ABSTRACT
This study
investigated the relationship between working capital management measured by
account receivable period (ACRP), inventory period (INVP), cash conversion
cycle (CCC) and sales Growth (SG) and profitability performance measured by
returns on assets (ROA). The study utilized secondary data obtained from the
annual financial statements of Nigerian Manufacturing companies listed on the
Nigerian Stock Exchange (NSE) for period 2008 – 2012. Multiple regression model
were adopted for testing all the hypotheses and the study result reveals that
there was a negative significant relationship between the account receivable
period and profitability of the Nigerian Manufacturing companies. It also
reveals that the profit is significantly influenced by the number of days
inventory were held (INVP) and that the profitability performance negatively
and significantly related to the cash conversion cycle (CCC). These results
suggest that effective policies must be formulated for the individual
components of working capital. Furthermore, efficient management and financing
of working capital (current assets and liabilities) can increase the operating
profitability of manufacturing firms.
TABLE OF
CONTENTS
Title
page
Abstract
List
of tables
List
of figure
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 Scope of the Study
1.7 Significance of the Study
References
CHAPTER TWO: REVIEW OF
LITERATURE
2.0. Introduction
2.1. Conceptual Review
2.1.0. Concepts of Working Capital Management
2.1.1. Working Capital
2.1.2. Working Capital Management
2.1.3 Working Capital Management Efficiency
2.1.4. Policy of Working Capital
2.1.5. Working Capital Cycle
2.1.6. Components of Working Capital Management
(WCM)
2.1.7. Cash Management
2.1.8 Cash Positioning
2.1.9 Cash Flow Volatility, Earnings Volatility
and Firm Value
2.1.10
Cash Budget
2.1.11.
Management of Cash Receivables
2.1.12.
Credit Standards
2.1.13.
Credit Extension Policy
2.1.14.
Credit Collection Policy
2.1.15.
Inventory (Inv) Management
2.1.16.
Need to Hold Inventory
2.1.17 Inventory Control
2.1.18. The Economic Order Quantity (EOQ)
2.1.19.
Re-Order Point
2.1.20.
Relation to Financial Management
2.1.20.1.
Payables Management
2.1.21. Receivables Management
2.1.22. Cash Conversion Cycle (CCC) Management
2.1.23. Measures of Profitability
2.1.24. Liquidity
2.1.25.
Nature of Working Capital
2.1.26.
Trade-Off between Profitability and Risk
2.1.27.
The Efficient Management of Firm’s Working Capital
2.1.29 . The Consequences of Inefficient Management
of Working Capital
2.1.30.
The Costs and Benefits of Firm’s Investments in Working Capital
2.1.31.
The Nigerian Economy and Working Capital Management of Quoted Firms in Nigeria
2.20. Theoretical Review
2.2.1. The Operating Cycle Theory
2.2.2. The Cash Conversion Cycle (CCC) Theory
2.2.3. The Pecking Order Theory
2.2.4
Agency Theory
2.2.5.
The Risk –Return Trade-Off Theory
2.3.0. Review of Empirical Studies
2.3.1. Summary of Literature Review
References
CHAPTER THREE: METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population of the Study
3.3 Sampling Techniques and Sample Size
3.4 Sources of Data Collection
3.5 Variables Used for the Study
3.5.1 Dependent Variable
2.5.2 Independent Variables
3.6 Data Analysis Techniques
3.7 Model Specification
3.8 Limitation of the Study
References
CHAPTER FOUR: DATA
PRESENTATION, ANALYSIS AND INTERPRETATION
4.0 Introduction
4.1. Presentation and Analysis of Multiple
Regression Results
4.2. Data Validity Test
4.3. Summary of Regression Results
4.4. Testing of Research Hypotheses
4.5. Interpretation of results and discussion
of findings
4.5.1.
The Impact of ACRP on Profitability
4.5.2.
The Impact of Inventory Period (INVP) on Profitability
4.5.3.
The Impact of Cash Conversion Cycle (CCC) on Profitability
4.5.4.
The Impact of Sales Growth (SG) on Profitability
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1. Introduction
5.2. Summary
5.3. Conclusions
5.3.1 Policy Implication
5.4. Recommendations
5.5. Suggestions for Further Research
Bibliography
Appendices
CHAPTER ONE
INTRODUCTION
1.1
Background
To The Study
Working Capital management of a
firm, which deals with the management of current assets and current
liabilities, has been recognized as an important area in financial management.
Working capital (WC) refers to the firm’s investment in short-term assets. Pandey, (2005) classified working capital into
gross and net concepts. He defined gross
working capital as the firm’s investment in current assets. Current assets are
the assets which can be converted into cash within an accounting year and these
include; cash, short-term securities, debtors, bills receivables and stocks. He
described net working capital as the difference between current assets and
current liabilities. Current liabilities are those claims of outsiders, which
are expected to mature for payment within an accounting year. These include
trade creditors, bills payable, bank overdraft and short- term loan. Home van,
(2000) described working capital management as involving the administration of
these assets namely cash, marketable securities, receivables and inventories
and the administration of current liabilities.
Management of these short-term
assets and liabilities is important to the financial health of business of all
sizes. This importance is hinged on the fact that the amounts invested in
working capital are often high in proportion to the total assets employed and
therefore warrants a careful investigation (Smith, 1980). Working Capital
therefore, should neither be more nor less, but just adequate for the smooth
running of a firm. While excess amount of working capital results in the
reduction of firm’s profitability, holding of inadequate amount of it leads to
lower levels of the firm’s liquidity and stock outs resulting in difficulties
in maintaining smooth operation (Krueger, 2002).
Business success, therefore,
heavily depends on the ability of the financial managers to effectively manage
accounts receivable, inventory and account payable (which are component of
working capital) (Filbeck and Krueger, 2005). Firm can reduce their financing
costs and or increase the funds available for expansion of project by minimizing
the amount of investment tied up in current assets (Home Van Wachowicz, 2004).
For this reasons, most of the financial manager’s time and efforts are spent in
identifying the non-optimal levels of current assets and liabilities and
bringing them to optimal levels (Lamberson, 1995). An optimal level of working
capital is the one in which a balance is achieved between risk and efficiency.
To maintain the optimal level of various components of working capital,
continuous monitoring is required (Afza and Nazir, 2009).
A poor or inefficient working
capital management leads to tie up funds in idle assets and reduces the
liquidity and profitability of a company (Reddy & Kameswar, 2004). Siddart
& Das (1993), states that the major reason for slow progress of an undertaking
is shortage or wrong management of working capital. Deloot (2003: 573), states
that “there is a significant relationship between gross operating income and
number of days of account receivable, inventories and accounts payables”. The
relationship between accounts payable and profitability is consistent with the
view that less profitable firms wait longer to pay their bills.
Considering the importance of
Working Capital Management therefore, the researcher focused on evaluating the
Working Capital Management and profitability relationship like other similar
works such as Uyar, 2009; Samiloglu and Demirgune 2008; Vishnani and Shah,
2007; Tervel and Solano, 2007; Lazaridis and Tryfonidis, 2006; Padachi, 2006;
Shin and Soenen, 1998; Smith et al, 1997 and Jose et al, 1996. However, there
are a few studies with reference to Nigeria in respect of the subject. Like
Akinsulire, 2005, Falope,, 2009, Ajilore,, 2009 etc.
Most of these studies focused on
the Working Capital Management financing policies. Shah and Sana (2006)
concentrated on the oil and gas sector and estimated the relationship using
small sample of 7 firms. Raheman and Masr (2007) analyzed profitability and
Working Capital Management performance of
94 firms listed on Karachi Stock Exchange for the period 1999-2004 by
using ordinary least square and generalized least square. However, this study
ignored the fixed effect of each firm as each firm has its unique
characteristics and also ignores sector-wise analysis of Working Capital
Management performance of manufacturing firms. Insufficient evidences on the
firm’s performance and Working Capital management with reference to Nigeria
therefore, provide a strong motivation for evaluating the relationship between
working capital management and firm’s performance in detail. This study
therefore, explores the various way of measuring Working Capital components and
relates them to the performance of the Nigerian manufacturing sector.
1.2
Statement
Of The Problem
There has been a growing number of
studies that examined the relationship between working capital and corporate profitability
in the recent time (Shin and Soenen, 1998; Deloof, 2003; Fildbeck and Krueger,
2005; Falope, 2009; .Jinadu, 2010). Justification for this common efforts
centered on the relationship between efficiency in working capital management
and firms profitability and its implications on shareholder’s value. Most of
these studies were however, centered on large firms operating within well
developed money and capital market of developed economies and did not consider
the fact that the amount of working capital required varies across industries
and indeed firms depending on the nature of business, scale of operation,
production cycle, credit policy, availability of raw materials etc (Ghosh and
Maji; 2004).
It is regrettable to note that in
spite of these huge literatures in this area, many firms had crashed, more
especially manufacturing sector of the Nigerian economy in which application of
working capital is more pronounced (Jinadu, 2009). In addition, some promising
investments with high rate of return are failing and being frustrated out of
business because of inadequacy of working capital. Many factories had been
either temporarily or completely shot down because they could not meet their
financial obligations as at when due because they were not liquid. Many
Nigerian workers had been forcefully thrown into unemployment market and
frustratingly became dependent on relations as a result of the aborted mission
of their organization caused by poor attention given to the management of
working capital . Unfortunately, Nigeria capital and money markets are not
really helping to ameliorate the problem, instead, more often than not; they
compound the problem by creating bottleneck with harsh conditions that could
not be easily met by the companies that are at the verge of collapse.
The
problem then arises as to how managers of these manufacturing organization
could be encouraged to pay more attention to the management of their working
capital. In other words, how could working capital be managed in order to
impact positively on firms performance.....
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