IMPACT OF WORKING CAPITAL MANAGEMENT ON CORPORATE PROFITABILITY OF NIGERIAN MANUFACTURING FIRMS: 2000 TO 2011

Abstract

This study examined the impact of working capital management on the profitability of Nigerian quoted Manufacturing firms. The working capital variables studied comprise accounts payable, accounts receivable, cash conversion cycle, stock/inventory turnover and liquidity. This study also used sales growth and Debt as control variables in examining the impact of working capital management on the profitability of Nigerian firms. Secondary sources of data were sourced from the Annual Reports of the 22 manufacturing firms selected for this study for the period 2000-2011. Five Hypotheses were estimated with the use of Generalized least square multiple regression. The findings of the study show that, accounts payable ratio [AP] had negative relationship with the industries’ profitability. On the other hand, accounts Receivable ratio [AR] had positive and significant relationship with profitability of the firms studied. Stock turnover ratio had negative and significant relationship with profitability of the firms under study. Results also show that firms cash conversion cycle [CCC] had positive but non-significant relationship with the industries profitability, and Liquidity ratio had negative relationship with the industries profitability. Based on the findings of the study, the following recommendations were made; there should be a balance between liquidity and profitability. They should also avoid stock-outs because of the huge sales they made during the years under study. They are encouraged to reduce their cost of sales to make more profit. There should also increase their credit sales so as to have enough cash to settle their obligations. Specialized persons should be hired by these companies for expert advice on working capital management. One of the greatest contributions of this study is the perspective we followed in the measurement of variables (Descriptive and four functional models of multiple regression).

CHAPTER ONE

INTRODUCTION

1.1             Background of the study

The sustainability of a firm heavily depends on the ability and success of its financial management function (Karaduman et al 2011). Traditionally, corporate finance involves capital budgeting, capital structure and working capital management, capital budgeting and structure, such as investments in fixed assets are about the management of long-term capital and attract more attention than working capital management in finance literature. However, working capital management is also a very important field of corporate finance, because of its considerable effects on the firms profitability and liquidity (Nazir and Afza, 2009, Chiou, et al 2006, and Alshubiri; 2011) In order to maintain its activity firms typically need two types of assets, fixed assets and current assets. Fixed assets which include, building, plant, machinery, furniture, fixture and fitting among others are not only purchased for the purpose of resale, but also for operational purposes (Singh and Pandey, 2008). On the other hand, current assets are seen as key components of the firm`s total assets. A firm may be able to reduce its investment on fixed assets by leasing, but this becomes practically difficult for current assets. (Afza and Nazir 2008)

A firm’s investment in current assets such as cash, bank deposits, short term securities, accounts receivables and inventories are called working capital. To put it differently, net working capital is the surplus of current assets over the short term liabilities and represents the liquidity margin available to meet the cash demands in order to maintain the daily operations and benefit from the profitable investment opportunities (Yaday, Kamtt and Manjrekar, 2009, Padachi, 2006).