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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