ABSTRACT
This study is an attempt to critically examine
the reliance of working capital in manufacturing organization and to highlight
its various effects. The reason for embarking on this research is therefore to
probe into the problem areas, objectives etc as well as making the necessary
suggestions. However, the research work
is divided into five chapters.
The first chapter deals with the general
introduction of the subject maters.
The chapter two contain interaction related to
the topic from which contains assumptions was made to formulate hypothesis.
The chapter three deals with the research
methodology, research design, selection of the data collection method and
conduct of field work.
The chapter four deals with the analysis and
interpretation of hypothesis in all, some hypothesis were formulated duly
tested and validated so as to draw a logical anachronism.
Finally, the chapter five deals with, the
summary of findings together with conclusion and recommendation.
TABLE
OF CONTENTS
Title
page i
Certification ii
Dedication
iii
Acknowledgement
iv
Abstract
v
Table
of Content vi - vii
CHAPTER ONE
1.0 Introduction 1-2
1.1 Statement of Problem 2
1.2 Objectives of the Research 2-3
1.3 Significance of the Research
3
1.4 Hypothesis Formulation 4
1.5
Research Questions 4-5
1.6 Scope and Limitation 5-6
1.7 Historical Background of Nestle Nig.
Plc 6-7
1.8 Definitions of Terms
7-8
1.9 Determination of Credit Worthiness 9-12
CHAPTER TWO
Nature
of Working Capital 13
2.1 Definition 13-15
2.2 Importance of Working Capital 15-17
2.3 Determination of Working Capital 17-20
2.4 Source of Finance for Working Capital 20-21
2.5 Debt Management 22-24
2.6 Inventory Management 25-29
2.7 Components of Working Capital 30
2.8 Working Capital and Overtrading 31-32
2.9 Finance Control in Working Capital
Management 32-33
2.10 Working capital management in Nestle Nig
plc. 33-40
CHAPTER THREE
3.0 Research Methodology 41
3.1 Introduction 41
3.2 Sampling Method and Sample Size 41
3.3 Source of Data Collected 41-42
3.4 Method of Data Analysis 42-43
CHAPTER FOUR
4.0 Analysis of Data 44
4.1 Introduction 44
4.2 Analysis of Data Collected 44-54
CHAPTER FIVE
5.0 Summary, Conclusion and
Recommendation 55
5.1 Introduction 55
5.2 Summary of Findings 55-56
5.3 Conclusion 56
5.4 Recommendations 56-57
Bibliography 58
Questionnaire 59-60
Research
Proposal 61-65
CHAPTER
ONE
INTRODUCTION
1.0 BACKGROUND
OF THE STUDY
Working
capital which is incremental value of current assets over current liabilities
is a very essential factor in corporate operations and survival. Its importance
lies in the fact that it is the blood
of any organization without which an establishment will cease to be a going
concern.
Therefore,
its strategic importance to corporate survival necessitates that it should be prudently
managed in order to ensure its continuous presence and adequacy.
As
much as inefficiency in working capital can lead to corporate deficit, over
investment in working capital can equally be disastrous, since money that could
have been profitably invested elsewhere to yield returns is being tied up. It is very important for the management of an
organisation that investment in working capital should be optimized
Appropriate
sources must be found, corporate working capital requirement and viable investment
areas must also be found in order to invest in excess funds, which can be
immediately realized and used to supplement the working capital base, whenever
the need arises. This research paper
focused its attention on working capital after having carefully considered the
nature of working capital, its importance to management and its undiminished
vantage of place in the finance structure and component, as well as its importance
to corporate survival.
This
research takes Nestle Nigeria Plc as its case study and intends to corroborate
findings by analysis of three similar companies namely, Foremost Diaries Ltd.,
Cadbury Nigeria Plc and Nigeria Bottling Company Plc belonging to the Foods,
Beverages and tobacco industry of the company chosen as case study.
1.1
STATEMENT
OF PROBLEM
The
inadequacies necessitating this investigation are highlighted below:
a.
Lack of awareness as regards the importance of
working capital management.
b.
Inability of management to detect and normalize
over or under investment in working capital.
c.
Appropriate appreciation of the affects of
over or under investment in working capital on corporate survival.
d. Inadequate knowledge of the rudiments of
working capital management.
e.. Ineffective follow up on the factor
militating against affective management and control of working capital
This
research study attempts to provide solution to these probing questions after
having carefully analysed the data collected.
1.2
OBJECTIVES
OF THE RESEARCH
The
keeping of optimum investment in current assets is of great significance to management
due to the cost of both over and under investment in working capital. It is the purpose of the research to discuss
upon the dynamics and modalities of working capital, its importance to
corporate liquidity and survival and the degree of its requirements among
various companies in the same industry.
It
is also the purpose of the research to examine the effects of working capital
over trading, that is, operating with sufficient working capital on corporate operations.
It will also critically appraise those factors and variables affecting working
capital itself as a financial concept.
This
research also has it as its main objective to examine the working capital
position of the food and beverages industries so as to keep management cadre in
the company chosen as a case study in particular and the entire industry in
general in highlighting the problems.
1.3
SIGNIFICANCE OF THE RESEARCH
This
research is relevant in that it examine an area that is important to financial
management as well as corporate survival. Its relevance also lies in the fact
that it corroborates and improves findings in earlier researches embarked upon
by eminent scholars.
Similarly,
it is significant in that it will no doubt highlight the benefit and bottle
necks associated with the management of working capital. This will contribute
to the existing knowledge and also assist the management of the chosen company
(Nestle Nigeria Plc) in the maintenance of adequate working capital.
1.4 HYPOTHESIS FORMULATION
1. Ho:
That working capital management is not importance.
H1: That working capital management is important.
2. Ho: That
management cannot detect and normalize over or under
investment in working capital.
H1: That management can detect and normalize over
and under investment in working capital.
3. Ho: That over or under investment in working
capital has no effect on corporate survival.
H1: That over or under investment in working
capital has effect
on corporate survival.
4. Ho: That
there are no rudiments of working capital management.
H1: That
there are rudiments of working capital management.
5. Ho:
That there are no factors militating against effective
management and control of working capital.
H1: That
there are factors militating against effective management and control of
working capital.
1.5
RESEARCH
QUESTIONS
1.
Research questions shall be drawn to test the
awareness of the working class that is mainly connected with the application of
working capital?
2.
Questions shall also be drawn on the
effectiveness of working capital for the smooth running of manufacturing
business.
3.
Whether over or under investment in working
capital can easily be detected and normalized.
4.
Questions shall be asked on whether there are
factors militating against the effectiveness of management and control working
capital.
5.
Also to test whether there is a possibility of
obtaining working capital required from the bank through overdraft, commercial
papers, Bankers Acceptance, Bills of Exchange etc
1.6
SCOPE
AND LIMITATIONS
This
research studies focus its attention on the management of working capital in
the foods and beverages industry taking Nestle Nigeria plc as a case study.
The
scope of the period covered by the research is five (5) years namely 2005 to
2009. As a back up for the evaluation of
the secondary case study, companies shall be made of three additional companies
selected from food and beverages industry such as :
FOREMOST
DIARIES LTD, CADBURY NIGERIA PLC and NIGERIAN BOTTLING COMPANY PLC.
The
four companies in aggregate, will be deemed to be representative of the
industry especially in the area of analyzing working capital.
This
research is limited on its scope on the premises that it took only four
companies as being representative of the entire food and beverages industry.
The reason for this decision is in the inadequacy of time and finance available
to cover all the companies included in the industry.
The
research is also limited due to the inability of management to provide needed statistics
like cash budget which they considered to be too confidential. This confidentiality
also affects other information regarded as “classified”.
1.7 HISTORICAL BACKGROUND OF NESTLE NIG.PLC
Nestle
Nigeria Plc is associated with Nestle Group, renown worldwide for its quality
products
like Maggi, Milo, Nutrend, Cereals, Nido,
Nescafe, Nestogen, Lactogen etc.
Nestle
Nigeria Plc started simple trading operations in Nigeria in 1961 and has today grown
into reputable manufacturing and marketing company.
It is a publicly quoted company listed since
1978 on the Nigerian Stock Exchange with over 9,000 Nigerian Shareholders
participating in 60% of the company’s equity 40% of the company’s equity is
owned by Nestle Ltd of Switzerland.
Nestle Nigeria Plc identifies itself
with the aspiration of Nigeria
towards economic and social progress and has made on a continuous basis
important investment in the various field of its activities.
Nestle
Nigeria Plc is in the Food Industry and its operations span the agricultural, industrial
and commercial sectors of the economy, bringing benefits to each sector. To achieve its goals, the company relies on a
cadre of skilled human resources, applying modern management method and a
progressive competitive personnel and social policy.
Nestle
Nigeria Plc aim at optimizing its long term profitability and as a result
ensure the continuity of the company, rather than attempting to maximize short
term profit. In pursuing the above aims,
the company has always insisted on high standard in the quality of its products
and high standards of integrity and efficiency.
Nestle
Nigeria Plc receives continues technical assistant from Nestle Ltd, Switzerland
particularly in the field of new improved productions processes and equipment,
research into raw materials and development of new product, constant quality assurance, latest management
techniques and continuous training of staff.
The
company trademark is an house hold name, which promotes the popularity and
acceptability of the company products by the consumers and have contributed to
the growth and success of the company.
1.8 DEFINITION
OF TERMS
Within
the context of carrying out the research work, here are certain words that have
connotative meaning with respect to working capital management in manufacturing
organizations. These terms used are given
their respective definition some of which are the Inventory, Economic order
quantity (EOQ) etc.
i. INVENTORY: This relates to the stock of goods in the
store. It comes in form of raw material work in process and finished goods of
Nestle Nigeria Plc.
ii. ECONOMIC ORDER QUANTITY (EOQ): This is
the optimal quantity that is needed in an organization for effective production
of goods and services. The EOQ involve the existence of required quantity to
avoid delaying production.
iii. WORKING CAPITAL: The word “Working
Capital” consists the excess of current assets over current liabilities. It involves
that amount by which current assets outstays current liabilities.
Mathematically
it is described as CA – CL
Where
CA = Current Assets
CL
= Current Liabilities
iv. WORKING CAPITAL TURNOVER: It involves
number of times or rapidly of which the Current Assets exceed the current
liabilities. This involves the ratio of sales to working capital.
v. STOCK TURNOVER: Stock turnover
describes the number of times goods (Stock) change hands i.e rapidity of stock
with relevance to its production and sales. It is the ratio of cost of goods
sold to average stock.
vi. PRIMARY DATA: The word “Primary” denotes
nearly existing or established data and information obtained from a direct
source. Basically, primary data has to do with new data. This can be mainly
from questionnaires.
vii. SECONDARY DATA: The word “Secondary”
data relates to already existing data that is used for the purpose of the
study. It comes in form of textbooks, notes and past books.
1.9 DETERMINATIONS OF CREDIT WORTHINESS
In
determining the credit worthiness of a customer prudent credit manager must
consider the following factors:
CHARACTER: The
characters of the customers must be considered. This can be generally through
inquiring into the probability that the credit customers will honour his/her
obligation.
It
bothers majorly on the moral factor of repaying debt. Credit manager can verify
this getting a guarantee from the proposed credit customer bank.
CAPACITY: The
credit manager should also access the credit customer capacity to pay up his
debt as they fall due. Capacity determining involves the evaluation of the
business records of the customers through ratio analysis to determine his
liquidity and relative solvency.
CAPITAL: It is worth
mentioning that the credit managers in other to be efficient have to be
conversant with all other creditors without capital/equity base of the customer
to be able to know the corrections of his financial standing and the degree of
credit that can be granted to him.
COLLATERAL: Since the granting of credit is synonymous
with the granting short term loan. It is essential that the potential credit
customer should get collateral security which he may be ready to offer as a
pledge to secure the credit. The credit manager and customer must be able to
ascertain the quality and adequacy of these pledge assets before attempting
grant credit.
CONDITION: Prudent debt managers have to take into
consideration the general trend in the economy so as to be able to determine:
a. Its
impact on the economy as to the urgency with which it needs its money.
b. Its
impact on the prospective credit and customer in relations to hours it affects
the ability to pay.
COLLECTIVE POLICY:
This refers to the process by which the company seeks to obtain payment of
receivable. The collection policy of a prudent credit manager and controller
seek to balance between the pressures to avoid excessive investment on
receivable and maintaining customer’s goodwill. It should seek to expand sales
to the profit at which increment sales equal at which incremental sales equal
incremental costs. The determination of incremental sales and incremental costs
can be done by the credit manager through the application of:
a. Ratio Analysis
b. Ageing of Accounts Receivables
FINANCIAL DEBTORS: A
company may have quoted a big amount of receivable and may be in some need for
cash, such an organization requires ways in which the debt can be easily
realized without necessarily forcing the debtor to pay. The various methods of
achieving these objectives is referred to as the method of financing account
interaction.
They
include interaction:
FACTORING: The
company can arrange to sell the account receivable unit rightly to a factor
(ration specializes in purchasing receiving) for an amount less than the face
value of the debt.
The
differential amount will then be the commission paid to the factor for his
waiting till the debtors pay up as well as that of bearing the risk of default
by debtors. Factoring account receivable can be with and without resource.
Factoring with resource implies that inability for default by debtors in the
long fun will devolve back to the company who will then pay off the factor.
Without resource factoring implies that the factor alone bear the risk of
default debtors.
CREDIT INSURANCE: The
company can also insure its receivable with an insurance company in order to
indemnify itself against the risk of default by the debtors. The company will
be paying a given amount to the insurance company as premium and claim the sum
assured upon default.
CAPTIVE FINANCE COMPANY:
Management may also decide to use captive finance company or professional debt
collectors to chase the debtors around and if possible institute a legal action
against them to recover the debt. A fee is usually charged by such captors
based on percentage of the amount collected.
This
will save the company a lot of administrative effort usually spent in casting
receivable.
PLEDGING: The
Company can also pledge its receivable as collateral security with financial
institution to get loan (Just as any other asset can be pledged).
CONSIGNMENT:
Management can decide to appoint the prospective customers as consigned and
treat goods dispatched to them as a consignment rather than a sale.
The
impact of this is that are with the customer (now consignees) are still earned
by the company and the consignees is only but an agent who must represent the
interest of his principle (consignor) and result all the revenue less allowed
partly expenses immediately sales are made only a commission (ordinary or
delcredere) is paid to the consignees.
CASH ONLY BASIS: A
company may decide that the problems associated with the granting of credit to
customer outweigh in its own perception the associated benefit.
The
option available to such an organization is adopt a cash only basis.
CASH MANAGEMENT:
Cash is a medium of exchange which a bank accept for deposit and immediate
credit to the depositor’s account. Cash include currency an personal cheques,
bank drafts, money order as well as money on deposit with banks. In essence,
the general characteristic of cash is that it must be:
a.
A medium of exchange
b. Be immediately
available for payment of current debt.
c. Be free from any contractual
restriction which would prevent management
From using it to meet any and all obligations.
The
management or cash is of a significant importance in any business because cash
is the means of commanding goods and services. hence, careful scrutiny of cash
transaction
is
crucial aspect of cash management because this asset may be readily
misappropriated.
Cash management generally is of pronged, these
are:
a. Cash budgeting.
b.
Internal Account Control.
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