An Evaluation Of Financial Distress And Its Antecedents In Public Sugar Companies In Kenya.

ABSTRACT

Financial distress refers to a condition in which an organization experiences difficulties in meeting its financial obligations as they fall due. A company under financial distress can incur costs related to the situation, such as high cost of financing, opportunity costs of projects, less productive employees, etc. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of bankruptcy, which could force them out of their jobs. Some of the causes of financial distress identified were capital inadequacy, unskilled workforce, Government regulations, bloated cost base, wastages, natural disaster, weak internal controls, competition, etc. Since inception, the performance of public sugar companies has been dismal hampering the achievement of target objectives of self-sufficiency in sugar production and efficiency in operational processes as well as financial performance. The myriad constrictions experienced over the years included buildup of loan arrears, farmers arrears, delayed salaries and overdue suppliers accounts, inability to fund their annual factory maintenance, poor cane husbandry, lack of early maturing varieties, poor yields, etc. For these Companies to pay off their overheads, they have continuously been compelled to operate on bank overdraft facilities with high interest rates thereby compounding their financial exertion. These circumstances are indicators of inadequate cash generation and poor financial health. In an effort to transform the industry and steer it towards greatness in efficiency and effectiveness, the Government embarked on a privatization mission. This project evaluated the presence of financial distress and its antecedents in Government owned sugar companies in Kenya. Specifically, the study established how liquidity, efficiency, profitability and solvency ratios relate to financial distress of an organization through the application of Edward I. Altman’s Z-score model. The study population comprised of four public sugar factories in Kenya and study sample included Chemelil, Muhoroni, South Nyanza and Nzoia sugar companies. Secondary data applied in the study was collected from audited financial statements for the five years from 2011/12 to 2015/16. Specific data content included working capital, total assets, retained earnings, market capitalization, total liabilities and sales figures. Descriptive research design was adopted in the study. The collected data was then analyzed using Microsoft excel software. In the analysis, Karl Pearson’s model of analysis, scatter diagrams and central tendency measures (mean and standard deviation) were used to test the correlation between independent and dependent variables for each of the four Companies. Multivariate Discriminant Statistical technique as used by Altman was employed in computing the level of financial distress as measured by Z-value. The computed Z-values were presented in a line graph showing the trend over time. The results of correlation computed according to Karl Pearson’s model, scatter diagrams, central tendency measures and hypothesis testing were presented. The study results showed that the four public sugar companies are financially distressed and operated at the mercy of creditors. The companies are technically insolvent as they do not generate adequate cash to support the operations. Therefore, privatization which was already embarked on by the Government appeared appropriate but there is need to restructure the human resource component as there seemed to be an over staffing problem which led to increased overheads in the form of high salary cost. Post the re-engineering exercise, new management should invest in modern sugar production technology in order to realize financial efficiency and effectiveness.