THE INFLUENCE OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF COMPANIES: ISSUE. CHALLENGES AND STRATEGIES

ABSTRACT

This study  titled  ‘influence of working capital management on profitability of companies; issues, challenges and strategies examined the various ways by which working capital can be managed to enhance profitability, evaluate the need for the management of working capital, and also identified the hindrances to proper management of account receivables in seeking for information needed for the study , primary and secondary means of data collections were adopted such as oral interview, questionnaires and  simple size observation, ESUT library and internet played a great role in data collection. The Taro Yamane’s formula was use in determining  the  chi-square statistic was adopted in presentation and analysis of data. Findings showed that proper management of account receivable aids efficient and effective operations in CADBURY NIGERIA PLC and that Mis-management of account payable decreases the profitability of firms to a high extent. It was concluded that the primary responsibility of preventing deficiencies and bringing new idea is with the management but financial manager play a very vital role on property management of working capital in an organization.

CHAPTER ONE

2.0      INTRODUCTION

2.1      Background of the Study

Working capital is a financial metric which represents the operating liquidity available to a business concern. As regarding fixed assets such as plants and equipment working capital is considered as a part of a company’s operating capital, referring to current assets such as cash at hand, cash on bank account raw materials working progress, finished goods, account receivable etc. To measures the efficiency of company’s working capitals, net working capital is often used which is  defined as the difference between current assets and current liabilities if current assets are higher than current liabilities, the company has working capital efficiency explaining the company’s ability to continue its operations and to have sufficient funds to satisfy both maturing short term debt and upcoming  operational expenses.

Working capital management involves planning and controlling current assets and current liabilities in a manner that dominates the risk of liability to meet due short-term obligations on one hand and avoid excessive investment in these assets on the other hand.       According to (Elijelly, 2004) there is a combination of policies and techniques for the management of a company’s working capital. These policies involves inventory management debtor’s management etc. a popular measures of working capital management is the cash conversion cycle, which tells how cash is moving through a company in terms of duration.

According to Brigham and Daves (2002) working capital management involves both setting working capital policy and carrying out that policy in day to day operation. It also involves making appropriate investments in cash, marketable securities, receivable and inventories as well as the level and mix of short-term financing (Emery Finnety and Stowe 2004).

In essence, the research tried to examine working capital management issues, specially how a company manages its working capital by shortening or lengthening its cash conversation cycle in order to contribute for a superior operating profitability. Management seeks to contain an optimum balance of cash working capital component thereby ensuring that firm operates with sufficient fund (cash flow) that will service their long-term debt and satisfy both maturing short-term obligation and upcoming operational expenses. Therefore, makes it more glaring that working capital has a pivotal  role to play in a company’s drive to achieve great or high profitability.

One can then say that decision relating to working capital must not be taken for granted. To this end, Arnold (2005) assets that if there is too little working capital or lack of working capital can account for inefficiencies in a company’s operation when it is not able to play-off. Its due obligations. On the other hand, without sufficient working capital, the company will not either be able to provide goods or service required to customers due to lack of money to buy materials for producing goods. The company’s profitability can be jeopardized as a result. Therefore the ultimate goal of working capital management is to ensure that firm’s are able to continue their operations with sufficient cash-flow that will service their long-term debts and satisfy both maturing short-term obligation (debts) and upcoming operational expenses. Hence, organization should try as much as possible to meet up with this goal so as to avoid being caught up in the trap of ineffective management of working capital components.

2.2      Statement of the Problem

This study will try to provide solution to the problem listed below.

i.            Hindrances of improper working capital management lead to bankneptey and close down of companies.

ii.          Inefficient management of working capital effect the profitability of a company.

iii.        With the high rate of corruption in our country can working capital management be wholly implemented?

2.3      Objective of the Study

The main objective of this study is to find out whether working capital management can impact on manufacturing companies profitability. Specially to determine:

i.            The relationship between account receivable period and profitability.

ii.          The relationship between account payable period and profitability.

iii.        Relationship between inventory period and profitability.

iv.         Relationship between cash conversation cycle and profitability.

2.4      Research Questions

The following research questions of this study are:

i.            To what extent do proper management of account receivable impact positively on profitability of firms?

ii.          To what extent do proper management of account payable period increase positively on profitability of firms

iii.              Can management increase in inventory period and profitability of a firm?

iv.         Can proper management increase positively in cash conversation cycle and profitability of firms?

2.5      Research Hypothesis

Hypothesis is a kind of questing thoughts formulated by the researcher in line with the research question. It is classified as follows.

Positive and negative hypothesis positive hypothesis (Alternative) while negative hypothesis means no (null).

Hypothesis one

Ho: proper management of account receivable does not enhance profitability of firms.

Hi: proper management of account receivable enhance profitability of firms.

Hypothesis two

Ho: Mismanagement of account payable does not decrease the profitability of firm’s

Hi: Mismanagement of account payable decrease the profitability of firm’s.

Hypothesis three

Ho: Management of cash and cash equivalents does not enhance profitability of firm’s.

Hi: Management of cash and cash equivalents  enhance profitability of firm’s.

1.6   Significance of the Study

This study is of importance to the researcher as it equips her with the knowledge of the      problems of working capital management to the cabric Nigeria Ltd companies. It will also be importance to various people in the society such as the government and owners of industries. It will reveal the problems of working capital management on profitability companies of working capital management on profitability companies and this knowledge will be vital to the general public and private sectors. It will also provide a model for an efficient and effective management of working capital. It will be significant to other researcher and studies who may want to use it as a reference.

1.9      Scope And Limitations of the Study

A good research to be delimited to a manageable scope delimitation of research refers to the definition of the scope (extent or boundary) covered by the research in other words, the research respondents are going to be concerned with making decisions in the companies.

The researcher faced the following challenges/limitation during the process of data collection.

Due to the economic situation of Nigeria and other academic issue like (buying of textbooks, paying of school fees), that requires financial attention, the researcher encountered financial challenges.

Secondary, due to inability to reach all the members of the sample owing to some circumstance, the resulting sample was not quite of cooperation from some respondents, somehow limited this exercise.

Finally, due to the limited time induced to complete and present the research work, the researcher curtailed her efforts to the most sensitive aspects of the topic. Notwithstanding; the above constraints, the research did her best to present worthwhile and comprehensive work.

1.10Definition of Terms

Working capital: Working capital is the total amount of cash tied up in current assets and current liabilities and is calculated by deducting the total amount of current liabilities from the total current assets.

Account payable: Is money by a business to its supplier shown as a liability on a company’s balance sheet.

Collection policy: Is the steps that a company follows in ensuring timely payment of its account receivable or procedures a firm follows in attempting to collect account receivable.

Account receivable: Are money which his owed to a company by a customer for product and service provided. It is been shown as current liabilities.

Management: This is the decision making body of an organization it is a group of people who manage the company affairs.

Cash conversation cycle;Is a company that measure how long a firm will be deprived of cash  if it increases its investment in resources, in order to expand customer sale

Operating cashflow Ration;Is use to measure how well current liabilities are covered by the cashflow generated from a company operation.

Credit policy; Is a clear , written guidelines that set the term and condition for supplying goods on credit.