Effect of funding structure and liquidity on the financial performance of sugar manufacturing firms in Kenya

Abstract

The sugar industry is critical, supporting over 100 million people globally by providing fuel and food. In Kenya, approximately 8 million individuals depend on the sugar firms for their livelihoods, whether directly or indirectly. This industry significantly contributes to the national economy, representing 15% of the agricultural Gross Domestic Product (GDP) as of 2022, while its contribution to GDP in 2023 was 0.5%. The substantial role of the sugar firms highlights their importance in promoting economic sustainability and generating employment within the agricultural sector. However, sugar manufacturing firms face challenges such as unstable finances, inefficient manufacturing methods, and competition from cheaper imported sugar. Despite government efforts to improve the firm's performance by providing additional funding, many firms continue to experience declines in profit, attributed to insufficient working capital and liquidity to sustain their operations. This has led to a situation where most firms are burdened with substantial debts amounting to Kshs 58 billion as of December 31, 2018. The primary objective of this research was to determine the effect of funding structure and liquidity on the financial performance of Kenya's sugar manufacturing firms. The specific objectives of this study were to determine the effect of funding structure on the financial performance of sugar manufacturing firms in Kenya, establish the effect of liquidity on the financial performance of sugar manufacturing firms in Kenya, and evaluate the moderating effect of liquidity on the relationship between funding structure and financial performance of sugar manufacturing firms in Kenya. This study was anchored on the trade-off theory. The interrelationship among variables, funding structure, liquidity, and financial performance is illustrated in a conceptual framework. A correlational research design was used, and nine sugar manufacturing firms were selected through a census sampling technique. A total of 324 secondary data points were collected from 2014 to 2022. The analysis of data was conducted using the ARDL model, which considers the short- and long-term impacts of liquidity and funding structure on financial performance. The results showed a significant positive relationship between the funding structure and Economic Value Added (coeff = 0.863, p = 0.000), meaning that the EVA is expected to increase by 86% for every 1% increase in the funding structure. a positive and significant relationship between liquidity and Economic value added (coeff=0.940, p=0.000), meaning that for every 1% increase in liquidity, the EVA is expected to increase by 94%. and that liquidity moderates the relationship between funding structure and Economic Value Added (coeff = 2.760, p = 0.001). This reveals that Companies that excel in liquidity management and maintain an appropriate funding structure are more likely to achieve higher Economic Value Added (EVA) over the long run. Given the positive long-term contribution of liquidity and EVA, it can be inferred that Kenyan sugar manufacturing firms should prioritize maintaining robust liquidity levels to strengthen their funding structure and ultimately create long-term value. The study concludes that funding structure and liquidity have significant relationships with economic value added and that liquidity moderates the relationship between funding structure and economic value added. The study recommends that firm managers and policymakers design more effective interventions and support mechanisms to maintain a proper balance between the components of funding structures and ensure a healthy level of liquidity within the sugar manufacturing firms. The findings are relevant for investors, firm managers, and policymakers as they can develop frameworks and guidelines that encourage better liquidity management practices within the industry.