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THE RELATIONSHIP BETWEEN FINANCIAL PERFORMANCE AND FINANCIAL MANAGEMENT PRACTICES: A SURVEY OF SHIPPING COMPANIES IN KENYA

BY

GEOFFREY KITONGA KIITA D61/70237/2008

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI

MARCH 2013

DECLARATION
This research proposal is my original work and has not been submitted to any other University for examination purpose.

Signature:…………………………………… Kitonga Geoffrey Kiita

Date:…………………… Reg: D61/70237/2008

Declaration by Supervisor This research proposal has been submitted with my approval as the University supervisor

Signature:…………………………………… Dr. Ogilo Supervisor, School of Business, University of Nairobi

Date:……………………

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LIST OF ABBREVIATIONS
AIS – Accounting Information System ARR – Accounting Rate of Return CBA – Cost Benefit Analysis CSM – Capital Structure Management EBIT – Earnings before Interest and Tax EVA – Economic Value Added FAM – Fixed Asset Management FRA – Financial Reporting Analysis IASB – International Accounting Standards Board IRR – Internal Rate of Return IT – Information Technology KSC – Kenya Shippers Council NOPAT – Net Operating Profit before Interest and after Tax NPV – Net Present Value ROA – Return on Assets ROCE – Return on Capital Employed ROI – Return on Investments SME – Small and medium-sized enterprise WACC – Weighted Average Cost of Capital WCM – Working Capital Management
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.........iii CHAPTER ONE: INTRODUCTION...............15 2..........8 1..........4 Significance of the Study.......4 The Pecking Order Theory.......................................... 21 iv ....................................9 1......................3 Return on Capital Employed (ROCE)......................................2..........................................1....1..........12 CHAPTER TWO: LITERATURE REVIEW.................................................5 Economic Value Added (EVA)................................6 1..............................................................................................................................3.......................................1 Return on Investments (ROI)........................................6 1.......................................................................................................1 Background of the Study........................................11 1..........16 2......7 1.......................................................................................................1 Financial Management Practices..........................................2 Theoretical Review....................19 2...13 2..................1 Agency Theory.......................18 2...3 Shipping industry in Kenya.........................12 1........................................................................2..............13 2..........19 2......................14 2.........................4 Empirical Review...........3..................1 Introduction..............................5 Critical Review... 13 2......................2.....................3.......... 20 2.........................13 2...ii LIST OF ABBREVIATIONS...................3...........................................1....................................................................................................................3 Objectives of the Study.............................................18 2.................................................2.TABLE OF CONTENTS DECLARATION...........19 2........2 Measurement of Financial Performance..........4 Cost Benefit Analysis (CBA)............................3...................2 Statement of the Problem.............................3 Financial Performance Measures..........................................................................18 2.....2 Return on Assets (ROA).2 Residual Equity Theory.........3 The Contingency Theory..............................................................................................................

.........................................23 3..................................................25 APPENDICES........................................34 v ................... 23 3........................................................2 Research Design....... 23 3.................................................................... 23 3...............4 Data Collection.................CHAPTER THREE: RESEARCH METHODOLOGY......................24 REFERENCES.............................................................................................................................3 Study Population...............................................................29 Appendix 2: List of Shipping Companies in Kenya..................................29 Appendix 1: Questionnaire...................1 Introduction..........................................................................................................................................................5 Data Analysis and Presentation............................. 23 3....................................

period of financing. and the tools and analysis used to make the decisions. money and risk and how they are interrelated. According to this approach financial management can be broken down into three different decisions: Investment decisions. Both share the same goal of enhancing a firm’s value by ensuring that return on capital exceeds cost of capital. cost of financing and the returns thereby. Financing decisions and Dividend decisions (Brealey & Myers.1 Background of the Study Financial Management is a discipline dealing with the financial decisions corporations make. 2010). Dividend decisions involve decisions on the distribution of profits. Financing decisions relate to the raising of finance from various resources which will depend upon decision on type of source. Investment decisions involve investment in non-current assets known as capital budgeting as well as investment in current assets known as working capital management. .CHAPTER ONE: INTRODUCTION 1. without taking excessive financial risks (Pandey I. At the individual level. This requires decisions to be made on how much to distribute to the shareholders and how much should be retained (Brealey & Myers. The discipline as a whole may be divided between long-term and short-term decisions and techniques. Modern approach of financial management basically provides a conceptual and analytical framework for financial decision making.M. 2007). financial management involves tailoring expenses according to the financial resources of the individual while from the organizational perspective the process of financial management is associated with financial planning and financial control. It emphasizes on effective use of funds. 2007). According to Gitman (2011) financial management refers to the concepts of time.

The shipping industry in Kenya is a major contributor to the economic development of the country. As pertains to Financial Reporting Analysis (FRA). According to Garrison (1999). which combines accounting principles and concepts with the benefits of an information system and which is used to analyse and record business transactions for the purpose of preparing financial statements and providing accounting data to its users. recording and organizing the accounting information systems will not meet objectives unless reports from systems are analysed and used for making managerial decisions. Financial Reporting and Analysis (FRA). Working Capital Management (WCM) refers to decisions relating to working capital and short term financing. All these practices are crucial for an efficient financial management in organizations.Sound financial management practices help to improve the profitability of an organization and ensure that it has a healthy statement of financial position.1. planning and decision making by making historical comparisons (Gitman. These involve managing the relationship between a firm’s short-term assets and short-term liabilities. Fixed Asset Management (FAM) and Capital Structure Management (CSM). The goal of WCM is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. 1.1 Financial Management Practices The most common financial management practices used are Accounting Information Systems (AIS). Information from financial statements can also be used as part of the evaluation. Reporting is a major tool for organizations to accurately see summarized. Orwel (2009) states that the AIS is a system of records usually computer-based. Financial statements usually provide the information required for planning and decision making. Romney et al (2009) purport that the biggest advantage of computer-based accounting information systems is that they automate and streamline reporting. 2011). timely information used for decision-making and financial reporting. . Working Capital Management (WCM). AIS assists in the analysis of accounting information provided by the financial statements.

Fixed (non-current) assets management is an accounting process that seeks to track noncurrent assets for the purposes of financial accounting. Most companies are funded by a mix of debt and equity. Periodically the organization can take inventory with a mobile barcode reader and then produce a report (Garrison 1999). Firm performance is measured over time by using the average stock market change per year. Capital Structure Management (CSM) according to Romney (2009) means overseeing the capital structure of an organisation. cash surplus investment practices and cash control practices. When determining a company’s cost of capital. one is interested in analyzing the change in market value. A popular approach to tracking non-current assets utilizes serial numbered asset tags. and inventory management.The context of working capital management includes cash management. A company’s capital structure refers to the combination of its various sources of funding. It consists of three basic components: cash forecasting practices. Cash management is the process of planning and controlling cash flows. preventive maintenance and theft deterrence.1. quantity. When applying stock market values as a measure of performance.2 Measurement of Financial Performance Financial performance of companies can be measured by use of accounting information or stock market values in a financial management practices context. This calculates the company’s weighted average cost of capital (WACC). often with bar codes for easy and accurate reading. The WACC is used to calculate the net present value (NPV) in capital budgeting for corporate projects. Many organizations face a significant challenge to track the location. the costs of each component of the capital structure are weighted in relation to the overall total amount. receivables and payables management. 1. condition and maintenance and depreciation status of their non-current assets. This value is usually obtained by calculating the yearly . A lower WACC will yield a higher NPV hence achieving a lower WACC is always optimal.

leverage and industry factors such as growth. 2011). predict that in the next five to seven years. This study will hold these variables as control variables (Moore & Reichert. market. Because of the limitations cited in using stock market prices. 1.change in stock price. 1989). firm advertising.1. When accounting information is used. research and development. 2007). The efficient market hypothesis is often used as a tool to create structure when analyzing information contained in stock prices (Gitman. Return on assets is an indicator of how profitable a company is relative to its total assets. (BSR). These variables include firm size. Sustainability and Responsibility. capital intensity. It gives an idea as to how efficient management is at using its assets to generate earnings. this study will employ Return on Assets (ROA) to measure the operating efficiency of the shipping companies in Kenya (Brealey & Myers. and regulatory pressures related to sustainability will drive significant changes in the way international shipping lines operate and do business. accounting ratios are employed. These will demand a bigger focus on routing to the emerging economies. rise in the costs . Although these other variables are not directly related to the relationship between financial management practices and performance. it is important to take them into account in order to isolate their effect on performance. When the relationship between financial management practices and financial performance is analysed. it should be noted that there are other factors which account for potential influences on the relationship.3 Shipping industry in Kenya The global economic changes over the last few years have presented the shipping industry with a paradigm shift in many facets of its conventional operations. It is calculated by dividing a company’s annual earnings by its total assets and it is shown as a percentage. customer. market share. Among the common accounting ratios used to measure profitability are: return on assets (ROA) and return on capital employed (ROCE). Those liners that fail to embrace these new paradigms will be engulfed by their ineffective and inefficient traditional methods. degree of risk. stakeholder. Peder and Farrag (2010) in their global focus on Business.

and the Kenya International Freight and Warehousing Association (KIFWA). offshore supply. who assist in clearing cargo and aiding in further logistical delivery. container ships. It is estimated that fifty ships of various types are in the major shipping lanes off the Kenyan coast at any given time. Its liberalisation has also enticed further presence of foreign owned liners. many stretching and redirecting their routes to more lucrative destinations. among others (see full list in appendix 2). The Kenyan shipping industry comprises of shipping liners which function as the main global carriers such as Maersk Liner. to regulate proprietary interests in ships. cutting carbon emissions and adapting to climate change. general cargo. 2009). amongst others (UNCTAD. CGM CMA. Section 317 of the Act denotes that the KMA issues licenses in respect to registration of Shipping Lines and Shipping Agents. the Kenya Revenue Authority (KRA). tank barges. . bulk carriers. Other players include the agencies that act as a contact between shipper and liner. maritime piracy and related costs. as well as the stakeholders increasing demand for environmental sustainability and corporate social responsibility. The shipping industry is one of the major driving forces behind the Kenyan economy.of energy. The bearish trend of the Nairobi Securities Exchange has meant that the economy is now riding on the back of private investments. the Kenya Shippers Council (KSC). fishing trawlers. The industry is regulated by the Kenya Maritime Authority (KMA) and the Kenya Ports Authority (KPA). and clearing and forwarding agents. the training and the terms of engagement of masters and seafarers and matters ancillary thereto (Kenya Shipping Act. and so the industry is critical to the economy since most of the liners and related organisations are privately owned. These can be characterized as follows: Oil tankers. The Merchant Shipping Act of 2009 is an act of parliament that makes provision for the registration and licensing of Kenyan ships. passenger ships. whilst other major stakeholders include the Kenya Ships Agents Association. 2011). providing direct and indirect employment. These are subsequently registered with the KPA.

Financial management practices adopted by organizations are said to maximize the shareholders’ wealth when they contribute to the company’s performance. they showed that firms adopting sophisticated capital budgeting techniques had better than average firm financial performance. found out that. Studies on the relationship between financial management practices and financial performance have presented mixed results. the objective of the firm is to maximize the wealth of its shareholders. unlike those firms using methods such as Payback method and Accounting Rate of Return (ARR). firms using modern inventory management techniques and Internal Rate of Return (IRR) reported superior financial performance. More specifically. Klammer (1973) in his study of the relationship between sophisticated capital budgeting methods and financial performance in US. Moore and Reichert (1989) in their multivariate study of firm performance and use of modern analytical tools and financial techniques study in 500 firms in US. Wanyugu (2001) did a research on financial management practices of micro and small enterprises in Kenya: a case of Kibera. Studies of reasons for business failure show that poor or careless financial management is the major cause of failure (Berryman & Peacock. its objectives. According to financial management theory. 1991). despite the growing adoption of sophisticated capital budgeting methods. Mundu (1997) did a research on selected financial management practices by small enterprises in Kenya. Locally. sound financial management practices can be regarded as a means by which a firm uses in order to fulfill . Khakasa (2009) sought to provide empirical evidence on the current state of the use of formal investment Under the assumption of economic rationality.2 Statement of the Problem Sound financial management is crucial to the survival and well-being of many business enterprises of all types.1. there was no consistent significant association between financial performance and capital budgeting techniques.

significant positive association between financial management practices and financial . ii. this research seeks to examine.N (2011) who looked at the relationship between financial performance and financial management practices of insurance companies in Kenya. A more recent study was conducted by Nyongesa M. The study will also help the Chief Executive Officers of shipping companies in understanding the importance of financial management practices adopted by shipping companies at large and hence the relationship with financial performance.appraisal techniques in IT investments among the Kenyan commercial banks. Kadondi (2002) in her study looked at capital budgeting application by companies listed at the Nairobi Stock Exchange.4 Significance of the Study The research findings will have a direct relevance to the finance departments of the shipping companies and will therefore be useful to the finance managers.3 Objectives of the Study The study will be guided by the following objectives: i. the shipping industry in Kenya. performance as measured by ROA. The The study revealed that there was a consistent. This study aims at shedding more light on the financial management practices adopted by the industry and aims to answer the following questions: What are the financial management practices adopted by shipping companies in Kenya? What is the relationship between the financial management practices adopted and the financial performance of the shipping companies? 1. The study will also add to the existing body of knowledge and stimulate further research on different aspects of financial management practices that have been adopted by shipping companies. To identify the financial management practices adopted by shipping companies in Kenya To determine the relationship between financial management practices and financial performance of shipping companies in Kenya 1. Following the conflicting results on the relationship between financial management practices and financial performance and in line with the above studies.

return on equity. The theory argues that under conditions of incomplete information and uncertainty. indeed agency theory is concerned with so-called agency conflicts. These relationships are not necessarily harmonious.2 Theoretical Review 2.1 Introduction This chapter looks at the theoretical review. financial performance measures. 1985). When agency occurs it also tends to give rise to agency costs. 2. the firm’s . and stock prices changes. Accordingly. If corporate performance is above the performance targets.government through the regulatory bodies would find the results of this study valuable as it would give them an insight into the dynamics of financial management practices in shipping companies.2. CHAPTER TWO: LITERATURE REVIEW 2. which another party undertakes.1 Agency Theory Agency theory explains how to best organize relationships in which one party determines the work. corporate governance and business ethics. which characterize most business setting. The primary agency relationships in public institutions are either those between stakeholders and managers or between debt holder and stakeholders. two agency problems arise: adverse selection and moral hazard. or conflicts of interest between agents and principals on financial reporting and management practices. among other things. empirical review and critical review. Most publicly owned institution like the public institution now employ financial reporting and management practices given to executives on the basis of performances as defined by financial measures such as earnings per share. This has implications for. which are expenses incurred in order to sustain an effective agency relationships. agency theory has emerged as a dominant model in the financial economics literature which widely discusses the financial reporting and management practices in the public institution (Eisenhardt.

The specific equities include the claims of creditors and the equities of preferred stockholders. income and in retained earnings and changes in interest of other equity holders are all reflected in the residual equity of the common stockholders. 1989). The equity of common stockholders in the balance sheet should be presented separately from the equities of preferred stockholders and other specific equity holders. 2. they offer executives incentives to take actions that will enhance shareholders wealth. such as performance shares. Incentive-based compensation plans. According to Hendrickson (1982) the residual equity point of view is a concept somewhere between the proprietary theory and the entity theory. the franchisee will have an incentive to shirk on his efforts to manage the outlet.2. however. Information transfer in a non-hierarchical setting is problematic because of the agency problem of moral hazard. The balance sheet equation becomes as follows: ‘Assets minus specific equities are equal to Residual equity’. changes in asset valuation. these plans help companies attract and retain managers who have the confidence to risk their financial future on their own abilities –which should lead to better performance. they receive less than 100 percent of the shares. First. If performance is below the target. the current value of common stock is dependent primarily upon the expectation of future .2 Residual Equity Theory In the residual equity theory. If the principal has imperfect information about the agent’s ability to perform the task that is demanded of the agent. This lack of measurement ability will provide the agent with an incentive to shirk on the proper performance of that task (Chi. 1994). are designed to satisfy two objectives. In the context of franchising. the principal will have difficulty ensuring that the agent has performed that task (Barzel. The objective of the residual equity approach is to provide better financial reporting as a consequence of good financial management practices.managers earn more shares. Second. In a going concern situation. this means that if the franchiser cannot be sure that the franchisee is performing the job of managing a local retail outlet.

They base their argument on Schall & Sundem (1980) study which shows that the use of sophisticated capital budgeting techniques declines with an increase in environmental uncertainty. that is. The first aspect is a firm’s organizational characteristics.3 The Contingency Theory According to Pike (1986). it represents an increase in the wealth of the proprietors.dividends. payments to specific equity holders and requirements for reinvestment. Thus the net income accrues directly to the owners. less complex organizations tend to adopt interpersonal.2. Since financial statements are not generally prepared on the basis of possible liquidation. Revenues are increases in proprietorship and expenses are decreases. Gordon & Pinches (1985) have an opposite opinion and argue that firms will experience more benefits from using sophisticated capital budgeting techniques. 1982). In the balance sheet format this is stated as follows: ‘Assets minus liabilities are equal to residual equity’. the information provided regarding the residual equity should be useful in predicting possible future financial status to common stockholders (Hendrickson. Haka. The proprietorship is considered to be the net value of the business to the owners. 2. less sophisticated control systems. resource-allocation efficiency is not merely a matter of adopting sophisticated. Decentralization and a more administratively oriented control strategy involving a higher degree of standardization are characteristics of large companies. Pike (1986) focuses on three aspects of the corporate context which are assumed to be associated with the design and operation of a firm’s capital budgeting system. theoretically superior investment techniques and procedures but consideration must also be given to the fit between the corporate context and the design and operation of the capital budgeting system. Future financial status is dependent upon expectations of total receipts less specific contractual obligations. It is a wealth concept (Hendrickson. Smaller. The assets are assumed to be owned by the proprietor and the liabilities are the proprietor’s obligations. 1982). .

Pike (1986) identifies three characteristics.e.2. the less appropriate will be the highly bureaucratic. 2002). These arguments have been applied to capital budgeting procedures by Haka. i. The last aspect concerns behavior characteristics. degree of professionalism and the history of the organisation. a high degree of professionalism and a history of undistinguished investment outcomes. Gordon & Pinches (1985). Pike (1986) suggests that firms operating in highly uncertain environments are assumed to benefit from sophisticated investment methods. Jackovicka J & Kheddache M (2002) more effort will be devoted to budgeting in an adverse financial situation. An administratively-oriented capital budgeting control strategy is assumed to be consistent with analytical style of management. managers will act in the best interests of existing shareholders: They will forego positive . The more variable and unpredictable the context of operation is. 2.4 The Pecking Order Theory It states that companies have a preferred hierarchy for financing decisions and maximize value by systematically choosing to finance new investments using the ‘cheapest available’ source of funds. particularly in appraising risk. Two key assumptions about financial managers are implicit in the Pecking Order Theory. management style. They argue that the implementation of sophisticated capital budgeting procedures is one of many means of coping with acute resource scarcity. since it will no longer be as simple to find an acceptable budget and there will be a need for more frequent follow up. The firm’s financial status may influence the design and effort put on capital budgeting. Another argument is that since the main value of adequate investment rules is in distinguishing profitable from unprofitable projects. there is asymmetric information: managers know more about the firm’s current earnings and future growth opportunities than do outside investors and there is a strong desire to keep such information proprietary.The second aspect is environmental uncertainty. highly profitable firms are expected to derive less benefit from such techniques than would less successful firms with history of marginal projects (Axelsson et al. mechanistic capital budgeting structures. According to Axelsson H. Secondly. First.

If a firm must use external funds. . A firm that has been very profitable in an industry with relatively slow growth (i. preferred stock. and if necessary. the preference is to use the following order of financing sources: debt. the more financial slack it can build up. A less profitable firm in the same industry will likely have a high debt-to-equity ratio. Not having to issue new securities allow the firm to avoid both the floatation costs associated with external funding and the monitoring and market discipline that occurs when accessing capital markets.e. few investments opportunities) will have no incentive to issue debt and will likely have a high debt-to-equity ratio. This order reflects the motivation of the financial manager to retain control of the firm (since only common stock has a ‘voice’ in management). Worth noting is that internal funds incur no floatation costs and require no additional disclosure of proprietary financial information that could lead to more severe market discipline and a possible loss of competitive advantage. Financial slack is defined as a firm’s highly liquid assets (cash and marketable securities) plus any unused debt capacity (Myers. of their investment opportunities internally and will not have to issue debt or equity securities. and common stock (Myers. reduce the agency costs of equity and avoid the seemingly inevitable negative market reaction to an announcement of a new equity issue.NPV projects if raising fresh equity gives more of the project’s value to new shareholders than existing shareholders (Brealey & Myers. The more profitable a firm. suggests that companies would only issue equity as a last resort when their debt capacity has been exhausted. prefer debt to equity because of lower information costs associated with debt issues. if not all. 1984). Firms with sufficient financial slack will be able to fund most.’ Journal of finance. A firm’s capital structure is a function of its internal cash flows and the amount of positive NPV investment opportunities available. 2007). Managers therefore prefer internally generated funds (retained earnings) to external funding. 1991). Myers (2007) in the ‘The Capital Structure Puzzle. convertible securities.

ROI = Gain from investment – Cost of investment Cost of investment In the formula above. If an investment does not have a positive ROI.3. ‘gains from investment’ refers to the proceeds obtained from selling the investment or interest. Cost Benefit Analysis (CBA) and Economic Value Added (EVA).3. It is computed as follows: ROA = Net income (EBIT) / Total assets (expressed as a percentage) ROA tells us what earnings were generated from invested capital (assets). the benefit (return) of an investment is divided by the cost of the investment.2. or if there are other opportunities with a higher ROI. Return on Investments (ROI). then the investment should not be undertaken. Traditional common measures include. In this study all these measures are discussed. 2. the result is expressed as a percentage or a ratio. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Return on Assets (ROA). To calculate ROI. Return on Capital Employed (ROCE). ROA for public companies can vary substantially and will be highly dependent on the industry. It is calculated by dividing a company’s annual earnings by its total assets.3 Financial Performance Measures Measures of corporate performance are numerous. 2.2 Return on Assets (ROA) This is an indicator of how profitable a company is relative to its total assets. Return on investment is a very popular measure because of its versatility and simplicity. .1 Return on Investments (ROI) This is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of different investments.

It is one of the most important operating ratios that can be used to assess corporate profitability. As a general rule. shareholders and debt holders).e.K & Rakshit.4 Cost Benefit Analysis (CBA) CBA is an economic decision-making approach used particularly in government and business organizations. Stated simply. D. benefits and costs are expressed in money terms and are adjusted for the time value of money so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their present value. 2.3. any profit earned over and above the cost of capital is Economic Value Added (Malik. A. It involves comparing the total expected costs of each option against the total expected benefits to see whether the benefits outweigh the costs and by how much. In CBA. a business should earn sufficient profit to cover its cost of capital and create surplus to grow. 2005).3 Return on Capital Employed (ROCE) ROCE indicates the efficiency and profitability of a company’s capital investment.5 Economic Value Added (EVA) This is a registered trademark of Stern Stewart & Company and is an estimate of a firm’s economic profit being the value created in excess of the required return of the company’s investors (i. The idea is that value is created when the return on the firm’s economic capital employed is greater than the cost of that capital. programme or policy is worth doing or to choose between several alternative ones. the skills of management and occasionally the general business climate. .3.3. EVA is the profit earned by the firm less the cost of financing the firm’s capital. 2. ROCE is calculated as follows: ROCE = PBIT (Net Income)/ Capital Employed Where capital employed = Share capital + reserves + all borrowings.2. Just earning profit is not enough. It is used in the assessment of whether a proposed project. a firm with a high return on capital employed will probably be a very profitable business. It is expressed as a percentage and can be very revealing about the industry in which a company operates in.

He further examined fixed (non-current) asset management practices of a sample of 99 trading and 51 manufacturing SMEs. In Kenya.4 Empirical Review Nguyen (2001). EVA = NOPAT – (WACC X Capital Employed) Where NOPAT refers to Net Operating Profit before Interest and After Tax while WACC represents Weighted Average Cost of Capital. These findings revealed that SMEs highly regarded fixed asset management although their knowledge of management techniques was not outstanding. the Net present value (NPV).M (1997) sought to review selected financial management practices adopted by small enterprises in Kenya. management and shareholders. It focuses on clear surplus in contradiction to the EVA is used by companies as a traditionally used profit available to the shareholders. He focused his attention at various financial management practices and financial characteristics and demonstrates the simultaneous impact of financial management practices and financial characteristics on SME profitability. Mundu S. performance indicator and also as a basis for executive compensation. 2. only 27 percent used the more sophisticated discounted cash flow techniques. Some 87 percent of SMEs stated that they used payback period techniques in capital budgeting. 70% of the business owners kept surplus cash with themselves and over 56% of the business owners were handling cash personally as the security to their money. internal rate of return (IRR) and modified internal rate of return (MIRR). The study found out that 66% of the respondents did not undertake cash budgeting. sought to assess the relationship between financial management practices and profitability of small and medium enterprises in Australia. . Surplus should be derived by deducting cost of capital from before interest but after tax.EVA is a measure of corporate surplus that should be shared by the employees. He found out the nearly 80 percent of SMEs always or often evaluate capital projects before making decisions of investment and review the efficiency of utilizing fixed assets after acquisitions.

Furthermore. despite a growing adoption of sophisticated capital budgeting methods. The studies have indicated that. Similar studies however reported a negative relationship of the capital budgeting techniques and financial performance. may have a greater impact on profitability. Over 80% of the businesses had prepared a business plan with the most common reason being to get financing. .5 Critical Review The objectives of this study will be to examine the relationship between financial management practices and financial performance of all shipping companies in Kenya. Some of the studies indicated that sophisticated capital budgeting techniques mostly NPV and IRR had a positive relationship with return on assets (ROA) while the traditional methods showed an insignificant relationship. These results led to the conclusion that the survival of SMEs heavily depended on the good practice of formal financial management. A number of arguments to support this have been cited. 70% of the businesses charged prices on the basis of full cost plus margin which may be a mentally calculated price or selling at what the competitors are charging and only 16% of them kept cost control reports. product development. In the literature. 2. there is no consistent significant association between performance and capital budgeting techniques. it has been argued that the use of financial management practices may be related to improved financial performance. Their findings indicate that discounted cash flow methods are not extensively being used to appraise investment decisions. Local studies on the other hand have mainly dealt with the application of the capital budgeting techniques in listed companies and also in the banking sector. Overdue accounts were followed up through reminders either by personal visits or telephone calls or both. This indicates that the mere adoption of various analytical tools is not sufficient to bring about superior performance. Other factors such as marketing. etc. more than 70% of the respondents sold on credit to those customers believed to be known by the business owner. labour relations. executive recruitment and training.

6 Summary of literature review Financial management practices influence the performance of a firm and its long term stability.The study in the banking sector particularly found the overwhelming application of the traditional capital budgeting techniques. Various theories as advanced by different writers clearly indicate the implications of each approach adopted by firms. The empirical theory also shows mixed results on the consistency of methods adopted and their impact on performance. Thus given these conflicting findings this study seeks to establish the effect of the financial management practices on financial performance of all the shipping companies in Kenya. 2. . It is therefore important that firms analyse their choices carefully in order to achieve the desired results with minimal costs so as to improve their financial performance.

1 Introduction This chapter covers the design of the study. The questionnaire will use both open and closed ended questions to obtain the information required.3 Study Population The target population will consist of all the 21 shipping companies in Kenya. One questionnaire will be administered to each shipping company using a drop and pick method or through e-mail whichever will be convenient. . A census study will therefore be conducted. The secondary data will be obtained from the published financial statements of the shipping companies. The study will seek to establish the relationship between financial management practices of shipping companies in Kenya between the periods 2008 – 2011. data collection methods. The questionnaire will be sub-divided into two sections. Primary data will be collected using a questionnaire. measurement of variables and data analysis techniques. The research design will identify how various independent variables are manipulated in order to examine how a dependent variable is affected within a relatively controlled environment. A five-point likert scale was used to save time and money. Section A for demographic information and section B for financial management practices adopted by the shipping companies. 3. Causal research has the potential to illustrate that a change in one variable causes some predictable chance in another variable. This design analyses the cause and effect relationship between the variables. the target population. 3. This is because the number of shipping companies is small and they are all situated within Mombasa County.4 Data Collection The study will use both primary and secondary data.CHAPTER THREE: RESEARCH METHODOLOGY 3. 3.2 Research Design The study will employ a causal research design also known as experimental design.

The data will also be presented using tables. . means and standard deviations. charts and cross tabulations. The data will then be analysed to generate descriptive statistics such as percentages.5 Data Analysis and Presentation The data collected will be edited for accuracy. β3 and β4 are regression coefficients The error is the difference between the calculated dependent variable value and the actual value. The following regression model will be used to compute the relationship between financial management practices and financial performance of shipping companies: Regression equation will be: Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 + ε Where: Y = Financial performance as measured by Return on Assets (ROA) X1 = Unit change in Non-current Asset management as a result of a unit increase in ROA X2 = Unit change in Accounting Information Systems as a result of a unit increase in ROA X3 = Unit change in Financial Reporting Analysis as a result of a unit increase in ROA X4 = Unit change in Capital Structure Management as a result of a unit increase in ROA ε = Error term β0 = Constant β1.3. consistency and completeness and arranged to enable coding and tabulation before final analysis. β2.

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Ownership of the company (Please tick as appropriate) Local Agent Foreign Liner Both Local & Foreign Both Agent & Liner 4.10 years Over 10 years . How long has the company been in operation in Kenya? 0 – 5 years 6 . How many branches does the company have in Kenya? 1– 5 6-10 Over 10 5. Name of the Company (optional): _________________________________ 2. PART A: GENERAL INFORMATION OF THE COMPANY 1. Your position in the Company: ___________________________________ 3.APPENDICES Appendix 1: Questionnaire AN EVALUATION OF THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF SHIPPING COMPANIES Please take a few minutes to complete this questionnaire. Your honest responses will be completely anonymous and will only be used for academic purposes only.

Neutral. 4 . 2 – Disagree & 1 – Strongly Disagree Fixed (Non-current) Assets Management (FAM) The company maintains a non-current assets register The non-current assets have been tagged Movement of non-current assets have to be authorized by senior management Non-current assets count is carried out every year Capital expenditure on non-current assets must be authorized by senior management The repair and maintenance of non-current assets is carried out regularly 5 4 3 2 1 Accounting Information System (AIS) 5 4 3 2 1 . What range of services does your company offer? (Tick as many as are applicable) Bulk Shipping Passenger service Oil Tankers Agency Service Containerized Consolidated Clearing Others (Please specify):_____________________________________________ SECTION B: FINANCIAL MANAGEMENT PRACTICES ADOPTED BY THE COMPANY Please tick (√) as appropriate your agreement with each of the following statements 5 – Strongly Agree.Agree.6. 3.

The company has a financial information management system The financial system is appropriate for the company The accounting system is well backed up outside the organisation’s offices The accounting system is custom-made for the company The accounting system is flexible to accommodate the changes in the operating environment The accounting system has an automatic back-up Retrieval of accounting information from the system is easy Financial Reporting Analysis (FRA) The financial statements of the company are prepared in line with the financial accounting standards The financial statements are prepared in accordance with GAAP The financial statements are published regularly 5 4 3 2 1 Capital Structure Management (CSM) 5 4 3 2 1 .

The capital structure of the company is appropriate The company has fully utilized the debt facility according to its capabilities The company relies on equity capital only The company is quoted on the NSE The company has foreign ownership Thank you for your co-operation .

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I. (K) Ltd 11) Seabulk Shipping Services Ltd 12) Seaforth Shipping Kenya Ltd 13) Spanfreight Shipping Ltd 14) Spear’s Shipping Agents (K) Ltd 15) Sturrock Shipping Kenya Ltd 16) Global Container Lines 17) Ignazio Messina & Co 18) CGM CMA 19) Mediterranean Shipping Co 20) P&O Nedlloyd east Africa Ltd 21) WEC Lines Kenya Ltd Source: KPA Handbook 2012/13 (www.L.kpa.ke) .Appendix 2: List of Shipping Companies in Kenya 1) African Liner Agencies Ltd 2) Bat-haf Barwil Agencies Ltd 3) Delmas Kenya Ltd 4) Diamond Shipping Services Ltd 5) Green Island Shipping Services Ltd 6) Inchcape Shipping 7) Maersk Kenya Ltd 8) Motaku Shipping Agencies 9) Oceanfreight K Ktd 10) P.co.