EFFECT OF WORKING CAPITAL MANAGEMENT ON FINANCIAL SUSTAINABILITY OF GOVERNMENT OWNED ENTITIES IN THE MINISTRY OF AGRICULTURE, LIVESTOCK AND FISHERIES (MOALF), KENYA

Abstract

The Government reform agenda, was to try and address how GoEs can attain selfsufficiency to ease the burden of overreliance on subsidies, through introduction of new government guidelines, policies and strategies designed at improving their financial sustainability. However reviews have shown that despites all these improvements, the GoEs often do not operate optimally for sustainability, attributing to either internal or external factors. Even though various studies have been done on financial sustainability, limited research have been carried out on financial sustainability of GoEs hence there is limited information on GoEs in the MOALF. This study sought to identify financial sustainability basics. The study focused on resource utilization as a determinant. A causal research design was adopted and with 27 organizations responding positively, giving a sample size of 134. The study used both primary and secondary sources of data. Primary data was collected using structured questionnaires and interview guides. The secondary data involved review of published information on Financial Statements of GoEs in MOALF. Data was obtained for a period of 7 years from 2009/2010 to 2014/15 financial years and analyzed using SPPS version 21 statistical software, fitted into a multi linear regression model and t-statistic. From the study it was evident that, management of working capital was key factor that influenced financial sustainability of the GoEs. Working capital had a positive correlated to financial sustainability with investment opportunities being inversely related to financial suitability hence lack of proper policies on Investment and strategies affects financial sustainability. The study recommends that prioritized resource utilization should be given more emphasis as a means to ensure that institutional goals are set in line with the availability of funds. There should be proper projects evaluation and prioritization before allocation of resources is done to the most profitable project, bottom up resource management should be adopted, thereby keeping expenditure within the approved levels is also key. GoEs should endeavour to adopt hybrid model of management that incorporates both public and private interface. Policies on investment should be developed, Investment in green finance and adoption of climatic finance that significantly reduce effects on the environment enhancing sustainability. They should also adopt a holistic evaluation model not limited to financial evaluation through innovative accounting that encompassing the key goals and objectives of their existence and adoption of risk assessment framework. The Ministry should set limits with the set frameworks for the Key ratios used to measure Financial Sustainability. © 2017 Elixir All rights reserved. Elixir Fin. Mgmt. 110 (2017) 48259-48272 Finance Management Available online at www.elixirpublishers.com (Elixir International Journal) Wachira Rosaly Njeri et al./ Elixir Fin. Mgmt. 110 (2017) 48259-48272 48260 There is need to develop its overall capacities. A sustainable organization is able to survive in the long run by generating its own revenue and without depending on contributions from donors, financiers, and well-wishers (Nganga & Kibati 2016). FS is sometimes seen as a mix of revenue, expenses and assets management. Accordingly (Meyer 2002), the concept to sustainability includes, amongst other criteria like obtaining funds at market rate and mobilization of local resources. Therefore financial selfsustainability is achieved when an organization can be able to cover the relevant costs of funds. It also involves all other elements and functions of an organization and major decision made which should be considered as a model through which to filter sustainability. Oganisation should be efficiently and fairly govern the use of these assets in order to generate resource for sustainability with full commitment to the process throughout the organization, from the board of directors through senior management and the entire staff (Johnson, G & Scholes K. 2007). FS is a process, not an end in itself so an organization does not become sustainable and then rest on its success, it is critical to keep constant evaluation of its sustainability management strategies keep the organizations abreast to achieve their desired objectives. Organization quest to improve their financial soundness is often affected by the way they operate and respond to both the internal and external factors, innovation and leadership styles (William, 2014.) key attributes to FS, are seen as sound financial practices, active fund management, planning and ability to innovate, infrastructure development. Fundamental principle of non-profit making organizations such as GoEs is the need to maintain their ability to be financially agile in order to maintain their function of serving social and Economic welfare which requires consistent and continually availability of resources. This is achieved when capital structure levels and standards are enhanced according to a long term plan of the entities without compromise in their own services delivery, and the ability to develop resilience to occasional economic shocks in the short term such as the current cash crunch being experienced from time to time (Bowman, 2011, CBK 2017). Financial sustainability is promoted through a broad based, interdisciplinary approach. Lack of good management or technical capacity prevents the organization from generating revenue and adversely affects FS. Learning from organisations that have managed to achieve financial sustainability to some extent, is important to GoEs paths to success in financial sustainability include, they being proposition on the maintaining strong stakeholder relationships, including beneficiaries, staff and donors; obtaining a range of types of funding, including unrestricted funds; building financial reserves; Assessing and managing risks and strategically managing and financing overhead costs. Operational self-sustainability is when the operating income is sufficient enough to cover operational costs like salaries, supplies, loan losses, and other administrative costs. And financial self-sustainability (which he referred as high standard measure) is when GoEs can also cover the costs of funds and other forms of subsidies received when they are valued at market prices (Meyer, 2002). Determinants of Financial Sustainability The measures of financial sustainability allow an organization to assess and compare their performance against those of others, through an analysis of various indicators that include but not limited to operating surplus ratio, net financial liabilities ratio, interest cover ratio, asset sustainability ratio and asset consumption ratio (LGA, 2006). These performance measures focus on the future directions and the dimensions of resources needed for financial sustainability as supported by (Christensen et al 2007). Financial sustainability can also be gauged by an organization‘s net income (the surplus of revenues over expenses); liquidity (the cash available to pay bills); and solvency (the relationship of assets and debt or liabilities). According to (Nganga & Kibiti 2016), the key elements of FS are capital structure composition and resource allocation. (Gibson 2012) notes that the financial sustainability is influenced by capital/ asset ratio and operating expenses/loan portfolio that enables organisations to cover all its present costs and the costs incurred in growth, if it expands operations, its financial costs adjusted with inflation costs and costs incurred in growth (Onyuma et al 2005) points out that FS is influenced by the ability of an institution to generate sufficient funds to sustain the costs of its programs. These costs are such as pricing of the product, costs of funds, administrative overheads, loan losses or portfolio quality, and inflation and each cost has its own significance way of being controlled. To analyze the sustainability of a GoEs two known set of ratios have been developed. These are widely accepted and they enable a comparison among GoEs all over the world. These two most important ratios are Operational Self Sufficiency. The above formula indicates or measures the degree to which operating income covers operating expenses. If the calculated figure is greater than 100%, the organization under evaluation is considered to be operationally self-sufficient. In organisation, operationally sustainable institutions are able to cover their costs through operating revenues. On the other hand FSS measures degree to which operating income covers adjusted operating expense. Organisation are on an unsubsidized basis or free from donation. Financial self-sufficiency requires adjustments for different reasons. Financial statements must be adjusted to conform to standard accounting practices, to take into account inflation and to remove the effect of subsidies and in-kind donations. FSS shows how a GoE would look if funds had been raised on a commercial basis and if services or equipment had been purchased at a market rate and were not received as a donation (Elia, M.2006). Government Owned entities in the Ministry of Agriculture Livestock and Fisheries (MOALF) The establishment of GoEs resulted from the Government reforms agenda on State Corporation in 2013, the proliferation of the Stake Corporation and Ministries was driven by lack of adherence to formation framework which often resulted to duplication of governments functions and creates inefficiency and often bring scrabble for the government subsidy. This prompted the reform in order to have GoEs that will support with an objective to drive the Government agenda of meeting the social and economic benefit for their citizen, among others. Four sectors, were merged to form MOALF which are Agriculture, Livestock development and Marketing, and Fisheries with a fundamental goal and purpose being conserv