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EFFECT OF
WORKING CAPITAL ON THE OPERATIONAL EFFICIENCY OF AN ORGANIZATION
TABLE OF CONTENTS
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study
CHAPTER TWO
LITERATURE
REVIEW AND THEORETICAL FRAMEWORK
2.1 Concept of Working Capital
2.2 Working Capital Management
2.3 Components of Working Capital
2.4 Working Capital Ratios
2.5 Dangers of Excess Working Capital
2.6 Determinants of Working Capital
2.7 Relationship between Working Capital and
Profitability
2.8 The Nigerian Economy and Working Capital
Management of Quoted Firms in Nigeria.
2.9 Historical Background of Cadbury Nigeria
Plc
2.10 Theoretical Framework
2.11 CONCLUSION
CHAPTER
THREE
METHODOLOGY
3.1 Description of the Study Area
3.2 Method of Investigation
3.3 Methods of Data Collection
3.4 Research Instrument
3.5 Validation of Research Instrument and
Testing
3.6 Method of Data Analysis
CHAPTER FOUR
PRESENTATION, ANALYSIS AND
INTERPRETATION OF DATA
4.1 Components Of Working Capital In Cadbury
Nigeria Plc
4.2 Data Analysis (Secondary Data)
4.3 Data Analysis (Primary Data)
4.4 Hypotheses Testing
4.5 Discussion of Findings
CHAPTER FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
REFERENCE
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The current
scarcity of cash and credit is threatening the survival of many businesses in
all over the world primarily in Nigeria as its considered the sources of
company’s working assets and liabilities referred to as working capital. it is
a fact that corporations could not exist without working capital and this is
undeniable. Eventually, the management of working capital (WCM) necessitates
short term decisions in working capital (WC) and financing of all aspects of
both firms short term assets and liabilities.
This
explains the fact that firms with inadequate working capital are in financial
strait jacket. As the name implies, working capital refers to the funds that
are required for the day to day running of the activities of a firm. it is the
excess of current assets over current liabilities. Working capital management
involves the relationship between a firms short term assets and its short term
liabilities. The goal of working capital management is to ensure that a firm is
able to continue its operations and that it has sufficient ability to satisfy
both maturing short term debt and upcoming operational expenses. In view of
that, working capital management has become one of the most important issues in
the organizations where many financial executives strive to identify the basic
working capital drivers and the appropriate level of working capital (Lamberson
1995).
The
management of working capital involves managing inventories, account payables,
account receivables and cash. Large numbers of business failure has been
attributed to the inability of financial managers to plan and control the
current assets and current liabilities of their respective organizations. This
explains why working capital management is vital to firms with limited access
to the long term capital market. The working capital measures both a company’s
efficiencies and its short term financial health. It also gives investors an
idea of the companies underlying operational efficiency. The working capital
shows a company’s efficiency, financial strength and cash flow health which
also helps in determining the profitability and risk as well as its value
(Smith 1980).
The
significant of working capital had been highlighted in most of the literature
of WCM i.e. Eljelly (2004) described that the efficient WCM are engaged with
planning and controlling current assets and liabilities in such a way that
eliminates the risk of inability to meet short term obligations in hands with
the avoidance of excessive investments in these assets. Siddiquee and khan
(2009) indicate that the inefficient management of WC not only reduces
profitability but ultimately may also lead a concern to financial crisis thus
every organization irrespective of its profit orientation, size and nature of
business needs requisite amount of WC. Consequently, the efficient WCM is the
most crucial factor in maintaining survival, liquidity, solvency and
profitability of the concerned business organization. Thus, we could say that
approach in managing working capital has enormous influence to the firm’s
performance.
The
importance of working capital in the day to day running of the business
activities of a firm are stated in the books. Having said that working capital
is the live wire of a business, it is expected that effective provision of it
will ensure greater success of a company while in — effective management of it
will lead to ultimate downfall of what otherwise might be considered as a
prosperous concern. Working capital is important to the operations of a firm
but the maintenance of a working capital is more crucial. This is because
excessive working capital means holding costs and idle funds which earns no
profits for the firms is dangerous while inadequate working capital which means
not having sufficient funds only limits the firm’s profitability but also
results in production interruptions and inefficiencies and sales disruptions.
.
1.2 Statement of the Problem
Working
capital management is a managerial accounting strategy focusing on maintaining
efficient levels of both components of working capital, current assets and
current liabilities in respect to each other. Generally speaking, the immediate
problem facing most financial managers always centers on the best way to ensure
suitable survival of the business as well as its expansion in terms of working
capital management.
A firm or
company should be in a sound working capital position. It should have adequate
working capital to run its business operations. One should note that both
excessive as well as inadequate working capital position are dangerous to any
business, therefore a company is required to maintain a balance between
liquidity and profitability which are sometimes conflicting objectives while
conducting its day to day activities.
However,
financial managers are faced with the major problem of obtaining an optimum
level of working capital which is a situation whereby working capital managers
are able to avoid the problem of holding idle funds which earns no profit for
the firm and inadequate working capital which reduces the firm’s profitability
as well as production interruptions and inefficiencies. The credit policy of a
firm is another bottleneck confronting working capital management. A flexible
credit policy adopted by the management in most cases results in writing off a
high proportion of bad debts while a rigid credit policy reduces the level of
sales and also scares away customers. Therefore, financial managers are faced
with the problem of determining an effective and efficient credit policy which
should be in line with their company’s goals and objectives.
Fraud is
almost in every organization and this is also a big problem to working capital
managers since working capital management requires a substantial part of the
capital held in liquid cash so as to run the day to day activities of a firm.
Financial managers are faced with the task of providing adequate security in
order to prevent embezzle of money meant for the organization. Working capital
management is mostly important to firms in developing economics because they
are faced with many problems such as; low investment, low sales, lack of
resources, low level of product and process technology, small market, lack of
access to capital, lack of physical infrastructure, production capacity to
satisfy demand (because they are small), thereby, making inventory management
more crucial. Most of the Nigerian firms do not have access to capital and lack
the opportunity of getting the benefit of financial market.
Working
capital policy is one of the minimizing committed finance whereas working
capital management is an optimizing process aimed at filling the minimization
policy to operational requirement. This implies that inefficient and
ineffective management of working capital will hinder the growth and survival
of the organization.
A survey of
empirical literature on the determinants of working capital and its effect on
profitability showed that few studies have been conducted on these issues in
both developed and developing countries. Many of these studies identified such
factors as size, leverage, operating cash flow among others as major
determinants of working capital while few found negative effect of working
capital management on profitability. However, it was observed that most of the
existing studies focused only on developed economies. Not many studies have
focused on firms’ in developing countries. In addition, none of the existing
studies has addressed the issue of long run relationship between working
capital and profitability and the direction of causation between the two
phenomena. These are the main gaps that this study intends to fill. Firstly,
this study is focused on firms’ in Nigeria. Secondly, it does not only examine
the determinants of working capital and its effect on profitability but also
investigates the relationship between working capital management and
profitability.
1.3 Objectives of the Study
The broad
objective of this study is to examine the effect of working capital management
on the profitability of manufacturing firm. The specific objective is to:
(i) Investigate the various
components of working capital in Cadbury Nigeria PLC.
(ii) Examine the level of working capital management in
Cadbury Nigeria PLC and
(iii) evaluate the impact of working
capital management on the profitability of Cadbury Nigeria PLC.
1.4 Research Questions
This study
intends to provide answers to the following questions;
(i) What are the components of working
capital management in Cadbury Nigeria PLC?
(ii) How effective does the working
capital management of Cadbury Nigeria PLC enhances its profitability?
(iii) Has Cadbury Nigeria PLC been able
to manage its trade debtors, stock and trade creditors effectively?
1.5 Research Hypotheses
The main
purpose of this study is to examine the effect of working capital management on
profitability, This will form the basis for formulating the hypotheses which
will be tested and validated with a view to making some recommendations.
Ho: Working Capital Management of Cadbury
Nigeria PLC does not enhance its profitability
Hi: Working Capital Management of Cadbury
Nigeria PLC enhances its profitability
Ho: Cadbury Nigeria PLC does not have an
optimum level of working capital management
Hi: Cadbury Nigeria PLC has an optimum level
of working capital management.
1.6 Significance of the Study
This study
is generally designed for the benefits of all investors and owners of
manufacturing companies who have not adopted any policy on working capital
management. To investors and owners of firms, a good working capital management
indicates sound liquidity position of the company meaning that the company is
well managed, financed and sound. From the research, the firm ability to finance
long and short term liabilities is determined. Since investors wish to invest
therefore, proper study of the firm’s working capital position must not be
overlooked.
Apart from
the above, the study will also highlight certain problems associated with the
management of working capital and equally give useful information on the
possible means of improvements in the university’s library and for other
students who may wish to embark on the research of working capital management
in future.
Finally, the
general public may find this work useful in areas where they wish to broaden
their knowledge on working capital management in business organization.
1.7 Scope of the Study
This project
is meant to cover the working capital management in manufacturing companies
with particular reference to Cadbury Nigeria PLC. However, it is restricted to
the general management of current assets and current liabilities. The study
shall cover a period of 5 years from 2009- 2014 .Because of the importance of
working capital management as a tool for cost reduction and improvement in
profitability, the study is been conducted in other to evaluate the effect of
working capital management on firm’s profitability.
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