage accounts receivables appropriately. Trade credit is very important to a firm because it
helps to protect its sales from being eroded by competitors and also attracts potential customers to buy at favourable terms. As
long as there is competition in the industry, selling on credit becomes inevitable. A business will lose its customers to competitors
if it does not extend credit to them.
Management of debt which aims at maintaining an optimal balance between each of the accounts receivables components, that
is, cash, receivables, inventory and payables is a fundamental part of the overall corporate strategy to create value and is an
important source of competitive advantage in businesses (Deloof, 2012). In practice, it has become one of the most important
issues in organizations with many financial executives struggling to identify the basic accounts receivables drivers and the
appropriate level of accounts receivables to hold so as to minimize risk, effectively prepare for uncertainty and improve the
overall performance of their businesses (Lamberson, 2015).
The term debtors are defined as „debt‟ owned to the firm by customers arising from sale of goods or services in the ordinary
course of business” (Pike and Cheng, 2001). The three characteristics of receivables the element of risk, economic value and
futurity explain the basis and the need for efficient management of receivables (Jackling et al., 2004). The element of risk should
be carefully analyzed. Cash sales are totally riskless but not the credit sales, as the same has yet to be received. Accounts
receivables management entails managing the firm's inventory and receivables in order to achieve a balance between risk and
returns and thereby contribute positively to the creation of a firm value. Excessive investment in inventory and receivables
reduces the profit, whereas too little investment increases the risk of not being able to meet commitments as and when they
become due (Harris, 2005).
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH (IJARKE Business & Management Journal)
Abstract
Many companies are offering credit to their customers as a way of retaining existing customers or as a strategy to get acquire
new customers. Therefore, there is need to manage effectively this credit hence the purpose of this study was determining the
effects of Debtors‟ Management on financial performance of construction firms in Mombasa in Kenya, with specific interest
in the construction industry. To strengthen the conceptual framework the researcher used theories such as the credit risk
theory, liquidity preference theory, free cash flow theory, factoring theory and the Knight theory of profits. The study adopted
a descriptive research design. The study collected primary data through use of questionnaires with respondents in the
construction industry. The target population was 273 employees of construction firms in Mombasa County. The sample size
selected was 162, comprising the chief executive officers, finance officers and accountants. Data analysis was done using
frequency counts, percentages, means and standard deviation, regression, correlation and the information generated will be
presented in form of graphs, charts and tables. The study concluded that credit policy, liquidity management, debtors‟ turnover
and factoring have a significant effect on financial performance of construction firms in Mombasa County. The study
recommended that construction firms should develop stronger credit policies; that construction firms should diversify their
activities to ensure that they are liquid all the time; that construction firms should reduce the number of days they receive
finances from their debtors and that construction firms should establish other forms of mitigating financial risks.
Key words: Debtors Management, Credit Policy, Liquidity, Factoring, Financial Performance, Construction Firms
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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51 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
Construction firm‟s sector failure had been the subject of considerable research efforts in a capitalist economy. There was a
substantial amount of both theoretical and empirical comparison of construction firms research relating to debtors‟ credit
management practices and its relationship to the failure of construction firms was due to lack of Information Access for SMEs in
Indonesia (Gunawan, 2012). However, there seemed not to be much research that focuses on sorting out the relationships among
the many measures of credit management practices that had been used by these researchers. The study described an exploratory
investigation of the relationships among a set of items used to measure the debtors‟ management practices of credit in construction
firm‟s on growth in Brazil. Brazil construction authority usually made the highest percentage of businesses in Brazil and it
recently received a great boost after the enactment of the construction firms of year 2013. The sector had hitherto been largely
unregulated especially with regard to financial hurdles, lack of proper business management skills such as accounting, book
keeping and marketing. This was one of the flagship priorities of the Vision 2050 as it was aimed at construction firms.
Construction sector firm‟s failure had been the subject of considerable research efforts in a capitalist economy. There was a
substantial amount of both theoretical and empirical comparison of construction firm sector for research relating to debtors‟ credit
management practices and its relationship to the failure of hire purchase sector for construction firms was due to lack of
Information access for in Indonesia (Gunawan, 2012). However, there seemed not to be much research that focuses on sorting out
the relationships among the many measures of credit management practices that had been used by these researchers. The study
described an exploratory investigation of the relationships among a set of items used to measure the debtors‟ management
practices of credit in construction firms on growth in Kenya. The sector had hitherto been largely unregulated especially with
regard to financial hurdles, lack of proper business management skills such as accounting, book keeping and marketing.
The debtors‟ management practices on growth according to (Pandey, 2012) stated that was a strategy that involved the process
of designing and monitoring the policies that governs how a construction firm extends credit to its customer. The idea behind this
process was to minimize the amount of bad debt that the construction firms would eventually incur due to customers failing to
honor their commitments to repay the total amount of the credit purchases. Typically, the process of debtor management begins
with evaluating potential customers in terms of credit worthiness; identifying a credit limit that carries a level of risk that the
business was willing to assume; and then monitoring how well the customer makes use of that available credit; including making
regular payments within the terms and provisions associated with the credit account. One of the basics of debtor management was
to accurately assess what type of credit line to extend to a given customer. A number of factors go into making this determination,
including the credit rating of the client, current ratio of debt to average income, and the presence of any negative items on the
customer‟s credit reports. With this information in mind, it was possible to have some idea of how much credit the customer could
reasonably be expected to manage and not present a high risk for defaulting on any outstanding balance. Abor et al. (2016) stated
that the construction firm‟s governance for the construction Sector requires proper management in order to avoid bad debts
occurrence to construction firms in South Africa.
In Kenya, investment in accounts receivables may not be a matter of choice but a matter of survival (Kakuru, 2016). Given
that investment in receivables has both benefits and costs; it becomes important to have such a level of investment in receivables
at the same time observing the twin objectives of liquidity and profitability. To remain profitable, businesses must ensure proper
management of their receivables (Ojeka, 2015). The management of receivables is a practical problem; businesses can find their
liquidity under considerable strain if the levels of their account‟s receivables are not properly regulated (Samuels & walkers,
2016). Thus, management of accounts receivables is important, for without it; receivables will build up to excessive levels leading
to declining cash flows. Poor management of receivables will definitely result into bad debts which lowers the business‟
profitability. The growth in economic activities as currently witnessed in Nigeria; in our present democratic government with its
attendant limited financial resources available to the operators of the market has no doubt brought about increase in credit
transaction (Ifurueze, 2013). The impact depends on the skill and prowess with which the companies manage their credit sales.
Beckan and Richard (2014) have seen that most companies after granting credit sales rely on them as assets without providing
adequately for possible. With this situation, the financial statements of such companies obviously will lack true and fair view
because of the fact that the amount of trade debtors cannot be fully realized. In the same vein liquidity problem is not left out
when granting credit sales. This arises from over investment in receivables especially when the debtors are of high-risk class. A
company suffering from liquidity problem implies that the cost of obtaining funds from other sources may be high and a credit
sale beyond the optimal level of credit is dangerous. On the other hand, sales level and profitability are reduced as a result of
organization to meet short term obligation that are due. One of the major reasons that may cause liquidation is illiquidity and
inability to make adequate profit. These are some of the basic ingredient of measuring the “going concern” of an establishment.
For these reasons‟ companies are developing various strategies to improve their liquidity position. Strategies which can be adapted
within the firm to improve liquidity and cash flows concern the management of working capital, areas which are usually neglected
in times of favourable business conditions (Pass & Pike, 2015). Due to the speed in which technology is changing and the
dynamics in business caused by changes in their internal and external environment, the ways in which businesses are conducted
today differ significantly from yester years. Therefore, for a credit policy to be effective it should not be static (Ojeka, 2015).
Credit policy requires to be reviewed periodically to ensure that the organizations operate in line with the competition. This
will ensure further that sales and credit departments are benefiting. While most companies have their own policies, procedures and
guidelines, it is unlikely that any two firms will define them in a similar manner. However, no matter how large or small an
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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52 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
organization is and regardless of the differences in their operations or product, the effects of credit policies usually bring about
similar consequences. Effects of a credit policy are either good enough to bring growth and profits or bad enough to bring
declination and losses. This similarity is as a result of the aim of every manager which is to collect their receivables efficiently and
effectively, thus maximizing their cash inflows (Ojeka, 2015). This is contrary under competitive business environment were
survival depends on the volume of turnover (sales) which in turn leads to trade debt accumulation. Here debtors cannot be
completely avoided it is therefore the work of the management to initiate policies concerning credit sales so that they will survive
in the business environment they find themselves.
2. Research Problem
Management of debtors is one of the several functional areas of Management, but it is the center to the success of any
construction firms. Inefficient debtor management combined with the uncertainty of the firm‟s credit environment often led
construction firms to serious problems. Careless, undisciplined or unstructured debtor management practices are the main cause of
failure for construction firms in most developing countries (Wekesa, 2018). Regardless of the construction firms led by owner or
hired credit manager, if the financial decisions are wrong, profitability of the business will be adversely affected. Consequently, a
business organization‟s growth could also be affected because of inefficient credit record management. Record management
enables a firm to refer to mistakes and be efficient in future outcomes. Most construction firms had often failed due to lack of
knowledge of efficient debtor management as pointed out by (Teruel & Solan, 2015).
An analysis of groups of construction firms in Kenya shows that total debtor‟s portfolio represents 13% of the balance sheet
size of the firm. The analysis also shows that the average value of debtors is 50% of the total borrowing. Teruel and Solan (2015)
suggested that managers can create value by reducing their firm‟s number of days of accounts receivables. The construction
industry has huge accounts receivables and would have been more profitable if they were to be reduced significantly and the funds
applied towards other cash flow requirements. According to Kwansa and Parsa (2016) quoted in a study by Gu and Gao (2017),
loan default was found to be one of the events unique to bankrupt companies.
Locally, studies that pivoted linearly on the growth from debtor management practices that had been done include: Wanyungu
(2015) who did a research financial management practices of micro and small enterprises in Kenya, a case of Kibera, Musau
(2015) looked deeply at debtors‟ management practices on profitability of public listed energy companies, Ngugi (2015) examined
determinets of debtors management in the hotel industry, Waititu (2015) evaluated effects of debtors‟ management on profitability
of manufacturing firms in Kenya while Oware (2017) examine debtors management practices in the water industry and finally
Wekesa (2018) examined the effects of debtors‟ management practice on growth of Hire Purchase companies in Kenya. None of
these local studies has ever directly focused on debtor management practices in construction firms in Mombasa. It is in this light
that the current study seeks to fill the existing research gap by studying the influence of debtor management practices on
profitability of construction firms in Mombasa County.
3. Study Objectives
3.1 General Objective
The main objective of the study was to investigate the influence of social media monitoring on digital marketing of Small and
Medium Enterprises (SMEs) in Kenya.
3.2 Specific Objectives
The study was guided by the following specific objectives:
i. To examine the effect of credit policy on financial performance of construction firms in Mombasa County.
ii. To determine the effect of liquidity management on financial performance of construction firms in Mombasa County.
iii. To evaluate the effect of debtor‟s turnover on financial performance of construction firms in Mombasa County.
iv. To examine the effect of factoring on financial performance of construction firms in Mombasa County.
4. Review of Literature
4.1 Theoretical Framework
4.1.1 Credit Risk Theory
Although people have been facing credit risk ever since early ages, credit risk has not been widely studied until recent 30
years. Early literature (before 1974) on credit uses traditional actuarial methods of credit risk, whose major difficulty lies in their
complete dependence on historical data. Up to now, there are three quantitative approaches of analyzing credit risk: structural
approach, reduced form appraisal and incomplete information approach (Crosbie et al., 2017). Melton 1974 introduced the credit
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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53 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
risk theory otherwise called the structural theory which is said the default event derives from a firm‟s asset evolution modeled by
a diffusion process with constant parameters. Such models are commonly defined “structural model “and based on variables
related a specific issuer. An evolution of this category is represented by asset of models where the loss conditional on default is
exogenously specific. In these models, the default can happen throughout all the life of a corporate bond and not only in maturity
(Longstaff and Schwartz 2015). This theory supports the credit risk objective.
4.1.2 Liquidity Preference Theory
Liquidity preference theory was developed by Keynes in the mid-1930s. Keynes explained the detention of money by the
existence of three motives: the transaction-motive, the precautionary-motive and the speculative-motive (Keynes, 1936). Based on
liquidity preference theory, the central bank sets the rate of interest in order to control the price of financial assets through the
demand for money. The higher the rate of interest, the lower the price of assets with given expectations, and the higher is the
demand. Liquidity preference theory suggests that an investor demands higher interest rate, premium on securities with long term
maturities, which carry greater risk, because all other factors being equal, investors prefer cash or other highly liquid holdings.
Liquidity preference is the core of the relationship between pension funds and assets markets.
Precautionary motive of holding cash is for contingencies or unforeseen circumstances arising from course of business. Real
estate investors invest in real estates. The returns earned from rent income are invested in other properties. When interest rates are
high in the economy, realtors invest in affordable housing, whereas when interest rates are low realtors invest in high end
properties. Transaction-motive refers to cash required by firms to meet its day to day needs of its business operations.
Construction firms hold a portion of their funds to meet their financial obligations as and when they fall due. This motive helps
the construction firms to maintain a good cash flow leaving sufficient fund for investment and away from cash misuse (Marney &
Tarbert, 2017).
4.1.3 Free Cash Flow Theory
The Free Cash Flow Theory by Jensen (1986) presuppose that managers mount up cash so as to augment the amount of
resources they can be in command of and to get unrestricted authority over the investment decisions of the firm. Hence, managers
fancy to cling to more cash and soaring amounts of investment in working capital to lessen the investment risk of the firm so as to
reduce the likelihood of insolvency and consign excess import to deterrent motivation of holding cash (Opler et al., 1999).
Amassing of cash and having a bulky collection of liquidity accessible when wanted throughout the working capital cycle
decreases the anxiety on the managers to execute their responsibilities efficiently and permits them to select projects that make
them contented however may not necessarily keep shareholders pleased (Drobetz, Gruninger & Hirschvogl, 2018). Moreover, the
managers are not subject to scrutiny of the capital markets when funding new projects internally because they do not have to get
new funds externally, which could as well be very costly (Ferreira & Vilela, 2018).
There several implications derived from the Free Cash Flow theory. Companies with larger agency problems are inclined to
build up cash and have exceedingly liberal working capital policies to facilitate adequate liquidity even if they do not have
excellent investment prospects. Thus, cash holdings increase mostly in firms with soaring free cash flows produced and well-
established management, which does not face a great deal of demands to pay out the amassed cash holdings to shareholders in
form of dividends (Bates, Kahle & Stulz, 2019). Such firms might in fact be sloppy in collecting its accounts receivables and may
markedly invest in inventories, as the demands are not there to free the cash and heighten exploitation of it. Opler et al., (2019)
points out that business might be holding surplus cash with the intention of shielding themselves from superfluous takeover
endeavors and that these firms may be harder to assess as a result of liquidity. Equally, firms may have high levels of investments
in working capital. It is against this backdrop that the study sought to determine the mediating role of cash holdings on the
relationship between short-term financing decisions and financial performance of construction firms in Mombasa County.
4.1.4 Factoring Theory
Factoring theory was developed by Fasheng and Kouvelis in the mid-1970s. The contractor is capital constrained (i.e., the
supplier‟s initial capital may be insufficient to produce what is needed in support of the retail demand) and in need of short-term
financing, which is provided by a third-party bank (or a factor). For all cases, the bank offers a fairly priced loan for relevant risks.
Failure of the supplier‟s loan repayment leads to bankruptcy (Fasheng & Kouvelis, 2018).
Receivables constitute a significant portion of current assets of a firm. But, for investment in receivables, a firm has to incur
certain costs such as costs of financing receivables and costs of collection from receivables. Further, there is a risk of bad debts
also. It is, therefore, very essential to have a proper control and management of receivables. In fact, maintaining of receivables
poses two types of problems; (i) the problem of raising funds to finance the receivables, and (it) the problems relating to
collection, delays and defaults of the receivables. A small firm‟ may handle the problem of receivables management of its own,
but it may not be possible for a large firm to do so efficiently as it may be exposed to the risk of more and more bad debts. In such
a case, a firm may avail the services of specialized institutions engaged in receivables management, called factoring firms
(Fasheng & Kouvelis, 2018).
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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4.1.5 Knight’s Theory of Profits
The Knight's Theory of Profit was proposed by Frank H. Knight, who believed profit as a reward for uncertainty-bearing, not
to risk bearing. Simply, profit is the residual return to the entrepreneur for bearing the uncertainty in business. In this theory he
claims that bearing uncertainty is the least important of the entrepreneurial functions, and that introducing innovation and adapting
to the innovation of others are more important (Brooke, 2018).
Knight had made a reasonable refinement between the hazard and vulnerability. The hazard can be named a measurable and
non-measurable hazard. The measurable dangers are those whose likelihood of event can be foreseen through factual information.
For example, chances because of the flame, burglary, or mishap are measurable and consequently can be guaranteed in return for a
premium. Such measure of premium can be added to the absolute expense of generation (Brooke, 2018). Knight believes that
profit might arise out of the decisions made concerning the state of the market, such as decisions with respect to increasing the
degree of monopoly in the market, decisions regarding holding stocks that might result in the windfall gains, decisions taken to
introduce new product and technique. The major criticism of the knight‟s theory of profit is, the total profit of an entrepreneur
cannot be completely attributed to uncertainty alone. There are several functions that also contribute to the total profit such as
innovation, bargaining, coordination of business activities (Brooke, 2018).
5. Conceptual Framework
Bryman & Bell (2015) defines conceptual framework as a concise description of phenomenon under study accompanied by a
graphical or visual depiction of the major variables of the study. According to Young (2009), conceptual framework is a
diagrammatical representation that shows the relationship between dependent variable and independent variables. A conceptual
framework shows the relationship between independent and dependent variable. In this study, the dependent variable is the
financial performance of construction firms while the independent variables are credit policy, Liquidity management, debtor‟s
turnover and factoring.
Independent Variables Dependent Variable
Figure 1 Conceptual Framework
6. Review of Study Variables
6.1 Credit Policy
Credit Policy can be viewed as written guidelines that set the terms and conditions for supplying goods on credit, customer
qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency. This term can also
Credit Policy
Credit approval procedures
Customers Credit worthiness
Credit administration practice
Debtors Turnover
Account receivable practice
Turnover Levels
Trade-Off of sales and profits
Factoring
Contracts with creditors
Source of financing
Affordable funds
Liquidity Management
Optimal liquidity Level
Liquidity and performance
Balanced Liquidity
Financial Performance of
Construction Firms
Return on Equity
Return on Assets
Return on Capital Employed
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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55 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
be referred to as collection policy. It is also the guidelines that spell out how to decide which goods are sold on open account, the
exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts. Lawrence (2015), the
objective of managing accounts receivable is to collect receivable without losing sales from high-pressure collection techniques.
Accomplishing this objective encompasses; credit selection and standard which involve the application of technique for
determining which customer should receive credit. This process involves evaluating the customer‟s creditworthiness and
comparing it to the firm‟s credit standard, its minimum requirements for extending credit to customers and credit monitoring
which involves the review of the firm‟s account receivable to determine whether customers are paying according to the stated
credit terms. Slow payments are costly to a firm‟s investment in account receivable.
Debtor management means the process of decisions relating to the investment in business debtors. In credit selling, it is certain
that we have to pay the cost of getting money from debtors and to take some risk of loss due to bad debts. To minimize the loss
due to not receiving money from debtors is the main aim of debtor management. Economic conditions and firms credit policies
are the chief influence on the level of a firm‟s account receivable (James, 2015). The trade-off between increase in the market
share through credit sales and the collectability of the account receivable affects firm‟s liquidity and its eventual profitability. A
firm may report large profit and still suffer liquidity problem if bulk of its transactions are in account receivable and collection
policy in not effective. Credit and collection policies encompasses the quality of accounts accepted, the credit period extended, the
cash discount given, certain special terms and the level of collection expenditure. In each case, the credit decision involves a
trade-off between the additional profitability and the cost resulting from a change in any of these elements.
Receivable management begins with the decision of whether or not to grant credit. Where goods are sold on credit, a
monitoring system is important, because without it, receivable will have built up to excessive levels, cash flow (liquidity) will
decline and bad debts will offset the profit on sales. Corrective action is often needed and the only way to know whether the
situation is getting out of hand is to set up and then follow a good receivable control system (Eugene, 2015). Eugene, (2015),
states that optimal credit policy, hence the optimal level of accounts receivable, depends on the firm‟s own unique operating
conditions. A firm with excess capacity and low variable production cost should extend credit more liberally and carry a higher
level of receivable than a firm operating at full capacity on slim profit margin.
6.2 Liquidity Management
Liquidity management is a concept that is receiving serious attention all over the world especially with the current financial
situations and the state of the world economy. The concern of business owners and managers all over the world is to devise a
strategy of managing their day to day operations in order to meet their obligations as they fall due and increase profitability and
shareholder‟s wealth (Owolabi & Ibida, 2015). The importance of liquidity management as it affects corporate profitability in
today‟s business cannot be over emphasis. The crucial part in managing working capital is required maintaining its liquidity in
day-today operation to ensure its smooth running and meets its obligation (Eljelly, 2014).
Liquidity plays a significant role in the successful functioning of a business firm. A firm should ensure that it does not suffer
from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal
and the external analysts because of its close relationship with day-to-day operations of a business (Bhunia, 2015). Dilemma in
liquidity management is to achieve desired trade between liquidity and profitability (Raheman & Nasr 2017). Liquidity
requirement of a firm depends on the peculiar nature of the firm and there is no specific rule on determining the optimal level of
liquidity that a firm can maintain in order to ensure positive impact on its profitability.
Akenga (2015) evaluated effects of liquidity on financial performance of firms listed at the NSE. In order to meet their
obligations, firms are expected to hold a certain percentage of their total finance in cash. However, majority of the institutions
especially financial institutions tend to focus only on profit maximization at the expense of liquidity management. It is therefore
the role of financial managers to establish effective mechanisms of meeting a firm‟s obligations and profit maximization. The
objective of the study was to establish the effect of current ratio, cash reserves and debt ratio on financial performance of firms
listed at the Nairobi Securities Exchange (NSE). Causal research design was adopted. Purposive sampling technique was used to
select 30 firms. The data was analyzed using descriptive and inferential statistics It was found that current ratio and cash reserves
have a significant effect on ROA with a p value of less than 0.05. The debt ratio was found to have no significant effect on ROA
as it had a significance level of 0.571.
6.3 Debtors Turnover
The goal of debtor‟s turnover/accounts receivables management is to maximize shareholders‟ wealth. Receivables are large
investments in firm's asset, which are, like capital budgeting projects, measured in terms of their net present values (Emery et al.,
2014). Receivables stimulates sales because it allows customers to assess product quality before paying, but on the other hand,
debtors involve funds, which have an opportunity cost. The three characteristics of receivables - the element of risk, economic
value and futurity explain the basis and the need for efficient management of receivables. According to Berry and Jarvis (2016) a
firm setting up a policy for determining the optimal amount of account receivables has to take in account the following: The trade-
off between the securing of sales and profits and the amount of opportunity cost and administrative costs of the increasing account
INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.4article05
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56 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 4 May – Jul. 2019
receivables. The level of risk the firm is prepared to take when extending credit to a customer, because this customer could default
when payment is due.
Accounts receivable measures the unpaid claims a firm has over its customers at a given time, usually comes in the form of
operating line of credit and is mainly due within a relatively short time period (up to one year). The volume of accounts receivable
indicates firm's supply of trade credit while accounts payable shows its demand of trade credit. The study of accounts receivable
and accounts payable during periods of financial crisis is an important topic, particularly when the global economy is going
through a credit shock. During global financial crisis, characterized by high liquidity risk faced by the banks, trade credits may
increase, operating as a substitute for credits, or decrease - acting as their complement. Bastos and Pindado (2012), for example,
suggest that credit constraints during a financial crisis cause firms holding high levels of accounts receivable to postpone
payments to suppliers, which act in the same manner with their suppliers. This gives rise to a trade credit contagion in the supply
chain characterized by a cascading effect. The current financial crisis provides economists a unique opportunity to study the role
of alternative financial sources during periods of breakdown of institutional financing.
Accounts receivables are one of the most important parts of credit management. Receivables often represent large investment
in asset and involve significant volume of transactions and decisions. However, there are considerable differences in the level of
receivables in firms around the world. Demirgüç-Kunt and Maksimovic (2015) present evidence that in countries such as France,
Germany, and Italy account receivable exceed a quarter of firms' total assets, while Rajan and Zingales (2015) find that 18% of
the total assets of US firms consists of receivables. Accounts receivable management is a crucial filed of corporate finance
because of its effects on a firm‟s profitability and risk, and consequently on the firm's value.
Lyani, Namusonge and Sakwa (2018) examined relationship between account receivable management practices and growth of
small and medium enterprises in Kakamega County. Accounts receivable management practices and growth of SME. Descriptive
statistics such as mean, standard deviation and homoscedasticity were used to test for normality of data. Ordinary Least Square
method was utilized to establish the cause-effect relationship between variables while hypotheses were tested at5% significance
level. The overall model was statistically significant at F=11.298and p-value (0.000< 0.05). The findings revealed that efficient
Accounts receivable management practices, when adopted by SMEs lead to growth. The study recommended that owners and
managers should be trained and made to understand the various techniques of managing Accounts receivable levels. The findings
would form a basis for government and policy makers in management decision making, to formulate Accounts receivable
management strategies that would help minimize bad and delinquent debt.
Deloof (2015) study used accounts receivable, accounts payable, inventories and the cash conversion cycle as a comprehensive
measure of working capital management and found a significant negative relation between operating income and the number of
days accounts receivable, inventories and accounts payable. Deloof (2015) based on the study findings recommended that
managers can increase corporate profitability by reducing the number of days accounts receivable and inventories turnover. The
credit risk theory state that investors risk of loss, financial or otherwise, arise from a borrower who does not pay his or her dues as
agreed in the contractual terms. Accounts receivable are credit in the provision of goods or services to a person or entity on agreed
terms and conditions where payments are to be made later with or without interest. When the debtor does not pay on due date, the
lender is exposed to credit risk which may in turn lead to default and bad debts (Nyunja, 2014).
6.4 Factoring
Mian (2015) suggested a simple definition of Factoring being company's sale of its account‟s receivables to a financial
institution other than its captive one. Sopranzetti (1999) defined Factoring through the eyes of service providers, the Factors,
being a financial institution that are in the business of buying and managing other firm's accounts receivables whereas through a
typical Factoring contract the Factor bears credit risk and the responsibility to monitor the credit quality of the outstanding
accounts receivable.
Recently, Soufani (2014) and (Deacon & Whale, 2015) linked the two classifications of Factoring (Notification and right of
Factor to Recourse), they argued that "despite its early foundation, Factoring has been ignored as a source of corporate finance
this why some companies may not favor to Factor its receivables to avoid notifying its customer. This is in our hypothesis is tested
whether the Factor is seen by the companies as a sign of strength or weakness. Overcoming this obstacle, the notification and the
negative reputation of the factoring, encouraged a subsequent development of invoice discounting on a non-notification basis,
against ledger of sales, so-called "Non-Notification-Factoring". They explained the mechanism of non-notification Factoring
through making advance only on the security of receivables, as the seller checks his own credit and bears probably credit losses
and thus do his own collection and ledgering then turn on the proceeds in their original form to the lender.
Recourse Factoring is a typical asset-based lending “ABL” where assets are used as a collateral for the loan while title and risk
remains with the seller unlike nonrecourse Factoring whereby assets are sold to the Factor as that title and risk passed to him
(Weisel, Harm & Bradley 2013). Tomusange (2015)examine facting as a financing alternatives for African SMEs. Factoring could
enable African SMEs to gain access to finance, as underwriters mainly place the risk on the receivables as opposed to the firm
itself. Despite its benefits, factoring has not taken root in sub-Saharan Africa. The purpose of this phenomenological study was to
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explore the obstacles and prospects to stimulating awareness, availability, acceptance, and utilization of factoring in Africa. Data
on the lived experiences of 22 executives providing or promoting factoring in 16 African countries were collected through semi
structured interviews; these data were analyzed using the Braun and Clarke thematic approach. Four themes emerged: supply-side
conditions, demand-side conditions, business environment conditions, and facilitating institutions and industries. Results suggest
high factoring prospects, legal and regulatory impediments, low awareness levels, reluctance of banks to avail factoring, high
entry barriers for nonbank factors, a lack of credit insurance, and a lack of an open account trade culture. A framework was
recommended, based on these findings, along with actions for factoring development in Africa. Implications for positive social
change include increased awareness which may boost factoring. Improved financing options may yield improved African SME
competitiveness, which in turn, may result in improved job opportunities, household incomes, quality of life, and more broadly,
Africa‟s economic growth.
6.5 Financial Performance
Profitability is the ability to make profit from all the business activities of an organization, company, firm, or an enterprise. It
measures management efficiency in the use of organizational resources in adding value to the business. Profitability may be
regarded as a relative term measurable in terms of profit and its relationship with other elements that can directly influence the
profit. Corporate profitability is a measure of the amount by which a company's revenues exceeds its relevant expenses. It is an
evaluation of management's ability to create earnings from revenue-generating bases within an organization (Ifurueze, 2013).
Thus, Management is interested in measuring the operating performance in terms of profitability. Hence, a low profit margin
would suggest ineffective management and investors would be hesitant to invest in the firm. Profitability is the ability to make
returns from all the business activities of an organization, company, firm, or an enterprise and the concern of every firm lies with
its profitability. Profitability shows how efficiently the management can make profit by using all the resources available in the
market (Nwaechina 2013). Profitability is also considered as the rate of return on investment and a widely used financial measure
of performance. Hence, if there will be an unjustifiable over investment in current assets then this would negatively affect the rate
of return on investment. The primary goal of credit management is to control current financial resources of a firm in such a way
that a balance is reached between profitability of the firm and risk associated with that profitability (Ifurueze 2013). The greater
the risk associated with a business the more profitable it is adjudged and vice-versa. Profitability is determined by the capital
structure, size, growth, market discipline, risk and reputation of a firm. Corporate profitability is measured using ratio analysis.
Profitability in relation to sales includes ratios such as gross profit margin (GPM), net profit margin (NPM), operating expense
ratio (OER), and so on.
However, profitability in relation to investment, which to a greater extent justifies the efficiency and performance of a firm,
includes ratios such as return on investment (ROI), return on equity (ROE), earnings per share (EPS), dividend per share (DPS),
dividend pay-out ratio (DPR), dividend yield (DY) and earnings yield (EY), price-earnings ratio (P/E), market value to book value
ratio (MV/BV), and Tobin‟s Q (T-Q). Profitability and management efficiency are usually taken to be positively associated such
that poor current profitability may threaten current management efficiency and poor management efficiency may threaten
profitability. It is related to the goal of shareholders‟ wealth maximization, and investment in current assets is made only if an
acceptable return is obtained. Therefore, the management of investment in current assets is an aspect of corporate finance and it
has the capacity of influencing how profitable a firm is (Ifurueze, 2013).
7. Research Methodology
7.1 Research Design
Marczyk, DeMatteo & Festinger (2018) defines research design as the strategy that will be in use to integrate the different
components of the study in a coherent and logical manner that ensures the statement of the problem is addressed effectively. It
further provides the roadmap of collection, measurement and analysis of data. This study will adopt a cross sectional survey and
mixed methods research design. Tashakori and Teddlie (2019), argue that in cross sectional research design, data is collected at
once perhaps over a period of days, weeks or months in order to answer research questions.
This cross sectional research design is preferred because of its ability to combine quantitative and qualitative methods and it is
deemed to be the most effective to significantly contribute to the depth and specificity of the study (Creswell, 2018). Mixed
methods research design will be used in the study since some dataset may be inadequate in answering the research questions, an
explanation of initial results will be required, generalizability of quantitative findings will be desired or broader and deeper
understanding of a research problem will be necessary (Hadi, David, Closs, & Briggs, 2017).
7.2 Target Population
This study targeted 91 constructions firms registered by National Construction Authority operating in Mombasa County. The
study targeted finance officers, accountants, chief executive officers making it to 273. Zikmund, Babin, Carr and Griffin, (2017)
defined a population in research as any group of institutions, people or objects that have at least one characteristic in common.
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Sekaran (2015) further explains that a target population in experimental research refers to the total number of all possible
individuals relating to a topic which could, if funds were available, be included in a study.
Table 1 Target Population
Group Target Population
Chief Executive Officers 91
Finance Officers 91
Accountants 91
TOTAL 273
7.3 Sampling Technique
The study adopted Stratified random Sampling technique with total sample size drawn from each stratum (sub-sector) and
elements selected from each stratum using simple random sampling. A stratified sampling technique will be used because target
population is classified in stratums. As Bryman and Bell (2015) explains, stratified random sampling is used to reduce extent of
variability of heterogeneity of the study population with respect to the characteristics that have a strong correlation with what one
tries to ascertain. The study therefore will adopt this method since construction firms have various sub-sectors with varied
characteristics that would be useful to study to achieve greater accuracy.
7.4 Sample Size
Sample size determination is the act of choosing the number of observations or replicates to include in a statistical sample. The
sample size is an important feature of any empirical study in which the goal is to make inferences about a population from a
sample (Bryman and Bell, 2015). The total sample size for this study will be obtained using the formulae developed by Cooper
and Schinder, (2013) together with (Kothari, & Garg, 2018). The sample size was 162.
n = N / 1 + N (α) ²
Where:
n= the sample size,
N= the sample frame (population)
α= the margin of error (0.05%).
n = 273 / [1+ 273 (0.05)2 ]
= 162
Table 2 Sample Size
Group Sample Size
Chief Executive Officer 54
Finance Officer 54
Accountants 54
TOTAL 162
7.5 Data Analysis
Kothari and Garg (2018) argue that data collected has to be processed, analyzed and presented in accordance with the outlines
laid down for the purpose at the time of developing the research plan. Data analysis involves the transformation of data into
meaningful information for decision making. It involved editing, error correction, rectification of omission and finally putting
together or consolidating information gathered. The collected data was analyzed quantitatively and qualitatively. Descriptive and
inferential statistics will be done using SPSS version 22 and specifically multiple regression model will be applied. Set of data
was described using percentage, mean standard deviation and coefficient of variation and presented using tables, charts and
graphs. Fraenkel and Wallen, (2014) argue that regression is the working out of a statistical relationship between one or more
variables. The researcher used a multiple regression analysis to show the influence of the independent variables on the dependent
variables.
The multiple regression equation is as follows;
Y=α + β1X1 + β2X2 + β3X3 + β4X4 + ε
Where,
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Y = Represents the dependent variable, Profitability of Construction Firms
α= Constant
β1, β2, β3 and β4 = Partial regression coefficient
X1 = Credit Policy, X2= Liquidity, X3= Debtors Turnover and X4 = Factoring
ε = error term or stochastic term.
8. Data Analysis and Results
8.1. Descriptive Statistics
8.1.1 Credit Policy
The first objective was to examine the effect of credit policy on the financial performance of construction firms in Mombasa
County. The statement that capacity of a debtor is evaluated before credit is approved had a mean score of 3.33 and a standard
deviation of 1.554. The statement that conditions and terms of the debtors is evaluated before offering credit had mean score of
3.18 and a standard deviation of 1.537. The statement that collateral of the debtor is evaluated before offering credit had a mean
score of 3.13 and standard deviation of 1.683. The statement that capability of the debtor is evaluated before offering credit had a
mean score of 3.24 and standard deviation 1.615. This result are in agreement with (Ifurueze, 2013) as shown in Table 3.
Table 3 Credit Policy
N Mean
Std.
Deviation
Capacity of a debtor is evaluated before credit approval 115 3.33 1.554
Conditions and terms of the debtor is evaluated before
offering credit. 115 3.18 1.537
Collateral of the debtor is evaluated before offering credit. 115 3.13 1.683
Capability of the debtor is evaluated before offering credit 115 3.24 1.615
Valid N (listwise) 115
8.1.2 Liquidity Management
The second objective was to evaluate the effect of liquidity management on financial performance of construction firms in
Mombasa County. The statement that action on defaulters was set in place by the credit department had a mean score of 2.93 and
a standard deviation of 1.582. The statement that recovered amount in a period had been increasing according to the credit
department had a mean score of 3.51 and a standard deviation of 1.435. The statement that liquidity of the construction firms has
been increasing in the last three years had a mean score of 3.37 and a standard deviation of 1.641. The statement that payments to
suppliers are normally made on cash basis had a mean score of 3.67 and a standard deviation of 1.599. These results agree with
(Akenga, 2015) as shown in Table 4.
Table 4 Liquidity Management
N Mean
Std.
Deviation
Action on defaulters was set in place by the credit
department. 115 2.93 1.582
Recovered amount in a period had been increasing
according to the credit department 115 3.51 1.435
Liquidity of the business had been increasing in the last
three years 115 3.37 1.641
Payments to suppliers are normally made on cash basis. 115 3.67 1.599
Valid N (listwise) 115
8.1.3 Debtor’s Turnover
The third objective was to determine the effect of debtor‟s turnover on financial performance of construction firms in
Mombasa County. The statement that available debt collection policy has assisted towards effective debt management had a mean
score of 3.52 and a standard deviation of 1.416. The statement that construction firms sets and follows debt collection policy and
terms had a mean score of 3.00 and a standard deviation of 1.595. The statement that the organization implements these terms and
policies in case of failure to repay the loan had a mean score of 3.27 and a standard deviation of 1.385. The statement that
favourable credit terms stimulates sales had a mean score of 3.49 and a standard deviation of 1.471. These results agree with
(Lyani, Namusonge, & Sakwa, 2018) as shown in Table 5.
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Table 5 Debtor’s Turnover
N Mean
Std.
Deviation
Available debt collection policy has assisted towards
effective debt management 115 3.52 1.416
Construction firms sets and follows debt collection policy
and terms 115 3.00 1.595
The organization implements these terms and policies in
case of failure to pay the loan 115 3.27 1.385
Favourable credit terms stimulates sales 115 3.49 1.471
Valid N (listwise) 115
8.1.4 Factoring
The fourth objective was to examine the influence of factoring on financial performance of construction firms in Mombasa
County. The statement that contracts helps construction firms to buy materials at low prices had a mean score of 3.26 and a
standard deviation of 1.493. The statement that invoice discounting helps construction firms obtain building materials at a lower
price had a mean score of 3.40 and a standard deviation of 1.456. The statement in disagreement that factoring helps construction
firms reduce purchasing risks had a mean score of 2.75 and a standard deviation of 1.290. These results agree with (Tomusange,
2015) as shown in Table 6.
Table 6 Factoring
N Mean
Std.
Deviation
Contracts helps construction firms to buy materials at low
prices 115 3.26 1.493
Invoice discounting helps construction firms obtain
building materials at a lower price. 115 3.40 1.456
Factoring helps construction firms reduce purchasing risks 115 2.75 1.290
Valid N (listwise) 115
8.1.5 Financial Performance
Business growth has been as a result of proper financial management practices undertaken by the firm had a mean score of
3.69 and a standard deviation of 1.624. The statement that there had been an improvement in debtors‟ collection by using credit
collection policies had a mean score of 3.10 and a standard deviation of 1.441. The statement that the business growth depends on
sales returns in terms of price of the product, sales in the period, number of customers in a period and credit collection policy in
place had a mean score of 3.69 and a standard deviation of 1.541. The statement that managerial competences had been applied
well, it played a positive role on the business growth had a mean score of 3.37 and a standard deviation 1.570. as shown in Table
7. These results agree with (Makori, Jagongo, & Simiyu, 2017).
Table 7 Financial Performance
N Mean
Std.
Deviation
Business growth has been as a result of proper financial
management practices undertaken by the firm. 115 3.69 1.624
There had been an improvement in debtors‟ collection by using
credit collection policies. 115 3.10 1.441
The business growth depends on sales returns in terms of price of
the product, sales in the period, number of customers in a period and
credit collection policy in place.
115 3.69 1.541
Managerial competences had been applied well, it played a
positive role on the business growth 115 3.37 1.570
Valid N (listwise) 115
8.2 Inferential Statistics
8.2.1 Correlation Analysis
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To establish the relationship between the independent variables and the dependent variable the study conducted correlation
analysis which involved coefficient of correlation and coefficient of determination.
Pearson Bivariate correlation coefficient was used to compute the correlation between the dependent variable (Financial
Performance) and the independent variables (Credit policy, Liquidity management, Debtor‟s Turnover and Factoring). According
to Sekaran, (2015), this relationship is assumed to be linear and the correlation coefficient ranges from -1.0 (perfect negative
correlation) to +1.0 (perfect positive relationship). The correlation coefficient was calculated to determine the strength of the
relationship between dependent and independent variables (Kothari & Gang, 2014).
Total 8 Pearson Correlations
Financial
Performance
Credit
Policy Liquidity
Debtors
Turnover Factoring
Financial
Performance
1
115
Credit
Policy
.517**
1
.000
115 115
Liquidity .177 .433**
1
.000 .000
115 115 115
Debtors
Turnover
.421**
.261**
.419**
1
.000 .005 .000
115 115 115 115
Factoring .113 .272**
.560**
.486**
1
.000 .003 .000 .000
115 115 115 115 115
**. Correlation is significant at the 0.01 level (2-tailed).
In trying to show the relationship between the study variables and their findings, the study used the Karl Pearson‟s coefficient
of correlation (r). This is as shown in Table 8 above. According to the findings, it was clear that there was a positive correlation
between the independent variables, credit policy, liquidity management, debtor‟s turnover and factoring and the dependent
variable financial performance. The analysis indicates the coefficient of correlation, r equal to 0.517, 0.177, 0.421 and 0.113 for
credit policy, liquidity management, debtor‟s turnover and factoring respectively. This indicates positive relationship between the
independent variable namely credit policy, liquidity management, debtor‟s turnover and factoring and the dependent variable
financial performance.
8.2.2 Coefficient of Determination (R2)
To assess the research model, a confirmatory factors analysis was conducted. The four factors were then subjected to linear
regression analysis in order to measure the success of the model and predict causal relationship between independent variables
(Credit policy, liquidity management, debtor‟s management and factoring), and the dependent variable (Financial Performance).
Table 9 Model Summary
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .771a .595 .580 2.30880
a. Predictors: (Constant), Factoring, Credit Policy, Liquidity, Debtors Turnover
The model explains 59.5% of the variance (R Square = 0.595) on Financial Performance. Clearly, there are factors other than
the four proposed in this model which can be used to predict financial sustainability. However, this is still a good model as
Bryman and Bell, (2018) pointed out that as much as lower value R square 0.10-0.20 is acceptable in social science research. This
means that 59.5% of the relationship is explained by the identified four factors namely credit policy, liquidity management,
debtor‟s turnover and factoring. The rest 40.5% is explained by other factors in the financial performance not studied in this
research. In summary the four factors studied namely, credit policy, liquidity management, debtor‟s turnover and factoring also
explains 59.5% of the relationship while the rest 40.5% variation is explained by other factors which are not related to the four
variables.
8.2.3 Analysis of Variance (ANOVA)
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The study used ANOVA to establish the significance of the regression model. In testing the significance level, the statistical
significance was considered significant if the p-value was less or equal to 0.05. The significance of the regression model was as
per Table 10 below with P-value of 0.00 which is less than 0.05. This indicates that the regression model is statistically significant
in predicting factors of financial performance. Basing the confidence level at 95% the analysis indicates high reliability of the
results obtained. The overall Anova results indicates that the model was significant at F = 18.672, p = 0.000
Table 10 ANOVA
Model Sum of Squares df
Mean
Square F Sig.
1 Regression 398.128 4 99.532 18.672 .000b
Residual 586.359 110 5.331
Total 984.487 114
a. Dependent Variable: Financial Performance
b. Predictors: (Constant), Factoring, Credit Policy, Liquidity, Debtors Turnover
8.2.4 Regression Coefficients
The researcher conducted a multiple regression analysis as shown in Table 4.15 so as to determine the relationship between
financial performance of construction firms in Mombasa County and the four variables investigated in this study.
The regression equation below established that taking all factors into account (Financial Performance of Construction firms in
Mombasa County) constant at zero financial performance of construction firms in Mombasa County will be 12.742. The findings
presented also showed that taking all other independent variables at zero, a unit increase in credit policy would lead to a 0.318
increase in the scores of financial performance of construction firms in Mombasa County; a unit increase in liquidity management
would lead to a 0.233 increase in the scores of financial performance of construction firms in Mombasa County; a unit increase in
debtor‟s turnover would lead to a 0.308 increase the scores of financial performance of construction firms in Mombasa County
and a unit increase in factoring would lead to 0.216 increase the scores of financial performance of construction firms in Mombasa
County (Mac-Bhaird & Lucey, 2011).
Table 11 Regression Coefficients
Model
Unstandardized
Coefficients
Standardize
d Coefficients
t Sig. B Std. Error Beta
1 (Constant) 12.742 1.439 8.854 .000
Credit Policy .318 .089 .360 3.562 .001
Liquidity .233 .089 .278 2.621 .000
Debtors
Turnover .308 .094 .347 3.264 .001
Factoring .216 .107 .198 2.016 .004
a. Dependent Variable: Financial Performance
The regression equation was:
Y = 12.742 + 0.318X1 + 0.233X2 + 0.308X3 + 0.216X4
Where;
Y = the dependent variable (Financial Performance)
X1 = Credit Policy, X2 = Liquidity Management, X3 = Debtor‟s Turnover and X4 = Factoring
This therefore implies that all the four variables have a positive relationship with financial performance of construction firms
in Kenya with credit policy contributing most to the dependent variable and factoring contributing lowest to the dependent
variable. From the table we can see that the predictor variables of credit policy, liquidity management, debtor‟s turnover and
factoring got variable coefficients statistically significant since their p-values are less than the common alpha level of 0.05.
From the table we can see that the predictor variables of credit policy, liquidity management, debtor‟s turnover and factoring
got variable coefficients statistically significant since their p-values are less than the common alpha level of 0.05.
9. Conclusions and Recommendations
9.1Conclusions
The study results led to the following conclusions:
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9.1.1 Credit Policy
From the research findings, the study concluded credit policy studied have significant effect on financial performance of
construction firms in Mombasa as indicated by the strong coefficient of correlation and a p-value which is less than 0.05. The
overall effect of the analyzed factors was very high as indicated by the coefficient of determination. The overall P-value of 0.00
which is less than 0.05 (5%) is an indication of relevance of the studied variables, significant at the calculated 95% level of
significance. This implies that the studied independent variables namely credit policy, have significant effect on financial
performance of construction firms in Mombasa County.
9.1.2 Liquidity Management
From the research findings, the study concluded liquidity management studied have significant effect on financial performance
of construction firms in Mombasa as indicated by the strong coefficient of correlation and a p-value which is less than 0.05. The
overall effect of the analyzed factors was very high as indicated by the coefficient of determination. The overall P-value of 0.00
which is less than 0.05 (5%) is an indication of relevance of the studied variables, significant at the calculated 95% level of
significance. This implies that the studied independent variables namely liquidity management, have significant effect on financial
performance of construction firms in Mombasa County.
9.1.3 Debtors’ Turnover
From the research findings, the study concluded debtors‟ turnover studied have significant effect on financial performance of
construction firms in Mombasa as indicated by the strong coefficient of correlation and a p-value which is less than 0.05. The
overall effect of the analyzed factors was very high as indicated by the coefficient of determination. The overall P-value of 0.00
which is less than 0.05 (5%) is an indication of relevance of the studied variables, significant at the calculated 95% level of
significance. This implies that the studied independent variables namely debtors‟ turnover, have significant effect on financial
performance of construction firms in Mombasa County.
9.1.4 Factoring
From the research findings, the study concluded factoring studied have significant effect on financial performance of
construction firms in Mombasa as indicated by the strong coefficient of correlation and a p-value which is less than 0.05. The
overall effect of the analyzed factors was very high as indicated by the coefficient of determination. The overall P-value of 0.00
which is less than 0.05 (5%) is an indication of relevance of the studied variables, significant at the calculated 95% level of
significance. This implies that the studied independent variables namely factoring, have significant effect on financial
performance of construction firms in Mombasa County.
9.2 Recommendations
The study recommended as follows:
i. That construction firms should develop stronger credit policies;
ii. That construction firms should diversify their activities to ensure that they are liquid all the time;
iii. That construction firms should reduce the number of days they receive finances from their debtors.
iv. That construction firms should establish other forms of mitigating financial risks.
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