study examines Working Capital Management as a Tool for business survival (A
case study of two medium scale organization). Data gathered and analyzed in the
course of conducting this study was derived from both primary and secondary
sources, with the utilization of interview guides as the primary data
collection instrument, and information from past research work and journals as
the secondary source.
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Question
1.4 Aims and Objectives
1.5 Significance of the Study
1.6 Study Area
1.7 Limitation of the Study
1.8 Definition of Terms
2.0 Literature Review
2.1 Nature and Importance of Working Capital
2.2 Conceptual Framework
2.3 Role of the SME Sub-Sector in the Economy
2.4 Problems of SMEs in Nigeria
3.0 Research Methodology
3.1 Research Design
3.2 Population of the Study
3.3 Sample Size and Sampling Technique
3.4 Re-Statement of Research Question
3.5 Re-Statement of Research Hypotheses
3.6 Source of Data
3.7 Data Collection Instrument
3.8 Validity and Reliability of the Research Instrument
3.9 Method of Data Analysis
3.10 Limitations of Methods
4.0 Data Presentation, Analysis and Interpretation
4.1 Testing and Interpretation of the Hypotheses
4.2 Test of Hypotheses Two
4.3 Test of Hypotheses Three
4.4 Discussion of Findings
5.0 Summary, Recommendations and Conclusion
1.1 BACKGROUND TO THE STUDY
growing population of small businesses and startups, and the increasing rate of
‘crashing out’ or liquidation of such businesses has become an issue of concern
in an already harsh national economy. The small businesses in no small measure
contribute to the development of the nation’s economy as they not only provide
avenues for entrepreneurs to spring up, but they serve as employers of labor;
thus reducing the level of unemployment in the economy.
the aforementioned benefits, it will thus be important to ensure the
sustainability of the small and medium scale enterprises.
spite of the fact that SMEs have been regarded as the bulwark for employment
generation and technological development in Nigeria, the sector nevertheless
has had its own fair share of neglect with concomitant unsavory impacts on the
economy. In a seminar titled “Career Crisis and Financial Distress- The Way
Out”, the General Manager of Enterprise and Financial Support Company Limited,
Mr. Oluseyi Oluboba, identified in his paper the following as the main problems
of SMEs, which are however not insurmountable: low level of entrepreneurial
skills, poor management practices, constrained access to money and capital
markets, low equity participation from the promoters because of insufficient
personal savings due to their level of poverty and low return on investment,
inadequate equity capital, poor infrastructural facilities, high rate of
enterprise mortality, shortages of skilled manpower, multiplicity of regulatory
agencies and overbearing operating environment, societal and attitudinal
problems, integrity and transparency problems, restricted market access, lack
of skills in international trading bureaucracy, lack of access to information
given that it is costly at times (Basil, 2005)
Small Scale and Medium Sized Enterprises (SMEs) have been credited with
enormous contribution to the growth of the developed economies of the world. In
the same vein, the Information and Communications Technologies (ICT), and
particularly the Internet have played their own part in those economies. The
SMEs provide the cornerstones on which any country’s economic growth and
stability rests. The American economy, the largest economy in the world,
depends largely on the success of SMEs for “innovation, productivity, job
growth and stability” (SBA Report, 2000).
businesses represent more than 99% of all employers, employ 51% of
private-sector workers, employ 38% of workers in high-tech occupations, provide
about 75% of new jobs of the private sector output and represent 96% of all
goods exporters” (Twist, 2000).
was a dramatic growth in the American economy in 1999 when almost 2.8 million
new, private-sector jobs were created. According to the SBA Report (2000), 75
percent of these new jobs were created by the SMEs with the services sector
topping the list with about 1 million, followed by manufacturing, finance and
insurance. The same story emerges in every other economy. The differences lie
in the magnitude of impact and the indices for measuring them.
rapid transformation of the “Asian Tiger” countries of India, Malaysia,
Taiwan and Hong Kong, has also been hailed as proof that SMEs are
major catalysts to economic development. Their importance to any economy hinges
on their ability to stimulate indigenous entrepreneurship, to provide
employment to a greater number of people; to mobilize and utilize domestic
savings and raw materials, to provide intermediate raw materials or
semi-processed products to large-scale enterprises, and to curtail rural-urban
migration. Of equal strategic importance is also the role of the SMEs in other
developing countries like Nigeria.
With a Gross National Product (GNP) of some $41.2 billion and a World Bank
estimated population of 126.9 million, Nigeria
is one of the largest economies in Africa
(World Bank Report, 2000). This being the case, the economic success or failure
can affect not only the country but the whole of sub Sahara Africa. This is why
any effort geared towards understanding how the SMEs make use of emerging
technologies in improving their products and services which ultimately reflect
on their growth potential is worthwhile.
study conducted in Nigeria
by the Federal Office of Statistics shows that over 97% of all businesses in Nigeria employ
less than 100 employees. This therefore means that about 97% of all businesses
are SMEs (Ariyo, 2000). The Federal Government of Nigeria initiated and
actualized some policy measures, like the setting up of Small and Medium
Industries Equity Investment Scheme (SMIEIS), in the expectation that improved
funding would facilitate the achievement of higher economic growth.
Capital (abbreviated WC) in the simplest of terms refers to the
financial input a business or organization requires for its day to day running
and maintenance to ensure sustainability.
capital is a financial metric which represents operating liquidity available to
a business, organization or other entity, including governmental entity. Along
with fixed assets such as plant and equipment, working capital is considered a
part of operating capital. Net working capital is calculated as current assets
minus current liabilities. It is a derivation of working capital that is
commonly used in valuation techniques such as DCFs (Discounted cash flows). If
current assets are less than current liabilities, an entity has a working
capital deficiency, also called a working capital deficit.
existence, survival, growth and stability of any corporate body is highly
dependent on the efficiency and effectiveness of its management. This is
measured by the ability of the organization’s management to combine all the
necessary material for optimal and efficient actualization of their set
objectives within the stipulated time. In any organization, cash forms the life
wire, which determines to a large-extent, its growth, existence and survival
among other competing firms. As a result, it becomes imperative for the
management of any organization to give a close attention to the management of
working capital if they want to stand the test of time. The management decides
the best proportion of its investment on both fixed and current assets and
finally her liability level to enable improvement and correction of imbalances
in the liquidity position of the firm. Most organizations believe in
profitability, but it is generally accepted that liquidity is more important
for survival and growth. The reason behind this premise is that most
organizations make profit but do not posses enough or adequate, liquid asset to
off-set current obligations. However, this inability to make payment at when
due may definitely have serious consequences on the organization financial
growth. Weak liquidity makes it unsafe and unsound for the survival of the
company but all it takes is efficient and effective management Nwankwo (2005).
company can be endowed with assets and profitability but short of liquidity if
its assets cannot readily be converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it
has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash (Wikipedia, 2011).
working capital meets the short-term financial requirements of a business
enterprise. It is a trading capital, not retained in the business in a
particular form for longer than a year. The money invested in it changes form
and substance during the normal course of business operations. The need for
maintaining an adequate working capital can hardly be questioned. Just as
circulation of blood is very necessary in the human body to maintain life, the
flow of funds is very necessary to maintain business. If it becomes weak, the
business can hardly prosper and survive. Working capital starvation is
generally credited as a major cause if not the major cause of small business
failure in many developed and developing countries (Rafuse, 1996).
success of a firm depends ultimately, on its ability to generate cash receipts
in excess of disbursements. The cash flow problems of many small businesses are
exacerbated by poor financial management and in particular the lack of planning
cash requirements (Jarvis et al, 1996).
working capital on the other hand, is the difference between
a business' current assets and its current liabilities. Working capital policy,
then, refers to decisions related to types and amounts of current assets and
the means of financing them. These decisions will necessarily involve:
management of cash and inventories
Credit policy and collection of accounts receivables
Short-term borrowing and other financing opportunities such as trade credit
capital management is primarily concerned with the day-to-day operations rather
than long-term business decisions. For example, plans for introducing new
products to the market and plans for obtaining the facilities and equipment
necessary to produce them are strategic in nature, as are the long-term
financing needs of the firm. On the other hand, working capital management
policies target short-term concerns such as the:
Availability of raw material and inventories
Continuous operation of the production line
Granting credit to customers and collecting past-due accounts
Taking advantage of credit purchases and the discounts for early payments
management of the cash account
factors help promote smooth operation of the business on a day-to-day basis.
the average firm has about 40 percent of its capital tied up in current assets,
decisions regarding working capital greatly impact business success. This is
especially true for smaller businesses which often minimize their investment in
fixed assets by leasing rather than buying, but which cannot avoid investing in
inventories, cash and receivables. Further, small businesses tend to have a
limited number of financing opportunities and less access to capital markets.
This requires them to rely heavily on short-term credit such as accounts
payable, bank loans and credit secured by inventories and/or accounts
receivable. The use of any of these financing sources influences working
capital by increasing current liabilities Deloof (2003).
relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's
short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that the firm is able to continue its operations and
that it has sufficient cash flow to satisfy both maturing short-term debt and
upcoming operational expenses Owolabi, (2005).
capital management (WCM) is of particular importance to the small business.
With limited access to the long-term capital markets, these firms tend to rely
more heavily on owner financing, trade credit and short-term bank loans to
finance their needed investment in cash, accounts receivable and inventory
(Chittenden et al, 1998; Saccurato, 1994). However, the failure rate among
small businesses is very high compared to that of large businesses. Studies in
the UK and the US have shown
that weak financial management - particularly poor working capital management
and inadequate long-term financing - is a primary cause of failure among small
businesses (Berryman, 1983; Dunn and Cheatham, 1993). The success factors or
impediments that contribute to success or failure are categorized as internal
and external factors. The factors categorized as external include financing
(such as the availability of attractive financing), economic conditions,
competition, government regulations, technology and environmental factors.
While the internal factors are managerial skills, workforce, accounting systems
and financial management practices.
research studies have been undertaken on the working capital management
practices of both large and small firms in India, UK, US and Belgium using
either a survey based approach (Burns and Walker, 1991; Peel and Wilson, 1996)
to identify the push factors for firms to adopt good working capital practices
or econometric analysis to investigate the association between WCM and profitability
(Shin and Soenen, 1998; Anand, 2001; Deloof, 2003).
firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. Liquidity is a precondition to
ensure that firms are able to meet its short-term obligations and its continued
flow can be guaranteed from a profitable venture. The importance of cash as an
indicator of continuing financial health should not be surprising in view of
its crucial role within the business. This requires that business must be run
both efficiently and profitably. In the process, an asset-liability mismatch
may occur which may increase firm’s profitability in the short run but at a
risk of its insolvency. On the other hand, too much focus on liquidity will be
at the expense of profitability and it is common to find finance textbooks
(Gitman, 1984 and Bhattacharya, 2001) begin their working capital sections with
a discussion of the risk and return tradeoffs inherent in alternative working
capital policies. Thus, the manager of a business entity is in a dilemma of
achieving desired tradeoff between liquidity and profitability in order to
maximize the value of a firm.
Working Capital involves the various activities combined to
ensure the effective utilization of the available working capital.
the performance levels of small businesses have traditionally been attributed
to general managerial factors such as manufacturing, marketing and operations,
working capital management may have a consequent impact on small business
survival and growth (Kargar and Blumenthal, 1994). The management of working
capital is important to the financial health of businesses of all sizes. The
amounts invested in working capital are often high in proportion to the total
assets employed and so it is vital that these amounts are used in an efficient
and effective way. However, there is evidence that small businesses are not
very good at managing their working capital. Given that many small businesses
suffer from under capitalization, the importance of exerting tight control over
working capital investment is difficult to overstate.
firm can be very profitable, but if this is not translated into cash from
operations within the same operating cycle, the firm would need to borrow to
support its continued working capital needs. Thus, the twin objectives of
profitability and liquidity must be synchronized and one should not impinge on
the other for long. Investments in current assets are inevitable to ensure
delivery of goods or services to the ultimate customers and a proper management
of same should give the desired impact on either profitability or liquidity. If
resources are blocked at the different stage of the supply chain, this will
prolong the cash operating cycle. Although this might increase profitability
(due to increase sales), it may also adversely affect the profitability if the
costs tied up in working capital exceed the benefits of holding more inventory
and/or granting more trade credit to customers Akwaja, (2004).
component of working capital is accounts payable, but it is different in the
sense that it does not consume resources; instead it is often used as a short
term source of finance. Thus it helps firms to reduce its cash operating cycle,
but it has an implicit cost where discount is offered for early settlement of
1.2 STATEMENT OF THE PROBLEM
and Medium Enterprises (SMEs) in Nigeria
have not performed creditably well and hence have not played the expected vital
and vibrant role in the economic growth and development of Nigeria. This
situation has been of great concern to the government, citizenry, operators,
practitioners and the organized private sector groups. Year in year out, the
governments at federal, state and even local levels through budgetary
allocations, policies and pronouncements have signified interest and
acknowledgement of the crucial role of the SME sub-sector of the economy and
hence made policies for energizing the same. There have also been fiscal
incentives, grants, bilateral and multilateral agencies support and aids as
well as specialized institutions all geared towards making the SME sub-sector
as it has been a great concern to all and sundry to promote the welfare of
SMEs, it has also been a great cause of concern to all, the fact that the vital
sub-sector has fallen short of expectation. The situation is more disturbing
and worrying when compared with what other developing and developed countries
have been able to achieve with their SMEs. It has been shown that there is a
high correlation between the degree of poverty hunger, unemployment, economic
well being (standard of living) of the citizens of countries and the degree of
vibrancy of the respective country’s SMEs.
SMEs die within their first five years of existence. Another smaller percentage
goes into extinction between the sixth and tenth year thus only about five to
ten percent of young companies survive, thrive and grow to maturity.
factors have been identified as to the possible causes or contributing factors
to the premature death. Key among this include insufficient capital, lack of
focus, inadequate market research, over-concentration on one or two markets for
finished products, lack of succession plan, inexperience, lack of proper book
keeping, lack of proper records or lack of any records at all, inability to
separate business and family or personal finances, lack of business strategy,
inability to distinguish between revenue and profit, inability to procure the
right plant and machinery, inability to engage or employ the right caliber
staff, lack of good plan, cut-throat competition, lack of official patronage of
locally produced goods and services, dumping of foreign goods and
overconcentration of decision making on one (key) person, usually the owner.
Other challenges which SMEs face in Nigeria include irregular power supply and
other infrastructural inadequacies (water, roads etc) unfavorable fiscal
policies, multiple taxes, levies and rates, fuel crises or shortages, policy
inconsistencies, reversals and shocks, uneasy access to funding, poor policy
implementation, restricted market access, raw materials sourcing problems,
competition with cheaper imported products, problems of inter-sectoral linkages
given that most large scale firms source some of their raw material outside
instead of sub contracting to SMEs, insecurity of people and property, fragile
ownership base, lack of requisite skill and experience, thin management,
unfavorable monetary policies, lack of preservation, processing and storage
technology and facilities, lack of entrepreneurial spirit, poor capital
structuring as well as poor management of financial, human and other resources.
If Nigeria were to
achieve an appreciable success towards attaining the Millennium Declaration
Goals for 2015, one of the sure ways would be to vigorously pursue the
development of its SMEs. Some of the key Millennium Declaration Goals like
halving the proportion of people living in extreme poverty, suffering from
hunger, without access to safe water, reducing maternal and infant mortality by
three-quarts and two thirds respectively and enrolment of all children in
primary school by 2015 may indeed be a mirage unless there is a turnaround of
our SMEs’ fortunes sooner than later. The time is now to do something surgical
to the situation of our SMEs given the aggravating level of poverty in Nigeria and the
need to meet up with the Millennium Declaration Goals. The decreasing level of Nigeria’s per
capita income, which declined from $870 in 1981 to $260 in 1998, and $205 in
2004 as well as a low level of agricultural, industrial and infrastructural
development (irrigation, road and railway networks) all represent disturbing
indices, which also contribute to the dismal performance and contribution of
our SMEs. Dr. Ade Oyedijo, a financial expert in a paper titled “Nigeria’s Economy and its Career Promise for the
Mature Employee” affirmed that the plights of SMEs in Nigeria have to
do with key variables and challenges that characterize the nation’s economy.
These include but are not limited to a very high unemployment rate, which is
expected to increase as a result of the current ongoing public sector reforms,
high unemployment rate, high poverty level, disease, hunger, etc. Dr. Oyedijo
also mentioned a drastic shift from the production of non-oil traded goods
(mostly agricultural) to traded goods while about 95 million Nigerians are
reported to be living below the poverty line even as 19 of her citizens are
ranked among the 500 wealthiest men in modern capitalist economy as among the
characteristics of our nation’s economy which aggravate the problems of
Nigerian SMEs. He also opined that since independence, the main thrust of
Nigeria’s development strategies and objectives have been the development of
industrialization, education and a self reliant economy but regretted that the
human capital which is expected to support the industrialization process and
propel other sectors to maturity has not exhibited the right mix of knowledge,
attitude and skills required to achieve this purpose.
1.3 RESEARCH QUESTIONS
research questions of this study aims at eliciting information in certain areas
that will serve as a guide or map in data generation and information gathering.
The following questions were asked to serve this purpose:
Working Capital Management influence business survival?
are the trends regarding small and medium scale business in Nigeria?
can Working Capital Management influence business survival?
are the main causes of liquidation of most small and medium scale enterprises
in the country?
roles do banks and other financial houses play in the sustenance of SME’s?
AIM AND OBJECTIVES
research study mainly aims at evaluating the impact of Working capital management
as a tool for business survival;
specific objectives of the study are to:
information on the relationship between working capital management and the
survival of small and medium scale enterprises.
how working capital management can affect business survival
the inherent benefits in effective working capital management for the benefit
of small and medium scale enterprises in Nigeria.
the major problems, challenges and constraints, which have militated against
the SMEs from playing the vital role in the Nigerian economic growth and
1.5 JUSTIFICATION FOR THE STUDY
interest behind this study stems from the researchers overall look and from
personal observations at the trends of growth and closure patterns of small and
medium scale enterprises in the country. After reviewing some related and
relevant literature work, it became clear that the issue of survival of small
and medium scale enterprises should not sidelined. Small and Medium scale
enterprises are more present in the Nigerian economy than the Large scale
sector and serves as a higher employer of labor.
there has been countless research work carried out in the area of small and
medium scale enterprise survival, only a handful have actually looked into the
area of working capital management as a key factor in their survival in
study, if successful, will throw more light to effective working capital
management as a viable tool for the survival of small and medium scale enterprises.
1.6 STUDY AREA
pharmacetical store is located just outside the borderlines between Lagos and Ogun state, Nigeria. The outfit has been
popularly known in the area as one of the foremost pharmaceutical dealers for
both wholesale and retail consumers. Over the years, the pharmacy has witnessed
a change in the management; three times, 1998, 2005 and 2009 respectively. The
pharmacy employs about 120 staff capacity (both confirmed and casual); the
confirmed staff carryout the daily activities in the administrative section of
the business to ensure a smooth flow of responsibilities and results, while the
casual staff are mostly used for the loading and unloading of the goods.
Paint Industry on the other hand, is also located in Abule-egba area Lagos. It was initially a
paint shop at startup, but grew into a popular paint industry especially valued
by wholesale and retailers.
case studies were chosen by the researcher not just for proximity reasons, but
for the fact that they served as good representation of the typical Small and
Medium scale enterprises in the country today.
1.7 LIMITATION OF THE STUDY
with timing and initial financial constraints, as the study was financially
tasking on the researchers financial capacity, the study faced some
limitations. The acquisition of journals and materials for the research work
took considerable effort to scout through the pool of sources. Also, the issue
of communication constituted strain as most of the respondents was unwilling to
cooperate. Despite the limitations, adequate information was gathered by the
researcher as the case studies finally chosen had respondents who were willing
to divulge as much details as they could.
1.9 DEFINITION OF TERMS
Enterprise: An enterprise whose total cost including
working capital but excluding cost of land is between ten million naira
(N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce
between eleven (11) and seventy (70) full-time staff and/or with a turnover of
not more than ten million naira (N10,000,000) in a year.
Enterprise: A company with total cost including working
capital but excluding cost of land of more than one hundred million naira
(N100,000,000) but less than three hundred million naira (N300,000,000) and/or
a staff strength of between seventy-one (71) and two hundred (200) full-time
workers and/or with an annual turnover of not more than twenty million naira
(N20, 000, 000) only
Enterprise: Any enterprise whose total cost including
working capital but excluding cost of land is above three hundred million naira
(N300,000,000) and/or a labor force of over two hundred (200) workers and/or an
annual turnover of more than twenty million naira (N20,000,000) only (Basil,
thing of value, especially property, that a person or company owns, which can
be used or sold to pay debts.
Exacerbated: An action or condition that
happens to make something worse than its previous state.
written list of all objects or goods in a particular place that could be used
for reference or planning purposes.
or assets that has not yet been received, or money that is owed to a business.
that delays or stops the progress of something.
state of owning things of value that can easily be exchanged for cash.