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THE IMPACT OF
EFFECTIVE WORKING CAPITAL MANAGEMENT OF COMPANY’S PERFORMANCE IN A DEPRESSED
ECONOMY
ABSTRACT
Effective working capital management is concerned with management of current
accounts, the interaction between current assets and current liabilities is
therefore the there of the theory of working capital management.
The need fro working capital management cannot be overemphasized. The
objective of this study is to identify and discuss the basic determinants of
working capital and to highlight areas of short-term investment of the company
too to offer suggestion for improving insufficient cash balance to meet current
obligations. It should be emphasized that working capital is one of the
most important aspects of financial management, as short-term survival and
success. The materials used for this research work were by means of view
and related literature.
The research itself was undertaken by means of personal interview and
observation. Collection of data was also by means of questionnaires
administered on the respondents, the data collected were analyzed using some
analytical tools like percentages, descriptive tables and the chi-square
distribution table.
In
conclusion, working capital management polices and practices have significant
influence on a company’s solvency and profitability. Maintaining a large
size of current assets would improve the liquidity position of the company, but
profitability will be no doubt increase, but the liquidity position of the
company would be threated, making the company more risky.
Working capital management should therefore aim to strike a balance by ensuring
that the right combination of current assets and liabilities are held at each
point in time.
TABLE OF CONTENT
CHAPTER ONE
1.0
Introduction
2.0
1.1 Background of the Study
1.2 Statement of problem
1.3 Purpose of the Study
1.4 Significance of the Study
1.5 Scope of the Study
1.6 Limitations of the Study
1.7 Research
Hypothesis
1.8 Research
Question
CHAPTER TWO
3.0
Literature Review
3.1
Introduction
3.2
Need for effective working Capital
3.3
Determination of Working Capital
3.4
Credit Policy
3.5
Nature and Size of Business
3.6
Growth and Expansion activities
3.7
Operation efficiency
3.8
Motives for Holding cash
3.9
Cash Management
3.10
Cash Budget
3.11
Inventory
Management
3.12
The Economic Order Quality E.O.Q Model
3.13
Receivable
Management
CHAPTER THREE
4.0
Research
Methodology
3.1 Research Design
3.2 Area of study
3.3 Population of
Study
3.4 Sampling
Method
3.5 Research
Instrumentation
3.6 Data Analysis Technique
3.7 Validity of
Response/Reliability of Data
3.8 Assumptions of Study
3.9 Method of Hypothesis Testing
CHAPTER FOUR
5.0
Presentation and Analysis of Data
4.1 Data Presentation
4.2 Data
Interpretation
4.3 Analysis and Interpretation
of Relevant
Questions
CHAPTER FIVE
6.0
Summary of Findings, Recommendation and
Conclusion
5.1 Summary of Findings
5.2
Recommendation
5.3 Conclusion
5.4 Suggestion for Further
Research
References
Appendix
LIST OF TABLES
4.4
Table showing distribution and return of questionnaire
4.4.1
Table showing response to number three of the questionnaire
4.4.2
Table showing response to number seven of the questionnaire
4.4.3
Table showing response to number thirty of the questionnaire
4.4.4
Table showing response to number thirteen of the questionnaire
4.4.5
Table showing response to number fourteen of the questionnaire
4.4.6
Table showing response to number eighteen of the questionnaire
4.4.7
Table showing to number eighteen of the questionnaire
4.4.8
Table showing response to number six of the questionnaire
4.4.9
Table showing testing of hypothesis one
5.0.0
table showing testing of hypothesis two
5.1.0
Table showing testing of hypothesis three
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Working capital
usually referred to as the life wire of a company is made up of those resources
which are capable of being converted into cash. The efficient management
of working capital is pre-requisites for overall operational efficiency of a
company.
“Working capital is
not current asset”. It is the difference between current assets and
current liabilities. Any transaction that increases the amount of working
capital is source of working capital.
The various
components of working capital management cannot be separated from fundamental
decision of investment and financing, the takes of the financing manager in
managing working capital effectively, to ensure sufficient liquidity in the
operations of the company.
A company’s liquidity
is measured by the ability to satisfy short-term financial obligations as they
are done. The net working capital is one of the measures of a company’s
liquidity other measures include the current ratio and acid test ratio.
“The net working
capital has been commonly defined as excess of current asset over current
liabilities”. Effective working capital management requires that a
company should operate with some net working capital, though the exact amount
varies from one company to another.
The theoretical
justification for the use of net working capital to measure a company’s
liquidity is based on the assumption that the greater margin by which the
current assets cover the short-term obligation when they fall due
payment. The net working capital is quite useful in internal control,
though not quite for company comparison of performances. The greater the
net working capital, the more liquid the company is and the less it is to
become insolvent.
Most profitable
companies have failed because of improper management of working capital,
especially cash and accounts receivable. The management of these
resources is a balancing problem and this problem stems from the fact that the
relationship between cash flow and profitability is not fully understood.
The privilege economic condition in Nigeria today calls for a more serious
attention in the effective management of working capital in companies.
The unprecedented oil boom of the early seventies in Nigerian economy has come
and gone. The sudden down-turn in the price of oil the backbone of out
natural economy culminated in our present economic woes. This is manifest
by the rapid rise in unemployment, price and interest rates, coupled with
fluctuations in the exchange value of our currency at the foreign exchange
market.
Profitability and
liquidity of companies has been effected by this development. Therefore,
effective management of working capital has necessarily become a test that
should be given such importance, more ever than before in any company. It
should be noted that companies would do better by tying down less funds in
receivables. However, economic considerations and circumstance often
makes it difficult to keep these items down as far as most companies would
wish. Frequent examination of the size, competition and significant
change in not working capital would assist financial managers to achieve the
much desired balance between profitability and liquidity.
1.2
STATEMENT OF PROBLEM
The management of
inter-relationship existence between assets and liabilities has been the
primary problem of working capital management. Effective working capital
management involves sourcing of funds for the management daily operations of
companies. Every company need to maintain a satisfactorily level of
working capital or it would go into banking and finally wound up. However
profitability liquidity and other related risks have been a major problem
facing companies in our depressed economy. This is an important
characteristics of working capital management maintaining a large size of
current asset would improve the liquidity positive of the company but
profitability would be adversely affected as funds remain ideal.
Conversely, if a
company’s holding asset are relatively small the overall profitability will no
doubt increase, but this will have an adverse effect on the company’s overall
performance. Including its liquidity position and thus making the company
more risky. Working capital management should therefore aim at striking a
balance between the liquidity and profitability positions of the company by
ensuring that right combinations of current assets and liabilities are held at
each point in time for a better performance.
1.3
PURPOSE OF THE STUDY
As mentioned earlier,
effective working capital management plays effective role on the financial
decision making of any company, which is however, the backbone of success in
any viable company. As earlier observed, the objective of financial
decision-making is to maximum share wealth.
However, company’s profit usually depends on the rate of their turnover.
There is a deficit and curtained day-to-day operation of the
company.
Primarily the purpose of this study is to examine how Paul – B Nigeria Plc:
1.
Identify and discuss the basic determination of working capital, because the
individual need of companies as influenced by many factors and fluctuates over
time.
2.
Identify and highlight areas of short-term investment of the company with a
view of making recommendation on better utilization of funds to generate higher
earning and to offer suggestions for improving cash balances, to meet current
obligations.
3.
Discuss the place of receivable in the liquidity of a company with a view to
proving solutions. Through lightening of collection policies where
receivable appears excessive.
4.
Highlight the importance of net working capital as a measure of liquidity as
this is as important consideration of any contemplating granting to the
company.
1.4
SIGNIFICANCE OF THE STUDY
Virtually continuous
growth and development of every business or company depends on its source and
proper application of fund generated, which acts as its measure of
profitability. This topic is therefore significant as it provides a
panacea to the profitability problem of companies through product cash
management.
Inadequacy of cash
receivable, which are the vital forms of working capital impairs the growth of
any business. However, the present degree of uncertainty prevailing in
the economy makes it important to maintain better cash or its equivalent for
contingency expenditure. This is the crux of the need for effective
working capital management.
Nevertheless,
determination of the current ratio of companies has been a determinant of
credit grant to companies. The working capital ratio is particularly
significant in this regard as it is indicative of the degree of shrinking in
current asset that will not discourage the interest of the current
creditors. Therefore working capital is significant and crucial in this
context.
1.5
SCOPE OF THE STUDY
This research work
will only cover the management of cash account receivable which is the
foundation of working capital since working capital is naturally wide in scope,
this is the management of current assets and liabilities.
1.6
RESEARCH HYPOTHESIS
HYPOTHESIS I:
Ho: Effective working capital
management does not have
significant impact on
profitability of companies.
H1:
Effective working capital management have significant impact on profitability
of companies impact on the working capital management.
HYPOTHESIS
II:
H0:
Credit management policies of companies does not have significant impact on the
working capital management.
H1:
Credit management policies of companies have significant impact on the working
capital management.
HYPOTHESIS
III
Ho:
Liquidity is not the best single measure of quality adopted by companies in
working capital management.
H1:
Liquidity index is the best single measure of quality adopted by companies in
working capital management.
1.7
RESEARCH QUESTION
What is the impact of
effective working capital management on company performance in a depressed
economy.
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