International Journal of Education and Research Vol. 6 No.

6 June 2018

Effect of Liquidity on Financial Performance of the Sugar Industry in Kenya

1
Calistus Wekesa Waswa, 1Mohamed Suleiman Mukras & 1David Oima

Maseno University

Kenya

Abstract
Liquidity is one of the most important goals of working capital management and central task of
revenue optimization and company’s financial performance. Equally, aggressive liquidity
management is associated with higher corporate value, despite differences in structural
characteristics or in the financial system of a firm. Given the recurrences of liquidity management
in sugar industry this study sought to investigate the effect of liquidity management on firm
performance using a sample of five sugar firms over the period 30th June 2005 to 2016. We estimate
a random effects regression model where the results suggest that a negative relationship exists
between liquidity management on firm performance. Based on the study findings the following
policy recommendations are proposed and if implemented will help resuscitate the overall financial
performance of factories in the sugar industry and hopefully reverse their financial performance
fortunes. The study recommends that careful consideration and planning of funding liquidity
management is one of the ways to financial performance and as such this study recommends that
there is need for the sugar industry firms to increase their operating cash flow, to positively
influence their financial performance.

1.1 Background of the Study

The sugar industry sector is one of the most important contemporary economic sectors. Because of
their role and high impact in the development of the economy at the local and global level. In fact, it
is relied upon by most national economies of industrialized advanced countries where the
manufacturing industries sector plays a significant role and hence cannot be ignored in the process
of economic development in any state and because this sector occupies an increasing importance in
developing countries’ development plans as they seek to improve firms’ financial performance
through managing its liquidity.

Liquidity is one of the most important goals of working capital management and central task of
revenue optimization and company’s financial performance. Efficient working capital management
leads to an improved in the operating performance of the business concern and it helps to meet the
short-term liquidity (Maness and Zietlow, 2005; Samiloglu and Demirgunes, 2008). Increased use
of overdrafts, lateness in payments of trade creditors, and decreasing cash balances may all signal a
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weakening liquidity position and a potentially increased probability of default. Current liability
coverage ratio, a measure of a firm’s liquidity position provides a litmus test for firm’s solvency. It
is considered the most accurate method as cash used to pay off dividends is subtracted thus giving a
truer picture of the operating cash flow. GARP (2015) contended that liquidity is essentially a
short–term problem caused by short-term unexpected liabilities and the funding requirements of
long-term liabilities that have adverse effect on firm financial performance. Liquidity risk therefore
arises from the variability in short-term assets and liabilities and short-term components of long-
term assets and liabilities.

According to Podilchuk (2013), financial optimisation of a company is usually performed along two
basic dimensions: long-term and short-term analysis. The former is aimed at capital structure
optimisation, which is the balance of debt and equity maximising the value of the firm. Short term
optimisation focuses on liquidity management. Basically, current assets management is the major
tool for capital structure optimisation. Therefore, the task of the company’s chief financial officer
(CFO) is to conduct effective liquidity management to maximise the value of the company and its
financial performance. The key factor in identifying firms in liquidity is their inability to meet
contractual debt obligations due to poor revenue. This has a negative effect on firms’ financial
performance (Elloumi and Gueyie, 2001).

Halling and Hayden (2006) explain that an institution should define and identify its liquidity risk. A
Company’s liquidity needs and the sources of liquidity available to meet those needs depend
significantly on the company’s business and product mix, balance sheet structure and cash flow
profiles of its on- and off-balance sheet obligations. As a result, an institution should evaluate each
major on and off-balance sheet position, including the effect of embedded options and other
contingent exposures that may affect the institution’s sources and uses of funds, and determine how
it can affect liquidity risk (Jeanne and Svensson, 2007).

A company should recognise and consider the strong interactions between liquidity risk and the
other types of risk to which it is exposed. Various types of financial and operating risks, including
interest rate, credit, operational, legal and reputational risks, may influence company’s liquidity
profile. Liquidity risk often can arise from perceived or actual weaknesses which may affect the
company’s financial performance (Akhtar, 2007). The study on the effect of liquidity on financial
performance of the sugar industry Kenya will strongly be anchored on this theory.

Depending on organisational goals, different methods are adopted by different firms to measure
their performance. This performance indicator can be measured in financial and non-financial terms
(Darroch, 2005; Bagorogoza and Waal, 2010; Bakar and Ahmad, 2010). According to Grant,
Jammine, and Thomas (1988) firms, prefer to adopt financial indicators to measure their
performance Return on assets. However, financial elements are not the only indicator for measuring
performance of a firm. It needs to combine with non-financial measurement to adapt to the changes
of internal and external environments (Krager and Parnell, 1996).

Kegode (2005) argued that threat to the sugar sector is real and it arises from uncompetitive
position that characterises the sector. The sector requires a total of KSh50 billion to bail it out from
total collapse. The industry needs at least KSh20 billion to clear all debts on sugar factory balance
sheets. Shilitsa (2015) stated that Mumias Sugar Company was temporarily closed to allow for

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urgent maintenance work, but it was also facing liquidity problems. The company owes farmers and
creditors an estimated KSh6 billion, which it found difficult to repay in the face of dwindling
production and low profitability. This is attributed to cane shortage, frequent of breakdown of
machines and low sales. Sugar famers welcomed the change of guard at the company and expected
the new CEO to address challenges surrounding development of raw materials and poor
management of the company.

Kenya’s sugar industry is dying a slow but painful death, the largest miller, Mumias sugar company
is now living from hand to mouth, waiting for Government bailouts to stay afloat. Five other
publicly owned sugar millers are either in receivership or choking under the burden of debts. Nzoia
sugar is the most indebted and owes the Government and the Agricultural Food Authority at least
sh28 billion in total. Muhoroni Sugar Company owes sh8 billion while Miwani has sh3 billion debts
sitting on its books. Sony Sugar Company and Chemelil owes each sh1 billion. The factories cannot
pay farmers on time, the taxman and other suppliers are also on the queue. Mumias Sugar
Company, a once vibrant and largest miller in country, is collapsing under the mountain of debt and
acute shortage of raw material, raising questions whether public funds given to the firm as bailout
have been useful. There is little to show since the bailout began as the company has been making
losses with production declining drastically. There are lapses in management and corporate
governance, which have led to losses or being locked into unfavorable trading arrangements. The
company has been brought to its knees by bad management decisions, rising from debts and cheaper
imports from coming into the country (Makokha, 2017).

1.2 Statement of the Problem

As argued by Eljelly (2004), managing liquidity is important when firms are in a good situation, but
is most important during troubled times of firms’ performance. When a firm is unable to pay its
obligations, it is illiquid. Furthermore, aggressive liquidity management is associated with higher
corporate value, despite differences in structural characteristics or in the financial system of a firm.
Liquidity management is important for all firms in all situations.

From the literature on liquidity and financial performance efficient working capital management
leads to an improved funding liquidity (Maness and Zietlow, 2005; Samiloglu and Demirgunes,
2008; Howells and Bain, 2005; Rahaman, 2010; Akhtar, 2007). Stein and DeMuth (2003) stated
that liquidity ratios are used to compare firms’ performance contrary to Podilchuk (2013) who
argued that financial optimisation of a company is performed along two basic dimensions: long-
term and short-term analysis. Ramana and Hari (2013), Obado (2005), Odindo (2018), Makokha
(2017) and KNAEP, 2015 agreed that indebtedness affect negatively the financial performance of
the company however, Gongera, Barrak and Jane (2013), Atieno (2009) and Murgor (2008) stated
that financial risk exposure affects negatively company’s financial performance.

The studies indicated above discussed how company liquidity affects financial performance of
companies without applying current liability coverage ratio to test solvency in sugar industry in
Kenya, which is also a better indicator of the company’s ability to pay current liabilities and
includes the current maturing portion of long term debts. These authors reviewed did carry out
empirical reviews on current liability coverage ratio as one of the cash flow ratios acts as a reliable
indicator of liquidity which was applied in the current study. These researchers also failed to
explain the class of debts that affect liquidity (long term or short-term debts). Short term debts
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affect liquidity management. The study proposed adopted cross-sectional panel data, from a
methodological level the study had many strengths as it was conducted using sixty elements. The
recurrences of liquidity management problem in sugar industry indicate that there is a real need to
study the effect of liquidity and corporate governance on the financial performance of the sugar
industry in Kenya.

1.3 Objective of the Study

The objectives of the study are;

i). To determine the effect of liquidity on the financial performance of sugar industry in Kenya.
ii). To determine the effect of firm size on the financial performance of sugar industry in Kenya.

1.4 Hypothesis of the Study

Based on the above objectives we set to investigate the following hypothesis;
i). A firm’s liquidity position does not affect its financial performance.
ii). Firm size does not affect its financial performance.

2.0 Literature Review

This study is anchored on the liability management theory of Markowitz (1952). According to
Markowitz (1952) argued that the liability management theory holds that financial institutions can
meet their liquidity requirements by building in the market for additional funds to meet loans and
deposit withdrawal. The potential requirement for funds can be met by asset liquidity and liability
liquidity. The firm can use these liquid assets to finance its activities and investments when external
finance is not available.

Empirical literature on the nexus between liquidity and firm performance abounds. Pandey (2008),
Eljelly, (2004), in their studies found out that, Working capital management affect company’
liquidity. Palepu, Healy and Bernard (2000) recommended financial ratios and cash flow analysis as
methods of measuring financial performance and Shilitsa (2015) agreed that debts of the companies
increase companies’ illiquidity and impairs the companies’ financial performance..

Al-khatib and Al-Horani (2012) investigated the role of a set of financial ratios in predicting
liquidity of publicly listed companies in Jordan. The authors used logistic regression and
discriminant analysis a comparison to determine which is more appropriate to use as well as which
of the financial ratios are statistically significant in predicting the liquidity of Jordanian companies.
During the period between 2007 and 2011, the results show that both logistic regression and
discriminant analysis can predict liquidity, and that Return on Equity (RoE) and Return on Assets
(RoA) are the most important ratios, which help in predict the liquidity of public companies listed
on Amman Stock Exchange.

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In his study, Eljelly (2004) found that there was a significant negative relationship between a firm’s
profitability and its liquidity level. When firms have more assets than liabilities, this might be a sign
that they are losing investment opportunities that could return in profits for the company. Having
fewer current assets is risky. However, in the long term, it is profitable. This retains more cash
leads to lower profit due to missing profitability investment opportunities. Illiquid firms are risky,
yet profitable. However, this cannot be the case in all situations, as other factors can affect these
propositions. The size and age of the firm affects the effect of liquidity on profitability. Small firms
with high liquid assets might be more profitable than larger firms in the short term. Conversely,
larger firms with illiquid assets might be more profitable than smaller firms in the long term.

Sur, Maji and Banerjee (2013) made a comparative analysis of liquidity management of four major
companies in Indian power sector, covering a period from 1987-88 to 1996-97. The techniques of
radio analysis, Motaal’s comprehensive rank test, and simple statistical techniques like measures of
central tendency and spearman’s rank correlation analysis have been used for the analysis. The
liquidity ratios such current ratio, quick ratio, current assets to total assets ratio, inventory turnover
ratio and debtors’ turnover ratio have been used for comparison and suitable interpretations have
been made Motaal’s comprehensive test is used to analysis the liquidity more precisely. To measure
the closeness of association between liquidity and financial performance of the companies,
Spearman’s rank correlation co-efficient has been applied. The study has revealed that the inventory
turnover ratio has a positive impact on firms’ financial performance whereas the liquidity ratio,
working capital turnover ratio and working capital to total asset have negatively influenced the
profitability.

Margolis and Walsh (2001) found that, in 95 studies, financial performance was measured in 70
different ways. They found that there were 49 accounting performance measures (such as RoE and
RoA) and 12 market performance measures such as earning per share [EPS] and price–earnings
ratio [P/E] used in those studies. Five studies tended to use a mix of accounting and market
measures, and four other measures entailed outcome performance. Most of accounting measures
and marketing measures have focused on measuring return, rather than risk.

Bentzen et al. (2012) reported that new firms are anticipated to earn less profit than older ones
because they are less experienced in the market and because they are trying to establish their own
presence; in addition, they are usually trying to cover their cost structure.

Khidmat and Rehman (2014) analysed the relationship between the liquidity, solvency and
performance which plays a vital role in the Return on Assets of the chemical sector in Pakistan. The
analysis explained the relationship between liquidity and solvency with RoA and is conducted on
the data of 10 chemical companies for the past nine years (2000-2009) in the chemical sector of
Pakistan. Conclusions drawn were that liquidity ratio affects RoA positively while it impacts
negatively on solvency.

Rehman (2013) investigation on relationship between financial leverage and financial performance:
empirical evidence of listed companies of Pakistan. The study sample size was 35 food companies
listed on Karachi Stock Exchange. Financial performance was the dependent variable measured
using five indicators of: ROA (%), ROE (%), EPS after tax (%), NPM (%) and sales growth. The
researcher identified gaps that would require further studies in following areas: by extension period
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and take all food companies on the Karachi Stock Exchange, consider comparative studies by taking
data from different sectors to check the relationship between the variables studied.

Amalendu (2007) in his study on Liquidity Management of Sponge Iron India: A Case Study an
attempt was made to examine and evaluate the liquidity management of the public enterprise as a
factor responsible for poor performance in the iron and steel industry in India, covering a period
from 1991-92 and 2002-03, he compared the various liquidity ratios and concluded that the liquidity
management of sample companies were important for the firm’s financial performance.

According to Shen and Rin (2012), cited by Mule, Mukras and Nzioka (2015) in their study found
that firm size had a positive relationship with performance, implying that bigger firms are expected
to achieve better performance. However, in the case of UK firms, size had a negative and significant
effect on performance of the companies. This implies that, small companies sometimes suffer less
from agency problems and more flexible structure to fit the change. They further argued that
management efficiency reflects the capability of the management to deploy its resources efficiently
and can be measured by financial ratios. The higher the ratio, the more the efficient management is
in terms of operational efficiency, income generation and asset utilisation. Borghesi et al. (2014)
and Audra et al. (2007) indicated that older firms are incapable of quick response to any changes in
the environment and thus does not easily adapt to changing business environments which affects
their financial performance.

Research by Mugenda, Momanyi, and Naibei (2012) focused on the implications of risk
management practices on financial performance of sugar industry in Kenya using exploratory
design and survey research methodology that included structured questionnaires and interviews.
The empirical results of the study indicated that variation in risk management practices within firms
is significant. Further, the study indicated a more than average positive relationship between risk
management practices and performance (r = 0.67). Since this theory is more based on ownership
structure, it will not be strongly applied in the present study.

3.0 Research Methodology

A cross-sectional retrospective research design was used for this study where the effect of liquidity
was assessed in relation to financial performance of sugar industry in Kenya. This research design
enables the researcher to observe two or more variables at one point in time and was useful for
describing a relationship between two or more variables (Breakwell, Hammond, Fife-Schaw, and
Smith (2006). In this study the population of the study, comprised 11 sugar firms as by Kenya Sugar
Board 2010.

However not all firms were considered and thus we adopted a purposive sampling technique which
is used in cases where the specialty of an authority can select a more representative sample that can
yield more accurate results than by using other probability sampling techniques. The total sample
thus considered for this study consists of five sugar firms registered with Kenya Sugar Board that
were in operation and availability of firm’s secondary data.

The data were extracted from secondary sources that included the financial reports of the five
selected sugar manufacturing firms for the period for years ended 30th June 2005 to 2016. The

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period of study was long enough to avoid the firms’ effects. Therefore, the panel data had sixty
elements. The sugar factories were selected based on availability of data. They are Chemelil,
Mumias, Nzoia, Muhoroni and South Nyanza. To study the effect of liquidity on sugar industry
financial performance in Kenya, the study adopted the estimation model used by Kuznetsov and
Muravyev (2001) which is modified and estimated in the following form:

= + + + +

Where is return on assets and is used as a measure of a firm’s financial performance,

is the Current liability coverage ratio, is firm size and is a vector of control variables
that includes firm age and monetary policy that based on the literature also influence firm
performance. The adopted control variables help to capture heterogeneity or individual effects as
constants. Therefore, it contains a set of individual or group specific individuals which may be
unobserved or observed all of which are taken to be constant over time resulting in a more effective
model that is linear and fit by least sequences (Greene, 2008). , , and are regression to be
estimated.

Table 1: Measurement of variables in the study

Variables Definition Measurement
Dependent Variable Dividing profit after tax (net income)
ROA Return of assets by net reliable value of the asset

Independent Variable
Liquidity Funding Liquidity Current Liability Coverage Ratio

Firm size Firm size Natural logarithm of book value of

total assets
Control Variables
Monetary policy Basis rate Central Bank rate

Firm age Years of establishment Natural logarithm of years since

establishment
Source: Author (2017)

4.0 Descriptive and Correlational Analysis

The current liabilities coverage ratio for the firms under consideration had an average of 3.418
percent with a reported standard deviation of 2.07 suggesting that the ratio across firms oscillates
around the mean. The averages of 3.418 percent mean imply that current cash flows can pay 3.418
percent the current liabilities. On average, we establish that the sugar industry is underperforming as
indicated by the return on assets (ROA).

The companies have a ROA of -0.32 an implication that their they have not been financially stable
over time with the dip in financial performance for some companies being -6.92 percent. The
variation in financial performance between the firms in the sugar industry is also low with the
standard deviation from the mean being 1.19. ROA, an indicator of what management has
accomplished with the given resources (assets) is directly related to management’s ability to
efficiently utilize firms’ assets, which ultimately belong to shareholders. A lower return on assets
will indicate inefficiency hence poor financial performance.

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On liquidity, we establish that it averages 3.418 percent with a reported standard deviation of 2.07
suggesting that the ratio across firms oscillates around the mean. The averages of 3.418 percent
mean imply that current cash flows can pay 3.418 percent the current liabilities, an indication that
cash flows from these firms are not sufficient to pay the current liabilities as and when they fall due
(Jun, 2017: Joy, 2008). This is also consistent with liquidity management theory.

Table 2: Summary statistics

Variable Mean Std. Dev. Min Max
ROA -0.318 1.188 -6.920 1.320
Monetary policy 9.519 2.281 6.420 15.750
Firm size 21.970 1.832 15.860 24.180
Firm age 3.866 0.124 3.610 4.110
Current liabilities coverage 3.418 2.003 -0.095 7.683
The correlation findings reveal that there is a negative relationship between current liabilities
coverage ratio and firm performance, that is (r = -0.165). This finding implies that a higher score
current liabilities coverage ratio has a negative effect and an increase current liabilities coverage
ratio is associated with a decline in profitability (ROA) an indication that cash flows from these
firms are not sufficient to pay the current liabilities as and when they fall due (Jun, 2017: Joy,
2008). This is also consistent with liquidity management theory.

Table 3: Pearson correlation analysis

ROA MPI Size Age CLCR
Return on assets 1
Monetary policy -0.035 1
Size 0.625 0.046 1
Age -0.087 0.111 0.155 1
Current Liabilities to Coverage -0.165 0.063 0.130 0.222 1
Notes: ROA represents return on assets, CLCR is the current liabilities coverage ratio, CGI is the corporate
governance index, MPI is monetary policy innovations, while Size and Age are firm size and age respectively.

4.1 Diagnostic Tests

In order to ensure robustness of the results we conducted tests of multicollinearity, Stationarity
Tests, heteroskedasticity, autocorrelation and the Hausman test to test for the appropriate model to
estimate between a fixed and random effects model. In testing for multicollinearity, we adopted the
variance inflation factor (VIF) tests where we established that VIF were less than 5 and in the spirit
of Montgomery (2001) and Gujarati (2003) who indicated that VIF values should not as a rule of
thumb be more than either 5 or 10 respectively we conclude that the model did not suffer from
multicollinearity. The test for unit root was undertaken using the Im-Persaran-Shin (IPS) test which
allows for heterogeneous coefficients. The results of the Im-Persaran-Shin (IPS) test indicated that
the variables were non-stationarity at level but stationary at level and thus the model incorporated
variables at first difference. In testing the spherical disturbances assumption, we adopted the
Breusch-Pagan LM test of independence whose null hypothesis states that the spherical
disturbances are homoscedastic or tests the null of poolability (Gujarati, 2003; Wooldridge, 2003).

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The Breusch-Pagan LM test with a (10) = 8.004 is statistically insignificant (p-value =

0.6285) at all levels of significance and thus in line with Gujarati (2003) and Wooldridge (2003)
we conclude that the spherical disturbance assumption has been met as the Breusch-Pagan LM test
affirms that the cross-firm residuals are not correlated. In addition, using the Wooldridge (2002) test
for serial correlation which is a F-test under the null hypothesis of no first-order autocorrelation.
The F-test statistic i.e. F(1,4) = 3.514 is found not be statistically significant (p-value = 0.1341)
at all levels of significance and thus we conclude that there is no first-order serial correlation. In
choosing between the fixed and random effects model we employ the Hausman test which is a
test which yield a 1.36 with a p-value = 0.84 which is more than 0.05 thus this study applies the
random effects regression model.

4.2 Regression on the effect of liquidity management on ROA

The regression results for the random effects model reveals that the relationship between current
liabilities coverage ratio and financial performance is negative = −0.0962 , p-value = 0.138
though insignificant at 5% level of significance. This therefore invariably means that as a firm’s
current liabilities coverage goes up ratio (liquidity deteriorates) the financial performance of a firm
deteriorates. The results are consistent with many researchers who concluded that liquidity
management would improve the firm is worth and its operating performance (Khidmat and
Rehman, 2014; Amalendu, 2007). The results differed with Eljelly (2004) who found a significant
negative relationship between a firm’s financial performance and its liquidity level. He argued that
When firms have more assets than liabilities, this might be a sign that they are losing investment
opportunities that could return in profits for the company.

We also note that firm size has a significant positive effect on firm performance = 0.5184,
p-value = 0.000 which conforms to theoretical expectations that the larger the firm is the more
market share it commands and thus the higher her financial performance. On the controls, we
observe that changes in monetary policy is also seen to have a negative effect on a firm’s financial
performance = −0.009, p-value = 0.849 though the relationship that exists is insignificant.
From this relationship we infer that changes in the monetary policy, proxied by central bank rate
alters a firm’s financing structure as debt becomes more expensive to repay as interest rates
increases and thus a toll on the firm’s financial performance.

With respect to a firm’s age, a control variable adopted in the study, we establish that there exists a
significant negative relationship = −3.683 , p-value = 0.012 with financial performance. This
supports the proposition that older firms are contemporaneously reaching the end of their life cycle.
Black et al. (2006) suggest that older firms are more likely to have finished their high-growth stage,
while younger firms are faster growing. Accordingly, younger corporations, as measured by a
shorter incorporation history, are more likely to have better growth opportunities. Shen and Rin
(2012), cited by Mule, Mukras and Nzioka (2015) in their study also found that firm size had a
positive relationship with performance, implying that bigger firms are expected to achieve better
performance. Similarly, Borghesi et al. (2014) and Boone et al. (2007) indicated that older firms are
incapable of quick response to any changes in the environment and thus does not easily adapt to
changing business environments which affects their financial performance. However, it is in
conflict with the findings of Bentzen et al. (2012) who reported that new firms are anticipated to
earn less profit than older ones because they are less experienced in the market and because they are
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trying to establish their own presence; in addition, they are usually trying to cover their cost
structure.

Table 4: Random Effects regression results on the effect of liquidity and corporate
governance of firm performance

Std.
Dependent Variable: ROA Coef. t-stat P>t [95% Conf. Interval]
Err.
Constant 2.962 6.114 0.48 0.628 -9.0213 14.946
Current Liabilities Coverage Rate -0.096 0.065 -1.48 0.138 -0.223 0. 0308
Monetary Policy -0.009 0.046 -0.19 0.849 -0. 099 0. 0816
Firm Size 0. 518 0. 069 7.52 0.000 0.384 0.653
Firm Age -3.683 6.114 0.48 0.628 -9.021 14.946
(4) 77.16
Prob > 0.00
Overall Adjusted R-square 0.4445

5.0 Summary, Conclusions and Recommendations

The results of the data analyses undertaken to empirically test the nexus between liquidity
management and financial performance of the sugar industry. The results have indicated support for
the hypotheses linking liquidity and factory financial performance. Essentially, this study has used
the random effects empirical model to examine the relationship between liquidity and firm
performance of sugar industry in Kenya using data for the period June 2005-2016. The results
reveal that liquidity current liability coverage ratio is negatively correlated with firm performance,
indicating that a higher value of liquidity current liability invariably influences a firm’s financial
position. The regression results affirm that current liability coverage ratio negatively affects firm
performance a suggestion that the firms in Kenya’s sugar industry operate on low or negative cash
flows, highly geared and lack of asset and liability strategies that could improve their financial
performance.

Based on the study findings the following policy recommendations are proposed and if
implemented will help resuscitate the overall financial performance of factories in the sugar
industry and hopefully reverse their financial performance fortunes. First, the study recommends
that careful consideration and planning of funding liquidity management is one of the ways to
financial performance and as such this study recommends that there is need for the sugar industry
firms to increase their operating cash flow, to positively influence their financial performance.
Secondly, factories were highly geared and were incurring heavy financial costs, hence the
variations in the determination of return on assets. Thus, debt financing, which is rampant among
sugar factories need to be minimized and equity-based financing be introduced. The costs,
especially financial costs need to be put under control if the financial performance of the industry is
to be improved. Thirdly, the sugar firms under study are heavily indebted and near insolvent as
brought out by the results from secondary data analysis. The sugar factories should implement
appropriate capital structure, sound business premise, reasonable cash flow, and statement of
financial position leverage combined with supported forecasts. Fourthly, the management should

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develop asset and liability strategies, management needs policy guidelines for cash flow to
maximize the profit potential, while minimizing the liquidity risk in the financial statement.

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