EFFECT OF WORKING CAPITAL MANAGEMENT ON THE FINANCIAL PERFORMANCE OF PHARMACEUTICAL COMPANIES IN GHANA

ABSTRACT
Working capital management plays a vital role in improving the financial performance of companies. The purpose of the study is to analyze the effects of working capital management on the financial performance of pharmaceutical companies in Ghana. For this reason Pearson correlation and regression were used to analyze the secondary data in the form of annual financial report were obtained from the pharmaceutical companies for a period of eleven years (2005-2015). The study measured financial performance using Return on equity and Return on assets. The study used Rate of stock turnover, Average collection period, Current ratio, Firm size and Average payment period as the independent variable. The study found negative relationship with average collection period, firm size and rate of stock turnover and found a positive relation with current ratio and average payment period. However, firm size, average collection period were statistically significant. The results indicate that there was 22.5% and 9.8% of the variation in Return on assets (ROA) and Return on equity (ROE) as the dependent variable explained by the independent variables of Rate of stock turnover (ROST), Average collection period(ACP), Current ratio (CR), Firm size (FS) and Average payment period(APP). Based on the results from the study it concludes shareholders can create value for their wealth by reducing average collection period and delay payment for creditors. Managers of pharmaceutical companies must employ staffs with qualified expertise and experience to manage their working capital to improve their liquidity level and operations.


CHAPTER ONE
INTRODUCTION 
1.1 Background of the study
Pharmaceutical industry in Ghana plays a vital role in manufacturing, importing and distributing of quality and affordable drugs aimed at improving the health care delivery system in the country. Government has provided incentive to boost the pharmaceutical industry such as exemption in payment of custom duty on all raw and packaging materials for the local production of pharmaceuticals. Local produced pharmaceuticals are zero rated under the Value Added Tax (VAT) law, despite incentives from Government; the industry faces several constraints such as low capacity utilization, undercapitalization, weak financial base and high cost of inputs.

These challenges have necessitated the management of working capital to improve the financial performance of the pharmaceutical industry; however, the economic theory of firms requires that firm’s resources should be utilized efficiently in order to achieve economic success. Firm’s resources are broadly classified into two, long term assets (non-current assets) and short term assets (current assets).

Working capital management refers to investment in current assets and current liabilities which are liquidated within one year or less and is therefore crucial for firm’s day to day operations (Kesimli & Gunay, 2011). The components of working capital include cash, marketable securities, account receivables, inventories and account payable. Firms fail mostly because they are not able to meet their working capital needs; consequently, sound working capital management is a requisite for firm’s survival (Deloof, 2003).

Working capital is very important to a firm’s survival which is setting up and requires focus, adequate planning and management, since resource available to the firms is scare, management of working capital plays a vital role in the achievement of profitability and overall performance of such firm.

1.2 STATEMENT OF THE PROBLEM
Company financial performance is very essential to management; a financially stable company attracts investors both locally and abroad. It is also very easy for a financial stable company to obtain loans for development hence its growth. Well managed working capital is crucial to the running of a healthy and successful business. Good working capital ensures that the cash available to a business always exceed its current liabilities.

Stephen (2012) documents evidence that most business organizations do not hold the right amount of stocks, debtors and cash; as a result of which the firms are unable to meet their maturing short term obligations and its upcoming operational needs. Similarly, insufficient working capital means that a firm is unable to undertake expansion projects and increase its sales, therefore limiting the growth and financial performance of the business. These are particularly the symptoms revealed by the Ghana pharmaceutical firms in the recent times, as majority of pharmaceutical firms in Ghana have exhibited dwindling returns as well as poor financial performance. Pharmaceutical companies handle 500-600 types of products that include huge raw materials coupled with the high purity of items required making working capital management difficult.

Moreover, Report from the Ghana Standard Board (2015) showed that drug manufactures in Ghana are faced with several constraints, including low capacity utilization, under capitalization, a weak financial base, high production costs as a result of the high cost of inputs and unstable demand among others. Other research have focused on how reduction of working capital improves a firm’s profitability (Shin & Soenen, 1998; Deloof, 2008; Raheman & Nasr, 2007; Samiloglu, 2008; Zariyawati, 2009; Falope & Ajilore, 2009; Dong & Su, 2010; Sharma & Kumar, 2011. However, the inefficient management of working capital components in the pharmaceutical companies in Ghana and also no known studies have focus their attention on working capital management and its effects on financial performance and this constitute the problem of the study.

In summary, working capital management is a frequent area of research in finance and accounting but very little research have been done on pharmaceutical firms, most of these studies concentrated on a single working capital component and the study are mostly from the developed economy, where the market mechanisms and the business environment significantly differ from Ghana. Therefore, this study will examine the effect of working capital management on the financial performance of pharmaceutical companies in Ghana.

1.3 Purpose of the Study

1.3.1    General Purpose of the Study
The purpose of this study is to determine the effects of working capital management on the financial performance of listed pharmaceutical companies in Ghana.

1.3.2    Research Objectives
Analyze the effect of average collection period on the financial performance of pharmaceutical firms in Ghana.

Examine the impact of rate of stock turnover on the financial performance of pharmaceutical firms in Ghana.

Assess the effect of average payment period on the financial performance of the pharmaceutical firms in Ghana.

Test the effect of firm size on the financial performance of pharmaceutical firms in Ghana.

Examine the effect of current ratio on the financial performance of pharmaceutical firms in Ghana.

1.4 Research Hypotheses
In line with the objectives of the study, the following hypotheses have been formulated:

H01: Average collection period has no significant effect on the financial performance of pharmaceutical companies in Ghana.

H11: Average collection period has a significant effect on the financial performance of pharmaceutical companies in Ghana

H02: Average payment period has no significant effect on the financial performance of pharmaceutical companies in Ghana.

H12: Average payment period has a significant effect on the financial performance of pharmaceutical companies in Ghana.

H03: Rate of stock turnover has no significant effect on the financial performance of pharmaceutical companies in Ghana.

H13: Rate of stock turnover has a significant effect on the financial performance of pharmaceutical companies in Ghana.

H04: Firm size has no significant effect on the financial performance of pharmaceutical companies in Ghana.

H14: Firm size has a significant effect on the financial performance of pharmaceutical companies in Ghana.

H05: Current ratio has no significant effect on the financial performance of pharmaceutical companies in Ghana.

H15: Current ratio has a significant effect on the financial performance of pharmaceutical companies in Ghana.

1.5 Significance of the Study
The critical role of working capital management is playing in the short-term liquidity position and the recent crises of credit and liquidity make this study a necessity. Therefore, this study is significant in revealing the effect of working capital components on the financial performance of pharmaceutical companies in Ghana. The study finding is expected to be of useful benefit to Shareholders (as owners), Management, Creditors, Researchers and Regulators or policy makers of pharmaceutical companies in Ghana.

1.6       Delimitations
The research is delimited to study the effects of working capital components on the financial performance of pharmaceutical companies in Ghana. It will have help explore the study if the research had also recognized other pharmaceutical companies not listed on the Ghana stock exchange. The sampling units of this research is delimited to 37 pharmaceutical in Ghana, however, the sampling size is delimited to ten(10) pharmaceutical companies of which three(3) are listed on the Ghana stock exchange and remaining seven(7) are unlisted. The research method is delimited to quantitative method with descriptive and inferential statistics.

1.7 Limitations
The findings of this research is limited to only ten (10) pharmaceutical companies of which three(3) are listed on the Ghana Stock Exchange and seven(7) of the remaining ten are not listed because of lack of secondary data from pharmaceutical companies not listed on Ghana Stock Exchange.

1.8 Organization of study
The study will be structured into five chapters as follow. Chapter one represents the introduction chapter which comprises; background of the study, statement of the problem, objectives of the study, research questions/hypothesis, significance of the study and finally the scope and organization of the study. Chapter Two reviews both theoretical and empirical literature on Working Capital Management and Financial Performance. Chapter Three also presents methodology of the study. It includes the study design, population and sampling, data collection methods, data collection procedures, and data analysis. Chapter four then presents findings and interpretations. It also discusses the findings relative to the literature. Chapter Five finally presents summary, conclusions and recommendations based on the study. The limitations and recommendations for further studies were also included in this chapter.

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Item Type: Ghanaian Project Material  |  Attribute: 53 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH110 ($20)  |  Delivery: Within 30Mins.
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