Bachelorarbeit, 2018
57 Seiten, Note: 4.5/5.0
CHAPTER ONE
1 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 Significance of the Study
1.7 Scope and Limitation of the Study
1.8 Definition of Terms
CHAPTER TWO
2 REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework
2.2 Theoritical Framework
2.3 EMPIRICAL REVIEW
CHAPTER THREE
3 RESEARCH METHODOLOGY
3.1 Research Design
3.2 Source of Data Collection
3.3 Population of the Study
3.4 Reliability and Validity of Instruments
3.5 Method of Data Analysis
3.6 Model Specification
CHAPTER FOUR
4 DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation
4.2 Data Analysis
CHAPTER FIVE
5 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings
5.2 Conclusion
5.3 Recommendations
REFERENCES
Financial crisis and the collapses of organizations brought to the forefront of research the importance of management of organization resources and especially working capital management. Business organizations exist in a rapidly changing environment which threatens their survival. Many of them have adopted various survival strategies to maintain sustenance, hence, this has become the central philosophy of most business concerns for a business to survive, then it must make a substantial profit so as to experience growth, meet with its obligation when they fall due and ensure that the company does not run short of working capital.
Working capital management involves the application of strategies and policies in the use of firm's current assets and liabilities in such a way that an optimum level of working capital is maintained. In essence, the goal of working capital management is to promote satisfying profitability and maximizes shareholders’ value. Management of working capital has profitability and liquidity implications and proposes a familiar front for profitability and liquidity of the company. To reach optimal working capital management, firm managers should control the trade off between profitability maximization and liquidity accurately (Raheman and Mohamed, 2007).
Working capital management is a very sensitive area in the field of financial management. It involves the decision of the amount and composition of current asset and the financing of these assets. Current assets includes those assets that in the normal course of the business that can return to the form of cash within a short period of time, ordinarily within a year and such temporary investment as may be readily converted into cash.
The working capital management of a firm affects its profitability. The ultimate objective of any firm is to maximize profit. But, preserving liquidity of a firm is an important objective too. The problem is that increasing profit at the cost of liquidity can bring serious problem to the firm (Shin and Soenen, 2018).Therefore there must be a trade-off between these two objectives of the firm. One objective should not be at the cost of the other because both have their importance. If we do not care about profit, we cannot survive for a longer period. On the other hand, if we do not care about liquidity, we face the problem of insolvency or bankruptcy. Firms may have an optimal level of working capital that maximizes their value (Afza and Nazir,2015).
The financial crisis has significantly affected the overall business activities across the world. In Nigeria where credit is either not available or expensive to obtain, there are corporate issues across almost all the firms. That has to do with liquidity problem and consequently their operating performance. Financial managers are always expected when there is liquidity problem to examine the current asset and current liabilities in order to make an informed decision with regard the profitability of their entity. In the same vein, researchers do conduct studies to examine the relationship among the firm’s working capital components and profitability using various methodologies.
This study focuses on manufacturing company. The manufacturing companies produce goods either in their final or semi-final stage and distributes to the public. Nigeria as an African nation with over 140 million citizens has a high demand for manufactured products.
However, it is necessary and logical to carry out a study on the performance in relation to management of working capital of the manufacturing company. The rationale for this research to provide empirical evidences why financial managers should be more effective and efficient in management of working capital.
The inability of financial managers to effectively and efficiently manage the components of working capital has led to business failures. The efficient management of working capital is very vital for a business survival. This is based on the fact that having too much capital signifies that the survival of the firm is shaky.
Most manufacturing firms do not hold the right amount of stocks, debtors, cash and other components of working capital. Due to this reason, the firm is unable to meet its maturing short term obligations and its upcoming operational needs. Lack of adequate working capital also means that a firm is unable to undertake expansion projects and increase its sales, therefore limiting the growth and profitability of the business.
The firm under study is faced with the problem of striking a balance between excess stock and stock inadequacy, fluctuation in the working capital management, dynamics, ineffective and inefficient mix of their working capital components and long operating circle.
Working capital management and its impact on business profitability of a manufacturing company has not been an easy job to carry out. Working capital management is quite different from cash management. The difference of both is that working capital is defined as current assets less current liabilities and the term current normally refers to a period of less than one year while cash management is solely managing cash flows and liquidity and it is only a part of working capital. However, the extent to which working capital management affects the profitability of manufacturing firms is not well known. It is on this premise that this study will analyze the impact between working capital management and the firms’ profit.
The major objective of the study is to examine the impact of working capital management on the profitability of manufacturing company.
The specific objectives are:
i. To examine the effect of inventory holding period on Net profit margin of manufacturing company.
ii. To assess the effect of debtors’ collection period on Net profit margin of manufacturing company.
iii. To establish the effect of inventory holding period on Net profit margin of manufacturing company.
The research is guided by the following questions:
i. What is the effect of inventory holding period on Net profit margin of manufacturing companies?
ii. What is the effect of debtors’ collection period on Net profit margin of manufacturing companies?
iii. What is the effect of inventory holding period on Net profit margin of manufacturing companies?
In order to determine the effect of working capital management on the profitability of manufacturing companies, this study must follow the hypotheses
H01: Inventory holding period does not have significant effect on the Net profit margin of manufacturing company.
H02: Debtors’ collection period does not have significant effect on the Net profit margin of manufacturing company.
H03: Creditor’s payment period does not have significant effect on the Net profit margin of manufacturing company.
This research is justified due to its significance to manufacturing companies and other companies in general to improve and correct mistakes they have made in their respective working capital policies. It will also help firms’ management to adopt optimal working position suitable to their firm.
The study will benefit students and scholars who may use the findings for academic purposes, It will serve as source of knowledge and an information source to them.
The findings will also be of great benefit to future researchers in the field of working capital management in providing relevant literature in building up the course of study.
Shareholders as the business owners could be the primary beneficiaries of the findings from this research, as anything affecting the value of their investment is of great importance to them. Working capital management has the potentials of improving profitability and the overall firm value in general, this study is designed to find out the impact of the individual working capital components on the profitability of manufacturing company. Thus the shareholders of Nigeria Breweries Company PLC and other manufacturing companies will benefit from the findings of this study.
Managers of the manufacturing companies are also among the main beneficiaries of the findings of this research. This is because managers are usually interested in understanding the effects of their performance on the profitability and firm value. Hence, this study is an attempt towards such direction. Moreover, managers will like to know the stability of their firms liquidity position, particularly under unfavourable economic conditions.
This study could also be of significant importance to creditors, because they are interested in credit worthiness of the firm in meeting their obligations, which could only be possible with efficient management of firms working capital.
This study could be of interest to the government whose concern is to promote economic growth and ensure financial stability, with the working capital management playing a major role in financial stability of different firms.
The study will recommend ways through which working capital can be effectively utilized.
This study aims to evaluate the impact of working capital management and its main components on the profitability of manufacturing companies having Nigeria Bottling Company as the case study. The study is restricted to manufacturing companies (Nigeria Bottling Company) and limits itself to the information in the annual report and accounts of the company under review. This study covers a period of eight (8) years (2009-2017).
It is obvious that there is no research work without problems and research of this nature, the impact of working capital management on the profitability of manufacturing companies is not an easy one. The researcher faced some difficulties but the researcher was able to make effective and efficient use of scarce resources to make the research work a success.
The following terms assumed the stated meaning in the context of the study:
Debtor’s collection period: This refers to the Average time required for changing the company's receivable into cash. It is calculated as :
Abbildung in dieser Leseprobe nicht enthalten
Working Capital: Working capital also known as Net working capital or NWC, is calculated as current assets minus current liabilities. The major components of working capital are inventories, account receivable, cash and cash equivalent and account payable.
The concept of working capital will be taken in an orderly manner in this research work.
Working capital has been defined as a term for the excess of the current assets over the current liabilities; if a business working capital management centres on the total amount of current assets the firm should hold so as to be able to meet its current liabilities and still not incurred so much wastage by way of large idle balance. A short of working capital may lead to serious consequences for an organization which range from minor problem like delay in settlement of bills to bankruptcy or insolvency. Working capital is the fund required for the day to day administration of the business organization which include payment for raw materials, making payments due on current liabilities and meeting up payroll and other business expenses.
Current ratio = current assets
Current liabilities
The ideal way of financing assets is to finance short term assets with long term liabilities and long term assets with long term liabilities.
According to Eljelly 2004, working capital management requires planning and controlling current assets and current liabilities in such a way that eradicate the threat of inability to meet short term liabilities and evade excessive investment in these assets.
Improving return on capital employed may be achieved by targeting some critical areas such as cost containment, reducing investment in working capital and improving working capital efficiency. Working capital management involves relationship between a firm’s short term assets and short term liabilities (pandey 2005). The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short term debts and upcoming operational expenses (Padachi, 2007)
A firm has several objectives but "profit maximization" is said to be paramount among these (Damilola 2007: 20; Raheman and Nasr, 2007). Because profit maximization as a concept suffers some inherent limitations, some would rather substitute it with ‘wealth maximization. It is nevertheless true that profit is a tool for efficient allocation because it is the most appropriate measure of corporate performance under competitive market condition (Pandey 2005: 8). This was further supported by working capital management survey of European companies (2005), when they empirically found out that the primary concerns of corporate are still financial objectives, such as sales and profit.
Conceptually profit connotes the excess of revenue generated by a firm over its associated cost for an accounting period. Operationally, the term profit is imprecise, as many variants exist. The term profit could refer to profit before tax, profit after tax, gross profit, net profit, profit per share, return on assets, among other variants.(Damilola 2007: 21-22; pandey 2005: 8). This imprecision has often posed decisional challenges to researchers who must select an appropriate variant to proxy profitability.
However the most commonly used variant as appropriate measure of profitability include gross operating profit (GOP), net operating profit (NOP) and return on assets (ROA), (Deloof 2003; Teruel and Solanom, 2006; Lazaridis and Tryfonidis,2005; Raheman and Nasr, 2007).
Numerous factors can influence the size and need of working capital in a concern. So no set rule or formula can be framed. It is rightly observed that, “There is no precise way to determine the exact amount of gross or net working capital for every enterprise. The data and problem of each company should be analysed to determine the amount of working capital. Briefly, the optimum level of current assets depends upon following determinants:
Nature of business --Trading and industrial concerns require more funds for working capital. Concerns engaged in public utility services need less working capital. For example, if a concern is engaged in electric supply, it will need less current assets, firstly due to cash nature of the transactions and secondly due to sale of services. However, it will invest more in fixed assets. In addition to it, the investment varies concern to concern, depending upon the size of business, the nature of the product, and the production technique.
Conditions of supply -- If the supply of inventory is prompt and adequate, less funds will be needed. But, if the supply is seasonal or unpredictable, more funds will be invested in inventory. Investment in working capital will fluctuate in case of seasonal nature of supply of raw materials, spare parts and stores.
Production policy -- In case of seasonal fluctuations in sales, production will fluctuate accordingly and ultimately requirement of working capital will also fluctuate. However, sales department may follow a policy of off-season discount, so that sales and production can be distributed smoothly throughout the year and sharp, variations in working capital requirement are avoided.
Seasonal Operations -- It is not always possible to shift the burden of production and sale to slack period. For example, in case of sugar mill more working capital will be needed at the time of crop and manufacturing.
Credit Availability -- If credit facility is available from banks and suppliers on favourable terms and conditions, less working capital will be needed. If such facilities are not available more working capital will be needed to avoid risk.
Credit policy of enterprises -- In some enterprises most of the sale is at cash and even it is received in advance while, in other sales is at credit and payments are received only after a month or two. In former case less working capital is needed than the later. The credit terms depend largely on norms of industry but enterprise some flexibility and discretion. In order to ensure that unnecessary funds are not tied up in book debts, the enterprise should follow a rationalized credit policy based on the credit standing of the customers and other relevant factors.
Growth and expansion -- The need of working capital is increasing with the growth and expansion of an enterprise. It is difficult to precisely determine the relationship between volume of sales and the working capital needs. The critical fact, however, is that the need for increased working capital funds does not follow growth in business activities but precedes it. It is clear that advance planning is essential for a growing concern.
Price level change ─ With the increase in price level more and more working capital will be needed for the same magnitude of current assets. The effect of rising prices will be different for different enterprises.
Circulation of working capital ─ Less working capital will be needed with the increase in circulation of working capital and vice-versa. Circulation means time required to complete one cycle i.e. from cash to material, from material to work-in-progress, form work-in-progress to finished goods, from finished goods to accounts receivable and from accounts receivable to cash.
Volume of sale -- This is directly indicated with working capital requirement, with the increase in sales more working capital is needed for finished goods and debtors, its vice versa is also true.
Liquidity and profitability -- There is a negative relationship between liquidity and profitability. When working capital in relation to sales is increased it will reduce risk and profitability on one side and will increase liquidity on the other side.
Management ability ─ Proper co-ordination in production and distribution of goods may reduce the requirement of working capital, as minimum funds will be invested in absolute inventory, non-recoverable debts, etc.
External Environment ─ With development of financial institutions, means of communication, transport facility, etc., needs of working capital is reduced because it can be available as and when needed.
For smooth running of an enterprise, adequate amount of working capital is very essential. Efficiency in this area can help, to utilize fixed assets gainfully, to assure the firm’s long- term success and to achieve the overall goal of maximization of the shareholders fund. Shortage or bad management of cash may result in loss of cash and loss of reputation due to non-payment of obligation on due dates. Insufficient inventories may be the main cause of production held up and it may compel the enterprises to purchase raw materials at unfavourable rates.
Like-wise facility of credit sale is also very essential for sales promotions. It is rightly observed that “many a times business failure takes place due to lack of working capital.” Adequate working capital provides a cushion for bad days, asa concern can pass its period of depression without much difficulty.
O’ Donnel et al. correctly explained the significance of adequate working capital and mentioned that “to avoid interruption in the production schedule and maintain sales, a concern requires funds to finance inventories and receivables.”
The adequacy of cash and current assets together with their efficient handling virtually determines the survival or demise of a concern. An enterprise should maintain adequate working capital for its smooth functioning. Both, excessive working capital and inadequate working capital will impair the profitability and general health of a concern. The dangers of excessive working capital are as follows:
Heavy investment in fixed assets – A concern may invest heavily in its fixed assets which are not justified by actual sales. This may create situation of over capitalisation.
Reckless purchase of materials - Inventory is purchased recklessly which results in dormant slow moving and obsolete inventory. At the same time it may increase the cost due to mishandling, waste, theft, etc.
Speculative tendencies - Speculative tendencies may increase and if profit is increased dividend distribution will also increase. This will hamper the image of a concern in future when speculative loss may start.
Liberal credit - Due to liberal credit, size of accounts receivables will also increase. Liberal credit facility can increase bad debts and wrong practices will start, regarding delay in payments.
Carelessness - Excessive working capital will lead to carelessness about costs which will adversely affect the profitability.
Paucity of working capital is also bad and has the following dangers:
1. Implementation of operating plans becomes difficult and a concern may not achieve its profit target.
2. It is difficult to pay dividend due to lack of funds.
3. Bargaining capacity is reduced in credit purchases and cash discount could not be availed. 4. An enterprise looses its reputation when it becomes difficult even to meet day-to- day commitments.
5. Operating inefficiencies may creep in when a concern cannot meet it financial promises.
6. Stagnates growth as the funds are not available for new projects.
7. A concern will have to borrow funds at an exorbitant rate of interest in case of need.
8. Sometimes, a concern may be bound to sale its product at a very reduced rates to collect funds which may harm its image.
The following are the principles of working capital management:
Principles of the risk variation ─ Risk here refers to the inability of firm to maintain sufficient current assets to pay its obligations. If working capital is varied relative to sales, the amount of risk that a firm assumes is also varied and the opportunity for gain or loss is increased. In other words, there is a definite relationship between the degree of risk and the rate of return. As a firm assumes more risk, the opportunity for gain or loss increases. As the level of working capital relative to sales decreases, the degree of risk increases. When the degree of risk increases, the opportunity for gain and loss also increases. Thus, if the level of working capital goes up, amount of risk goes down, and vice-versa, the opportunity for gain is like-wise adversely affected.
Principle of equity position ─ According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position. Every rupee invested in the working capital should contribute to the net worth of the firm.
Principle of cost of capital─ This principle emphasizes that different sources of finance have different cost of capital. It should be remembered that the cost of capital moves inversely with risk. Thus, additional risk capital results in decline in the cost of capital.
Principle of maturity of payment─ A company should make every effort to relate maturity of payments to its flow of internally generated funds. There should be the least disparity between the maturities of a firm’s short-term debt instruments and its flow of internally generated funds, because a greater risk is generated with greater disparity. A margin of safety should, however, be provided for any short-term debt payment
The cash conversion cycle refers to the number of days between the purchase of firm’s raw materials and the cash collection from the product sales (Sathyamoorthi & WallyDima, 2008).Furthermore, cash conversion cycle is a fundamental tool that is applied in the assessment of the efficiency of working capital (Richard & Laughlin, 1980).
Bienaisz and Golas (2011) maintained that the cash conversion cycle is based on the three partial cycles. These are length of operational cycle and the accounts payable cycle. The three forming one synthetic tool or measure, called the cash conversion cycle. Similarly, Alipour (2011) asserted that the major yardstick of effective working capital management has been introduced by eminent researches on working capital such as Shin and Soenen (1998), Lazaridis and Tryfonidis (2006) and GarciaTeraul and Martinez Solano (2007) as cash conversion cycle. Undoubtedly, the different parts of working capital are the receivable accounts, the payable accounts and the inventory. It is vital that these parts are managed in different way to maximize the profit or to increase the company's value (Deloof, 2003).
The cash conversion cycle is represented as follows:
Abbildung in dieser Leseprobe nicht enthalten
Average collection period is the time frame which accounts receivables are expected to be collected back from the respective debtors. The accounts receivable at a firm represents the total unpaid credit that the firm has extended to its customers. Accounts receivable can include trade credit ( for example, credit extended to other business) or consumer credit ( credit extended to a consumer) or both (Moles, et al ,2001). The business provides trade and consumer credit because doing so increases sales and because it is often a competitive necessity to match the credit terms offered by competitors. However, the downside to granting such credit is that, it is expensive to evaluate customers’ credit application to ensure that they are creditworthy and then to monitor their ongoing credit performances. Firms that are not diligent in managing their credit operation can suffer large losses from bad debts, especially during a recession, when customers may have trouble paying their bills (Moles, et al, 2011). An important parameter in account receivable is the credit policy variable. The important dimensions of a firm´s credit policy are: The credit standard, the credit period, the cash discount and the collection effort (Prasana, 2000).
Additionally, it is very vital when discussing on the average collection period as a proxy for receivables management to always reflect on what is supposed to be a credit standard for a given firm? That is to say, what standard should be applied in accepting or rejecting an account for the purpose of granting credit. Therefore, in this regards a firm has choices, first, it could decide not to extend credit to any customer, no matter the strength of his credit rating. Conversely, it may decide to grant credit to all customers irrespective of their credit rating. Between these two extreme positions lies several possibilities, often the more practical ones (Moles, et al ,2011). Moreover, credit period is one important variable within credit policy. This refers to the length of time customers are allowed to pay for their purchases (Prasana, 2000). Lengthening of the credit period would have positive influences; it tends to lower sales, decrease the value of debtors, and reduces bad debts loss incidence ( Prasana, 2000). Another important component of working capital management is the inventory management with a proxy as inventory conversion period.
Inventory conversion period (ICP) is used as a proxy for inventory management. The ICP is one of the partial components of cash conversion cycle and by extension, the working capital management. Inventories include supplies, finished goods, work –in-progress and raw materials. These categories of inventory constitute an essential part of virtually all business operations (Brigham & Houston, 2007).Raw materials are materials and components that are inputs in making the final product. Work-in-progress refers to goods in the intermediate stages of production while finished goods are final products that are ready for sale (Moles, et al, 2011). An efficient management of inventory ensures a stable working capital, which ultimately increase profitability. Business must always strive to maintain an optimum level of inventories (Lazadris & Tryfonidis, 2006). It is worthy to note that two aspects relating to inventories efficiency are vital, one to know the size of inventory order, and the second to know the level at which the order should be placed. This decision is mostly handled using an important model called the Economic Ordering Quantity (EOQ) model. This model is empirically based formula or structure embodied by certain theoretical assumptions aimed at striking a balance between sales, fixed costs, carrying costs and the total costs. It is denoted by
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