ABSTRACT
The study examined the impact of working capital management on the profitability of cement manufacturing companies listed on the Nigeria stock Exchange from 2006 to 2020. Specifically, it assess the impact accounts collection period on profitability of cement manufacturing companies listed on the Nigeria stock Exchange, it examine the impact of inventory conversion period on profitability of cement manufacturing companies listed on the Nigeria stock Exchange, it ascertain the impact of accounts payment period on profitability of cement manufacturing companies listed on the Nigeria stock Exchange and it determine the impact of cash conversion cycle of profitability of cement manufacturing companies listed on the Nigeria stock Exchange. The ex-post facto research design was adopted. The data were sourced from financial statement of selected cement manufacturing companies in Nigeria. Regression analysis was used to analyze the stated hypotheses. The results show that account collection period has positive and significant impact on the profitability of listed cement companies in Nigeria, Inventory conversion period has positive and significant impact on the profitability of listed cement companies in Nigeria, accounts payment period has positive and significant impact on the on the profitability of listed cement companies in Nigeria and that cash conversion cycle has negative and significant impact on the profitability of quoted cement companies in Nigeria. The study recommended that the management of these cement companies should manage their working capital in more efficient ways by reducing the number of days inventory are held to an minimum level in order to enhance their profitability as well as create value for their shareholders
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Table of Contents vi
List of Tables vii
Abstract viii
CHAPTER
1: INTRODUCTION
1.1. Background
to the Study 1
1.2.Statement
of the Problem 4
1.3.Objectives
of the Study 6
1.4.Research
Questions 6
1.5.Research Hypotheses 6
1.6.Significance
of the Study 7
1.7. Scope
of the Study 8
1.8.Limitation
of the Study 8
1.9 Operational
Definition of Terms 8
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1. Conceptual Framework 11
2.1.1 Concept of Working Capital
Management 11
2.1.2 Components of Working Capital Management 14
2.1.3.
Concept of Profitability 19
2.1.3.1 Return on Assets 20
2.2 Theoretical Framework 21
2.2.1 Cash Conversion Cycle (CCC) Theory 21
2.2.2
Operating Cycle Theory 22
2.2.3
Trade –Off Theory 23
2.2.4. Resource-Based Theory 24
2.3Empirical Review 25
2.4. Gap in the Empirical Review 45
CHAPTER
3: METHODOLOGY
3.1 Research
Design 47
3.2 Population of
the study 47
3.3.
Sampling Size 47
3.4 Types and
Source of Data 47
3.5 Data Analysis
Technique 48
3.6. Model
Specification 48
3.6.1Description
of Model Variables 49
CHAPTER
4: DATA PRESENTATION AND RESULTS/ANALYSIS
4.1. Presentation
of Data 51
4.2 Descriptive Analysis 53
4.3. Discussion of Result 53
CHAPTER
5: CONCLUSION AND RECOMMENDATIONS
5.1. Summary of
Findings 60
5.2. Conclusion 60
5.3.
Recommendations 61
References
Appendix
LIST OF
TABLES
Table
4.1: Presentation of Data 51
Table
4.2: Summary of Descriptive Statistics 53
Table
4.3: Summary of Panel Regression (dependent variable, ROA) 53
Table
4.4. Hausman Test 53 Table 4.5: Summary of Panel Regression
(dependent variable, ROA) 54
CHAPTER 1
INTRODUCTION
1.1.BACKGROUND TO THE STUDY
Working
capital management is important concept that is receiving serious attention all
over the world especially in Nigeria with the current financial situations and
the state of the Nigeria economy (Adeleke & Mukolu, 2013). Block and Hirt (2010) in Ebenezer and Asiedu
(2016) observe that working capital management entails the management and
financing of the short term assets and liabilities of the enterprise to
maximize profit. The management of working capital is among the most essential
and vital aspect of the entire financial management of a business entity. This
is because efficiency in this area of financial management is necessary in
order to ensure a firm long term success and to achieve its overall goals which
is the maximization of profit. A certain amount of working capital is needed
for operation of companies in their day to today activities. The amount of
working capital does not directly earn the firm any income since they are
almost in all cases held in cash form. A well maintained working capital ensure
that there is smooth running of the business through the circulation of the
vital ingredients in the firm (Barine, 2015).
Therefore,
the number of days accounts receivable is outstanding, which determines the
credit policy of the firm; the number of days inventory are held, which
signifies the inventory management policy and the cash conversion cycle, which
is the comprehensive assessment of the quality and efficiency of the already
established working capital management practices, are the tools that ensure
that the daily operations of the firm are not hampered if well managed (Paul
& Agbo, 2014)..
Cement manufacturing companies requires a
large amount of current assets and current liabilities with heavy automation
and machineries to be deployed in running the day to day business activities of
the company which will enable them to maximize profit (Akindele and Odusina, 2015).
Nigerian cement industry is characterized by labour and capital intensive due to the nature
of cement making process which requires heavy automation and machinery deployed
in running, as well as construction of high capacity plants, where cement
making involves a significant amount of manual processes. The industry employs
over 100,000 people, making it one of the major employers of labour in Nigeria
(Akindele and Odusina, 2015)
Working
capital can be categorized based on concept and periodicity. The conceptual
basis comprises of gross working capital and variable working capital (which is
either seasonal or specific). Inventory conversion period is the time interval
taken from the acquisition of raw material, to the production process popularly
known as work in progress down to the sale of the final product (Paul & Agbo,
2014). This calculated by taking the value of stock from the current asset side
of the balance sheet and dividing it by cost of sales per day, the cost of
sales per day is equals to cost of sales times three hundred and sixty-five
days which is the number of day in a year. Account collection period is the
time interval which goods are sold on credit to the time that cash is received,
this is calculated by taking the debtors in the current assets side of the
balance sheet and divide it by revenue per day (Paul & Agbo, 2014).. The revenue per day is
equals to revenue times three hundred and sixty-five days. Accounts Payment
Period is the time interval taken by a manufacturer to repay his obligations or
to pay his suppliers for the goods bought on credit. This is calculated by
taking the figure of creditors from the current liability side of balance sheet
and dividing it by cost of sales per day (Paul
& Agbo, 2014)..
Finally,
cash conversion cycle is the time interval from the sale of goods on cash and
on credit to the time that all the cash are received. This is calculated by
inventory conversion period plus account collection period minus accounts
payment period. Profitability to create an excess of revenue over expenses in
order to attract and retain investment capital (Eljelly, 2004).
Therefore,
cement manufacturing companies are heavily dependent on the management of
working capital because an inefficient working capital might lead to
illiquidity or financial crisis. The firm’s profitability can be measured by
the return on firm’s assets (ROA) (Osisioma, 2016) Profitability refers to the
ability of an enterprise to generate profits from its investments. Working
capital management affects profitability in several ways. The management of
cash, debtors and stocks affects the level of profits made by an enterprise. The
excessive holding of stocks leads to high stock handling costs, deterioration n
in the value of stocks due to damage and obsolescence, theft or pilferage by
employees and wastage. All these are cost to the firm which reduces its
profitability. Inadequate stocks also lead to stock out costs and loss of
goodwill of the firm, leading to losses or profits. Holding a high level of
inventories leads to high capital tied up in stocks. This tied up capital means
loss of profitability due to forgone interest income which would have been
earned if the capital tied up in stocks were invested (Saleemi, 2009). The
profitability was provide by Return on assets. Return on assets is a ratio of
net income (annual) divided by the total assets (average) of a business during
its financial year. It explains the performance and progress of the business in
utilizing its resources to generate the income.
The
(ROA) measures the returns to all firm’s assets and is often used as an overall
index of profitability, and the higher the
value, the more profitable the firm, it is therefore an indicator of managerial
efficiency as it shows the firm’s management converted the institutions assets
under its control into earnings (Quayyum,
2011).
1.2. STATEMENT OF THE PROBLEM
There is no doubt that the ultimate
objective of any company is to maximize profit. However, the preservation of
the liquidity of a company is an important objective too and it is the
efficient management of the various components of working capital that helps to
preserve liquidity. However, problem lies in the efficient management of these
various components that makes up the working capital by managers of difference
companies. This problem arise as a result of the fact that most managers fight
to increase inventory turnover in a bid to increase profitability without been
mindful of the need to speed up the accounts collection period and to delay
creditor payment period as far as possible, so as to provide the funds needed
to keep the cycle flowing. This puts the companies in poor liquidity position
and it consequently affects the profitability of such company. Therefore, given
this position, it is expedient that an investigation of the effect of working
capital management on profitability be carried out (Lazaridis, 2016).
Furthermore,
cement manufacturing companies in Nigeria may not hold the right amount of
cash, inventories, account receivables and account payables that will generates
the needed profit in order to maximize their return on asset, because the
industry lacks proper support from the government and Deposit Money Banks
(DMBs) in form of stable policies and loan financing which will enable them to
have an optimal level of working capital (Adeniyi, 2008). For these reasons,
the companies have developed the culture of fixing high prices on their
products knowing that they operate an imperfect market where every cement
company fixes its prices different from the other. These issue is compounded by
other challenges such as high cost of transportation, inadequate power supply
and the presence of many middlemen in the distribution channel which contribute
to high price of cement and this may
make the accounts receivable to be delayed for few more days than they are
expecting. Any increase in price by cement manufacturers can make the middlemen
to increase their prices in such a way that the final cement customers may not
afford to buy the required quantity (Adeniyi, 2008). This may affect the cash
conversion cycle of the cement manufacturing firm. Several studies were
conducted on working capital management and profitability of cement
manufacturing companies both locally and internationally, such as Paul and Agbo
(2014), who utilized data from Nigerian cement industry to analyze how cement
manufacturing companies should finance and optimize their working capital in
more efficient ways by reducing the number of days inventories are held, days
accounts receivables are outstanding and cash conversion cycle in order to
enhance their profitability as well as create values for their shareholders.
Another study by Wangu and Kipkirui (2015) assesses the effect of working capital
management on profitability of cement manufacturing companies in Kenya, the
variable studied are inventory conversion period, account receivables and
accounts payable period. Therefore, this study examined the impact of working
capital management on profitability of listed cement manufacturing companies of
Nigeria.
1.3.OBJECTIVES OF THE STUDY
The
broad objective of the study is to examine the impact of working capital
management on the profitability of cement manufacturing companies listed on the
Nigeria stock Exchange. The specific objectives are to;
1. assess
the impact accounts collection period on profitability of cement manufacturing
companies listed on the Nigeria stock Exchange
2. determine
the impact of inventory conversion period on profitability of cement
manufacturing companies listed on the Nigeria stock Exchange
3. ascertain
the impact of accounts payment period on profitability of cement manufacturing
companies listed on the Nigeria stock Exchange
4. determine
the impact of cash conversion cycle of profitability of cement manufacturing companies
listed on the Nigeria stock Exchange
1.4. RESEARCH
QUESTIONS
This
study were guided by the following research questions.
a. What
is the impact of accounts collection period on the profitability of listed
cement companies in Nigeria?
b. To
what extent does inventory conversion period impact on the profitability of listed
cement companies in Nigeria?
c. In
what way does accounts payment period impact on the on the profitability of listed
cement companies in Nigeria?
d. How
does cash conversion cycle impact on the profitability of listed cement
companies in Nigeria?
1.5.RESEARCH
HYPOTHESES
This
study were guided by the following hypotheses;
H01: There
is no significant impact of collection period on the profitability of listed
cement companies in Nigeria
H02: There
is no significant impact of inventory conversion period on the profitability of
listed cement companies in Nigeria
H03: There
is no significant impact of accounts payment period on the on the profitability
of listed cement companies in Nigeria
H04: There
is no significant impact of cash conversion cycle on the profitability of listed
cement companies in Nigeria
1.6. SIGNIFICANCE OF THE STUDY
The
study focuses on the impact of working capital management on the profitability
of cement manufacturing companies listed on the Nigeria stock Exchange. The
study will be of immense benefit to the following group;
With
this fact laid out, working capital management is critical and of a particular
importance to manufacturing firms as these firms tends to rely more heavily on
owner financing, trade creditors and short term bank loans to finance their
needed investment in cash, receivable and inventories.
Small
scale businesses will need the outcome of this study since they deal with large
amount of working capital as compared with their assets in day to day business
dealings. That is, entrepreneurs will be guided on the amount of cash and
inventory to hold at a particular situation and to hold at a particular
business situation and to know how to give goods on credit to trusted customers
that can be recovered within the agreed period.
Government
is a beneficiary of this study because it helps in policy making, which will
guide the business environment to operate within the statutory framework in
order to attract investors.
This
study will help other researchers as it will enable them to get information for
further research. Above all, it is expected that this research would contribute
to knowledge and be useful as reference material for scholars and researchers.
1.7.
SCOPE
OF THE STUDY
The
work focused on the impact of working capital management on the profitability of
listed cement manufacturing companies on the Nigeria stock Exchange. The study was
conducted on these companies which include Ashaka Cement Nigeria Plc., Dangote Cement Nigeria plc, Cement Company of Northern Nigeria plc. Lafarge Cement Nigeria plc. (WAPCO),
which covered the periods between (2006 to 2020). The choice of this period by
researcher was based on the availability of financial statement over the
period.
1.8.
LIMITATION
OF THE STUDY
The
study was limited by the fact that so many scholars have conducted a study on
the impact of working capital management on the profitability of cement
manufacturing companies listed on the Nigeria stock Exchange and they all come
out with conflicting result. The study also was limited by finance as due to
the cost of material used for the study.
1.9. OPERATIONAL DEFINITION OF TERMS
Working capital
Working
capital is define as firm’s investment in short term assets such as cash,
marketable securities, account receivable and inventories.
Working capital management
Working
capital management as the use of an entity’s current asset and the funding
required to facilitate the short term asset
Gross working capital
Gross
working capital refers to a firm’s resources in short term assets that is cash,
accounts receivable, short term or marketable securities and inventories.
Current Assets
Current
assets are the assets which can be converted into cash within an accounting
year and includes cash, short term securities, debtors (accounts receivables or
book debts), bill receivables and stock (inventory).
Inventory management
Inventory
management is the systematic control of stock through establishment of
inventory control models, physical control as well as accurate and up-to-date
records of stock
Accounts receivables
Accounts
receivables arise when a company sells products or services on credit and does
not collect cash immediately
Accounts payable period
Accounts
payable arise when a company buys product or services on credit but does no pay
cash immediately. It constitutes a short-term source of finance along with
accrued expenses and deferred income. Trade credits could take the form of
bills payable or promissory notes
Accounts receivable
period
Accounts
receivable period evaluates the mean length of time, in days, that debtors are outstanding.
Accounts receivable, also known as debtors, are credit customers that are yet
to meet up with the payment condition for inventories or services rendered.
Return
on assets (ROA):
Return on assets is a ratio of net
income (annual) divided by the total assets (average) of a business during its
financial year. It explains the performance and progress of the business in
utilizing its resources to generate the income. It is a profitability ratio.
The formula to calculate return on assets is total annual net income divided by
the average total assets during a financial year
Cash conversion cycle
Cash
conversion cycle any business firm is to determine by the number of days taken
from the sale of goods in cash and on credit to loyal customers to the time the
goods sold credit are recovered and to the time the firm pay its supply.
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