The Effect of Longer Account Payable Days and Shorter Account Receivable Days on The Profitability of Small Retail Businesses in Kirinyaga County

Abstract

Management of account receivables and payables determines firm’s efficiency, and has an effect on profitability and liquidity. Firms may delay payment of debts and lengthen account payable days to optimize working capital. This study sought to establish the effect of shortening account receivable days and lengthening account payable days among small retail business in Kirinyaga County. Operational motives theory, transactions cost theory, and cash conversion theory were used to inform the conceptual framework. Questionnaires were distributed to 40 randomly selected small retail business owners in Kutus, Mwea, and Kerugoya, which are key business hubs in Kirinyaga county. The study utilized a mixed-research research design, and multiple regression and correlation models to analyze the data. It was observed that longer account payable days had a positive, but insignificant effect on profitability (p=0.478), while longer account receivable days had a negative, but insignificant effect on profitability (p=-0.399). Thus, account receivable and payable days have an insignificant effect on profit. However, lengthening account payable days affects business relationship with suppliers. There is need to negotiate better credit terms with suppliers to take advantage of the profitability associated with longer account payable days without affecting relationship with vendors.