Determinants of Working Capital Requirements Listed Companies in East Africa: An Empirical Study Using Generalised Method of Movements
Year: 2025
Type: article
Abstract: Effective working capital management is essential to a company’s survival.Working capital management helps managers in the value creation of thecompany and prevents the possibility of insolvency. This leads managers andresearchers to make an effort to identify variables that affect working capitalmanagement. The main focus of this study is to examine the determinants ofworking capital requirements of non-financial firms listed in East African stockmarkets. Working capital requirement as a dependent variable was presented bythe ratio of current assets less current liabilities over total assets and cashconversion cycle. However, the independent variable was represented by returnon assets, sales growth, firm size, leverage and operating cash flow, while thecountry's gross domestic product growth rate was used as a control variable. Forthe company to be financially successful, it depends much on how financialmanagers use their skills to ensure that management of working capital ismaintained at an optimal balance. The study used both a descriptive and aquantitative research design. Listed non-financial companies in East Africa,covering the period of 8 years from 2016 to 2023, were selected to represent thesample. Data analysis was done by eView12 using the panel generalised methodof movement to establish the relationship between dependent and independentvariables. This study concluded that there is a significant positive influence ofreturn on assets, growth, firm size and operating cash flow on working capitalrequirement. This indicates that if the firm wants to grow and improveprofitability it must increase the level of working capital. Furthermore, leverageand firm size were revealed to have a negative and significant influence onworking capital requirement. Then, if the firm is highly geared, it leads to areduction in the level of working capital. Moreover, GDP growth rate impactsworking capital requirement positively, meaning that when the country's GDPincreases, the company demands more cash to finance their working capital.
Authors: Sadiki Sumawe, Lucas Magoti
Institution: Tanzania Institute of Accountancy
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4413797988