EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF AN ORGANIZATION

Thesis Overview

INTRODUCTION1.1 Background of the studyThe Working capital is a financial metric which represents the operating liquidity available to a business concern. As regarding fixed assets such as plants and equipment working capital is considered as a part of a company’s operating capital, referring to current assets such as cash at hand, cash on bank account raw materials working progress, finished goods, account receivable etc. To measures the efficiency of company’s working capitals, net working capital is often used which is defined as the difference between current assets and current liabilities if current assets are higher than current liabilities, the company has working capital efficiency explaining the company’s ability to continue its operations and to have sufficient funds to satisfy both maturing short term debt and upcoming operational expenses.Working capital management involves planning and controlling current assets and current liabilities in a manner that dominates the risk of liability to meet due short-term obligations on one hand and avoid excessive investment in these assets on the other hand. According to (Elijelly, 2004) there is a combination of policies and techniques for the management of a company’s working capital. These policies involves inventory management debtor’s management etc. a popular measures of working capital management is the cash conversion cycle, which tells how cash is moving through a company in terms of duration.According to Brigham and Daves (2002) working capital management involves both setting working capital policy and carrying out that policy in day to day operation. It also involves making appropriate investments in cash, marketable securities, receivable and inventories as well as the level and mix of short-term financing (Emery Finnety and Stowe 2004).In essence, the research tried to examine working capital management issues, specially how a company manages its working capital by shortening or lengthening its cash conversation cycle in order to contribute for a superior operating profitability. Management seeks to contain an optimum balance of cash working capital component thereby ensuring that firm operates with sufficient fund (cash flow) that will service their long-term debt and satisfy both maturing short-term obligation and upcoming operational expenses. Therefore, makes it more glaring that working capital has a pivotal role to play in a company’s drive to achieve great or high profitability.One can then say that decision relating to working capital must not be taken for granted. To this end, Arnold (2005) assets that if there is too little working capital or lack of working capital can account for inefficiencies in a company’s operation when it is not able to play-off. Its due obligations. On the other hand, without sufficient working capital, the company will not either be able to provide goods or service required to customers due to lack of money to buy materials for producing goods. The company’s profitability can be jeopardized as a result. Therefore the ultimate goal of working capital management is to ensure that firm’s are able to continue their operations with sufficient cash-flow that will service their long-term debts and satisfy both maturing short-term obligation (debts) and upcoming operational expenses. Hence, organization should try as much as possible to meet up with this goal so as to avoid being caught up in the trap of ineffective management of working capital components.1.2 Statement of the ProblemThis study will try to provide solution to the problem listed below.i. Hindrances of improper working capital management lead to bankneptey and close down of companies.ii. Inefficient management of working capital effect the profitability of a company.iii. With the high rate of corruption in our country can working capital management be wholly implemented?2.3 Objective of the StudyThe main objective of this study is to find out whether working capital management can impact on manufacturing companies profitability. Specially to determine:i. The relationship between account receivable period and profitability.ii. The relationship between account payable period and profitability.iii. Relationship between inventory period and profitability.iv. Relationship between cash conversation cycle and profitability.1.4 Research QuestionsThe following research questions of this study are:i. To what extent do proper management of account receivable impact positively on profitability of firms?ii. To what extent do proper management of account payable period increase positively on profitability of firmsiii. Can management increase in inventory period and profitability of a firm?iv. Can proper management increase positively in cash conversation cycle and profitability of firms?2.5 Research HypothesisHypothesis is a kind of questing thoughts formulated by the researcher in line with the research question. It is classified as follows.Positive and negative hypothesis positive hypothesis (Alternative) while negative hypothesis means no (null).Hypothesis oneHo: proper management of account receivable does not enhance profitability of firms.Hi: proper management of account receivable enhance profitability of firms.Hypothesis twoHo: Mismanagement of account payable does not decrease the profitability of firm’sHi: Mismanagement of account payable decrease the profitability of firm’s.Hypothesis threeHo: Management of cash and cash equivalents does not enhance profitability of firm’s.Hi: Management of cash and cash equivalents enhance profitability of firm’s.1.6 Significance of the StudyThis study is of importance to the researcher as it equips her with the knowledge of the problems of working capital management to the cabric Nigeria Ltd companies. It will also be importance to various people in the society such as the government and owners of industries. It will reveal the problems of working capital management on profitability companies of working capital management on profitability companies and this knowledge will be vital to the general public and private sectors. It will also provide a model for an efficient and effective management of working capital. It will be significant to other researcher and studies who may want to use it as a reference.1.9 Scope And Limitations of the StudyA good research to be delimited to a manageable scope delimitation of research refers to the definition of the scope (extent or boundary) covered by the research in other words, the research respondents are going to be concerned with making decisions in the companies.The researcher faced the following challenges/limitation during the process of data collection.Due to the economic situation of Nigeria and other academic issue like (buying of textbooks, paying of school fees), that requires financial attention, the researcher encountered financial challenges.Secondary, due to inability to reach all the members of the sample owing to some circumstance, the resulting sample was not quite of cooperation from some respondents, somehow limited this exercise.Finally, due to the limited time induced to complete and present the research work, the researcher curtailed her efforts to the most sensitive aspects of the topic. Notwithstanding; the above constraints, the research did her best to present worthwhile and comprehensive work.1.10 Definition of TermsWorking capital: Working capital is the total amount of cash tied up in current assets and current liabilities and is calculated by deducting the total amount of current liabilities from the total current assets.Account payable: Is money by a business to its supplier shown as a liability on a company’s balance sheet.Collection policy: Is the steps that a company follows in ensuring timely payment of its account receivable or procedures a firm follows in attempting to collect account receivable.Account receivable: Are money which his owed to a company by a customer for product and service provided. It is been shown as current liabilities.Management: This is the decision making body of an organization it is a group of people who manage the company affairs.Cash conversation cycle; Is a company that measure how long a firm will be deprived of cash if it increases its investment in resources, in order to expand customer saleOperating cash flow Ratio: Is use to measure how well current liabilities are covered by the cash flow generated from a company operation.Credit policy; Is a clear , written guidelines that set the term and condition for supplying goods on credit.