ABSTRACT
The study investigated the Effects of Working Capital
Management on the profitability of manufacturing Company, A Case study of
Cadbury Nigeria Plc. The specific objectives of the study are to identify the
various components of working capital in Cadbury Nigeria PLC; identify the
level of working capital management in Cadbury Nigeria PLC; and to evaluate the
impact of working capital management on the profitability of Cadbury Nigeria
PLC. Total of questionnaires was distributed to staff in Cadbury Nigeria Plc
drawn from the study population was used for the analysis. Three hypotheses
were formulated for the study, simple percentage and ratio analysis. Under the
simple percentage and ratio analysis was analyzed by the use of tables which
involved the use of simple percentages. Contrarily, the reason for using this
method is to enable the researcher compare and group information and data
accordingly. The computation of ratios was limited to those that have to do
with working capital of the company. At the end of the study, the researcher
found out that, Working Capital Management of Cadbury Nigeria PLC does not
enhance its profitability and Cadbury Nigeria PLC does not have an optimum
level of Working Capital Management. Based on the
findings the following recommendations were made that the company should
reduce the period between the time cash is paid out for raw material and the
time cash is recorded from sales of the company’s product. This will provide
funds for regeneration and increasing working capital of the firm there after,
the company should pay more attention to its liquidity position and improve on
it. This is because a company that has no favorable liquidity position may
likely face insolvency problems, the poor working capital can also be remedied
through provision of additional fund by the shareholders and loans from banks
and Cadbury as international company should carry out more research to develop
new product with the view of diversifying into new areas or lines of business.
TABLE OF CONTENTS
PAGES
Title
page i
Certification ii
Dedication iii
Acknowledgements iv
Table
of Contents v
Abstract vii
CHAPTER ONE: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 6
1.3 Aim and Objective of the Study 7
1.4 Relevant Research Questions 7
1.5 Relevant Research
Hypotheses 8
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Operational Definition of Terms 9
References 11
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL
FRAMEWORK
2.1 Preamble 12
2.2 Theoretical Framework 12
2.3
Empirical Review of Previous Studies 16
2.4 Components
of Working Capital 26
2.5 Summary
of Literature Review 41
CHAPTER THREE: REVIEW
METHOD
3.1 Preamble 42
3.2 Research Design 42
3.3 Population of the Study 42
3.4 Sampling
Procedure and Sample Size 43
3.5 Data Collection Instrument and Validation
44
3.6
Research Instrument 44
3.7
Methods of Data Analysis 45
References 46
CHAPTER FOUR: DATA PRESENTATION,
ANALYSIS AND INTERPRETATION
4.1 Preamble 47
4.2 Presentation
and Analysis of Data 48
4.2
Data Analysis (Secondary Data) 51
4.3
Data Analysis (Primary Data) 57
4.4
Hypotheses Testing 65
4.5
Discussion of Findings 68
CHAPTER FIVE: SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1
Summary 69
5.2
Conclusion 69
5.3
Recommendations 70
Bibliography 72
Appendix 74
CHAPTER
ONE
INTRODUCTION
1.1
Background to the Study
The working capital of a company has
a major role in making it profitable or non-profitable. Most of the potential
investors and other sanalyze position statement to evaluate the management of
working capital. Net Working capital consists of current assets less Short term
obligations. Positive working capital explain that the corporation is in a fine
condition to reimburse it’s short-term debt whereas negative working capital
explain that the most liquid assets of the corporation are not sufficient to
fulfill its current monetary commitments. Any finance manager must sustain a
most favorable point of investment in the most liquid assets of the company.
Working capital for any business is the amount of capital to carry out its
daily basis operations. In manufacturing concerns, it is the investment
required for the conversion of raw material into ready to sell products for the
company. The most important items inside determination of working capital are
inventories of the corporation, its accounts receivables and payables. The
management of working capital frequently considered a tool to maintaining
competence of the business inside their operations. Working capital is often
assessed by lenders to judge the financial short term paying back ability in
difficult financial periods.
One of the key determinants of
survival and sustainable business growth of modern organisations is the
effectiveness of accounting and finance department or function (Eljielly,
2004). One area of accounting and finance that affects the efficient operations
of business organisations in general is working capital management (WCM), among
other things (Eljielly, 2004; Shin & Soenen, 1998; Tauringana & Afrifa,
2013). WCM has been described as the management of current assets and current
liabilities (Agyei & Yeboah, 2011; Tauringana & Afrifa, 2013). The
concept of WCM addresses companies’ management of their short-term capital,
which is an important component of corporate financial management, directly
affects the profitability and liquidity of both small and large firms (Agyei
& Yeboah, 2011; Tauringana & Afrifa, 2013). It has been well noted that
small scale industries contribute immensely to providing job opportunities,
nurturing a society of entrepreneurs and opening up new business avenues for
the development of a country.
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. EljeUy (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 firms 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.
Over the last five to ten years, the
world brewery market has become increasingly concentrated with a wave of
business combinations among brewery giants as well as diversification of
investments outside their geographical location. All these are in the quest to
dominate the market as well as the maximization of shareholders wealth. Increasing
market domination that will enhance the maximization of shareholders wealth
depends largely on certain firm specific factors such as persistent
profitability. Profit maximization for any firm depends on efficient management
of cost
and process of production as well as
increases in sales resulting from firm’s market domination. One factor that is
deduced to influence firm profitability grossly is the firm’s working capital.
Working capital is the stock stored
that has a conversion or resale value in order to gain profit. It represents
the largest cost of a firm especially the manufacturing firms. In normal
circumstances, working capital consists of about 30% - 40% of a firm’s total
investment. Investment in working capital to a large extent determines the
returns earned by a firm. Nevertheless, excessive levels of current assets can
easily result in a firm realizing a substandard return on investment while
firms with too few current assets may incur shortages and difficulties in
maintaining smooth operations (Van Horne and Wachowicz, 2000). As a
result,working capital management is a very important component of corporate
finance as it directly affects the liquidity and profitability of a firm. It
centers on current assets and current liabilities of a firm. For one thing, the
current assets of a typical manufacturing firm accounts for over half of its
total assets (Abdul and Mohamed, 2007).
One reason why managers spend
considerable time on day-to-day management of working capital is that current
assets are short-lived investments that are continually being converted into
other asset types (Rao, 1989). Liquidity for the on-going firm is not reliant
on the liquidation value of its assets, but rather on the operating cash flows
generated by those assets (Soenen, 1993). Working Capital Management is
therefore a sensitive area in the field of financial management (Joshi, 1994).
It involves the decision of the amount and composition of current assets and
the financing of these assets.
Efficient working capital management
involves planning and control of current assets and current liabilities in a
manner to strike a balance between liquidity and profitability. Harris (2005)
pointed out that working capital management is a simple and straightforward
concept of ensuring the ability of the firm to fund the difference between the
short term assets and short term liabilities. The ultimate objective of any
firm is to maximize shareholders wealth and maximizing shareholders wealth can
be achieved by a firm maximizing its profit. A firm that wishes to maximize
profit must strike a balance between current assets and current liabilities and
hence keeping abreast of the liquidity and profitability trade-off. Preserving
liquidity and profitability of the firm is an important objective as increasing
profit at the expense of liquidity can bring serious problems to the firm and
vice-versa. Working capital management is considered to be a very important
element to analyze the firm’s performance while conducting day to day
operations. There are chances of imbalance of current assets and current
liability during the life cycle of a firm and profitability will be affected if
this occurs. This is why the study of influence of working capital on firm’s
profitability is drawing scholars’ attention in recent times.
Numerous studies on the drivers and
financial impact of working capital management for different manufacturing
firms for different countries of the world have been published in recent times.
However, inter-country studies of world leading firms in a given industry are
spare. Attempting to
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.
1.3 Aim and Objective 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:
1.
identify the various components of working
capital in Cadbury Nigeria PLC;
2.
identify the level of working capital
management in Cadbury Nigeria PLC; and
3.
evaluate the impact of working capital
management on the profitability of Cadbury Nigeria PLC.
1.4 Relevant Research Questions
This study intends to provide answers to
the following questions;
1.
What are the components of working capital
management in Cadbury Nigeria PLC?
2.
How effective does the working capital
management of Cadbury Nigeria PLC enhances its profitability?
3.
Has Cadbury Nigeria PLC been able to
manage its trade debtors, stock and trade creditors effectively?
1.5 Relevant
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.
H0: Working Capital Management of Cadbury
Nigeria PLC have no significant influence on working capital profitability
H1: Working Capital Management of Cadbury
Nigeria PLC have significant influence on working capital profitability.
H0: Cadbury Nigeria PLC does not have
significant influence on optimum level of working capital
management
H1: Cadbury Nigeria PLC have significant
influence on 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 2004- 2008.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.
1.8 Operational
Definition of Terms
For the purpose of this research, the
following terms are defined as they were use in the study
i.
Working
capital: This is the capital or fund available for carrying on
the day to day operations of an Organization.
ii.
Working
Capital Management: It refers to the efficient management of
current assets and current liabilities
iii.
Current
assets: These are resources that are held or consumed within
a short period of time usually one year. They include stock, cash, debtors,
prepayments etc.
iv.
Current
liabilities: These are the amounts failing due to
creditors within a year. It includes trade creditors, bank overdraft, accruals
etc
v.
Loan
Port Folio: A mixture of shares and bonds held by a
firm.
vi.
Fixed
Asset: Assets, which are not readily convertible into cash
and are acquired for long term usage in the firm, e.g. building, plant, machine
etc.
vii.
Inventories:
Inventories are stocks of raw materials, works in-progress and finished goods
of a company engaged in manufacturing operations.
viii.
Bankruptcy:
Where the firm is unable to meet the payment of its debts. The company could
not pay its debts and therefore officially declare bankrupt or insolvent.
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