RELATIONSHIP BETWEEN TRADE CREDIT AND FINANCIAL PERFORMANCE OF SUPERMARKETS IN KENYA: EVIDENCE FROM MACHAKOS COUNTY
Abstract
The general objective of this study was to establish to establish the relationship between trade credit and financial performance of supermarkets in Kenya. Secondary data was used in the study. A descriptive approach was used. A regression of the variables was undertaken using Statistical Package for Social Sciences (SPSS), version 23. This elaborated on the possible relationship between the two variables. Conclusions were then made from the correlations and recommendations given for improvement. The study determined that trade credit constructs namely: trade receivables and trade payables were jointly significantly related to financial performance of the supermarkets in Machakos County. The study determined that trade payables and a trade credit construct, significantly influenced return on assets (ROA) of the supermarkets in Machakos County. According to the study, trade receivables significantly influenced ROA of the supermarkets in Machakos County. It was concluded form the study findings that trade credit generally is a critical antecedent of ROA of supermarkets in Machakos County. The study further concluded that trade credit constructs, including the trade payables and trade receivables were significantly related to ROA. This means that policy making institutions ought to pay keen attention to the dynamics of the variables. The study further recommended that in order to have a proper policy-practice nexus, various stakeholders in the retail industry including regulatory bodies, retail owners and suppliers ought to develop systems and processes that would trigger retail sector development. This could be through robust collaboration between the policy makers and the practitioners. Specifically, the study recommended that the academics should develop models that can be used by management practitioners to enhance the growth of their firms.
Key Words: Trade Receivables, Trade Payables, Return on Assets, Supermarket Performance
CITATION: Kombo, G. M., & Sang, W. K., & Muriithi, D. (2023). Relationship between trade credit and financial performance of supermarkets in Kenya: Evidence from Machakos County. The Strategic Journal of Business & Change Management, 10 (1), 162 – 178.
Full Text:
PDFReferences
Altheide, D. L., & Johnson, J. M. (1994). Criteria for Assessing Interpretive Validity in Qualitative Research. In N. K. Denzin & Y. S. Lincoln (Eds.). Handbook of Qualitative Research, pp. 485-499. Thousand Oaks, CA: SAGE.
Biais, B., & Gollier, C. (1997). Trade credit and credit rationing. Review of Financial Studies, 10, (1) 903–937.
Bougheas S., Mateut, S. & Mizen. P. (2009). Corporate trade credit and inventories: evidence of a trade-off from accounts payable and receivable. Journal of Banking and Finance, 33, 2:300-307.
Brennan, M.J., Maksimovic, V., & Zechner, J. (1988). Vendor financing. Journal of Finance, 43(5), 1127-1141.
Burkart, M., Ellingsen, T. (2004), In-kind finance: A theory of trade credit. American Economic Review, 94, 569-590.
Chant, E M; Walker, D.A (1988), Small business demand for trade credit, Applied Economics, Volume 20, 861-876.
Choi WG, Kim Y (2005). Trade credit and the effect of macro financial shocks: Evidence from US panel data. Journal of Financial and Quantitative Analysis, 40: 897–925
Collins K. and Robert M. (2015). Effect of trade credit on financial performance of small-scale enterprises: Evidence of Eldoret town, Kenya. International Journal of Economics, Commerce and Management, 7 (2), 40-49.
Cristina, M., Pedro J., & Pedro, M. (2007). Trade credit policy and firm value: the case of Spanish listed firms, Journal of economics 4 (3), 18-30.
Cristina, M., Pedro J., & Pedro, M. (2010). Trade credit and SME profitability: the case of Spanish manufacturing SMEs. (Unpublished MBA thesis, university of murcia -Spain)
Dogan, M. (2013). Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting, 4(4), 53–59.
Dunn, M. (2009). Why you need a credit policy. Journal of economics, 3(1)-75-84.
Emery, G. W. (1984). A pure financial explanation for trade credit. Journal of Financial and Quantitative Analysis19, 271-285.
Fiegenbaum, A., & Karnani, A. (1991). Output flexibility–A competitive advantage for small firms. Strategic management journal, 12, 101–114.
Finlay (2009) Credit management and profitability. Journal of Social Sciences, 2, 90-101.
Finley (2009), Peter D (2005), Dina A (2007). Credit management and profitability. Ferris, J. S. (1981). A transactions theory of trade credit use, Quarterly Journal of Economics 96, 243-270.
Fisman, R.J., & Raturi, M. (2004). Does competition encourage credit provision? evidence from african trade credit relationship. Review of economics and statistics, 86(1), 345-352.
Guangchen S., (2012). How does capital structure affect firm performance? Recent evidence from Europe countries. Journal of Economics and Management, 7(2),16-24.
Hill, M-D., Kelly, G.W., Lockhart, G.B., & Washam, J.O. (2010). Trade credit, market value, and product market dynamics. Journal of Marketing, 5(3), 33-45.
James N. K., Kenneth L. W., Anthony G. W., Geoffrey M. G. (2014). Effects of credit policy on profitability of manufacturing firms in Kenya, Journal of Business, 3(2), 477-481.
Krueger, T. M. (2005). An Analysis of working capital management results across industries. Mid-American journal of business 20, 11-18.
Lee, Y.W., & Stowe, J.D. (1993). Product risk, asymmetric information, and trade credit. Journal of financial and quantitative analysis, 28(2), 285-300.
larke, S. P., & Cossette, S. (2000). Secondary analysis: Theoretical, methodological and practical considerations. Canadian Journal of Nursing Research, 32(3), 109-129.
Meltzer A (1960). Mercantile credit, monetary policy, and the size of firms. Review of Economics and Statistics 4: 429–436
Mubeen A. R. and Muhammad K. K. (2016). A review of impact of trade credit on firm’s profitability: A study of non-financial firms in Pakistan. Journal of Economics, 6(22), 17-23.
Mugenda, O., & Mugenda, A. (2003). Research methods: quantitative and qualitative approaches. Nairobi: Acts Press.
Myers, C.S. and Brealey, R.A. (2003). Principles of corporate finance. New York: McGraw-Hill.
Myers, S.C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13 (2), 187-221.
Mian, S.L., Smith, C.W. (1992). Accounts receivable management policy: Theory and
evidence. The journal of finance, 47(1), 169-200.
Mwangangi J. N. (2013). Relationship between trade credit and value of firms listed at the Nairobi securities exchange. (Unpublished master thesis, University of Nairobi).
Mwololo, B.N. (2011). The Relationship between Credit policy and liquidity for oil manufacturing firms in Kenya (Unpublished master’s thesis University of Nairobi, Kenya).
Mykhailo I. (2013). The impact of capital structure on firm’s performance. Evidence from Ukraine. (Unpublished Master Thesis in financial economics, Kyiv School of Economics).
Nadiri, N. I. (1969). The determinants of trade credit terms in the US total manufacturing sector. Econometrica 37, 408–423.
Nzotta, S.M. (2004). Money, banking and finance: Theory and practice. Owerri: International educational books and publishers.
Peng, M. W. (2000). Business strategies in transition economies. Thousand Oaks, CA: Sage.
Petersen, M. A., & Rajan, R. G. (1997). Trade credit: theories and evidence. Review of financial studies, 10, 661–691.
Pike, R., Cheng, N.S., Cravens, K., & Lamminmaki, D. (2005). Trade credit terms, asymmetric information and price discrimination: Evidence from three Continents. Journal of business finance & accounting, 32(5/6), 1197-1236.
Rachmawati & Hanung Triatmoko. (2007). Analysis of factors influencing earnings quality and value. Papers presented in the national symposium of accounting 10. Makasar, 26-28 July.
Robson, C. (2011). Real World Research: A Resource for Users of Social Research Methods in Applied Settings, (2nd Ed.). Sussex, A. John Wiley and Sons Ltd.
Ruth W. K. & Aquilars M. K. (2012). The determinants of trade credit in small and medium sized firms in Kenya. International journal of science and research (IJSR) ISSN (Online): 2319-7064.
Salima Y. P. & Cherif G. (2009). Trade credit as short-term finance, Working Paper Series (ISSN 2041‐1596). Paper Number: 10/09
Singh, A. S. (2014). Conducting Case Study Research in Non-Profit Organisations. Qualitative Market Research: An International Journal, 17, 77–84.
Scheufler, B. (2002). Five risks you can target with best practices. [On-line].
Schwartz, Robert, A. (1974). An economic model of trade credit. Journal of financial and quantitative analysis, 9(4), 643–657.
Stierwald, A. (2009). Determinants of firm profitability–The effect of productivity and its persistence. Melbourne institute of applied economic and social research, 22,17-24.
Stiglitz, J.E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American economic review, 71(3), 393-410.
Summers, B., & Wilson, N. (2002). An empirical investigation of trade credit demand. International journal of the economics of business, 9(2), 257-270.
UNCTAD (2008). World investment report, New York and Geneva: United Nations
Van Horen, N. (2005). Do firms use trade credit as a competitiveness tool? Evidence from developing Countries. World Bank Working Paper.
Wilner, B. S. (2000). The exploitation of relationship in financial distress: the case of trade credit. Journal of Finance 55, 153–178.
Xiuli, L. (2011). Determinants of trade credit. A study of listed firms in the Netherlands. master thesis in business administration. University of Twente, The Netherlands (unpublished)
Yujie T. (2014). Trade credit and profitability in small and medium enterprises. 3rd IBA bachelor thesis conference, University of Twente, faculty of management and governance. Enschede, the Netherlands.
DOI: http://dx.doi.org/10.61426/sjbcm.v10i1.1357
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.