THE ROLE OF WORKING CAPTIAL MANAGEMENT IN PRIVATE SECTOR ESTABLISHMENTS

Thesis Overview

INTRODUCTION1.1                               BACKGROUND OF THE STUDYThe sole objectives of any business in the private sector are to make profit but the uncertainty inherent in today’s economic environment threatens the survival of every business and makes sound liquidity and cash management. The local point for financial management rather than achievement of maximum profit, for sometime past the convention revenue accounts and balance sheet have been considered sufficient for the effective control of a business. The deeper study and increased analytical approach to business finance has red to an ever growing realization of the importance of working capital and its influence on the success or other wise of business operation. Working capital management is concerned with the management of the various elements of working capital, which includes stocks, debtors, cash and creditors other components of working capital include short term securities, bills payable, prepayments and other current assets. However, working capital management has been variously defined but in a nutshell. It refers directly to planning organizing, financing and controlling of resource available to the business in order to achieve set of objectives or a definite goal.L.R Howard put it this way; working capital may be regarded as the lifeblood of a business.Its effective provision can do much to ensure the success of a business, while its inefficient management can lead not only to the loss of profit but also to the ultimate down fall of what other wise might be considered as a promissory concern.It is certain that if skilled working capital management is not available in amount of finance provided will transform a financially weak company with mediocre performance into a strong and dynamic organization enjoying a scintillating regulation.This research work is a crucial one in the sense that current asset by their very nature are changing daily if not hourly and management decision must be made.1.1                               STATEMENT OF THE PROBLEMThe management of inter-relationship existing between current assets and liabilities has been the primary problem of working capital management. Effective working capital management involves sourcing of fund for the management daily operations of the companies. Every company needs to maintain a satisfactory level of working capital or it would go into bankruptcy and finally wound up. However, profitability, liquidity and other related risks have been a major problem facing companies in private sector.This is an important characteristic of working capital management. Maintaining a large size of positive side of the economy, but profitability would be adversely affected, as fund remains ideal.Conversely, if company’s holding asset are relatively small, the overall profitability will not 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 cash point in time for a better company performance.1.2                               OBJECTIVE OF THE STUDYAs mentioned earlier, effective working capital management plays effective role on the financial decision making of any company, which is however the basis for success in any viable company. As earlier observed, the objective of financial decision making, is to maximize shareholders wealth.
This wealth or profit usually depends on the rate of turnover.Primarily, the objective of this study is to examine how (EBY CO NIG. LTD)(i)         Identify and discuss the basic determination of working capital because the individual need of companies as influenced by many factors and fluctuate over time.(ii)       Identify and highlight areas of short-term investment of the company, with a view to making recommendation on how funds could be better utilized to generate higher earrings and to offer suggestions for improving insufficient cash balances to meet current obligations.(iii)       Discuss the place of receivables in the liquidity of a company with a view to providing solutions through lightening or reduction of solutions collection policies where receivable appears excessive. (iv)     Highlight the importance of net working capital as measure of liquidity as this serves as important consideration for any contemplating granting of credit to the company. 1.3                              SIGNIFICANCE OF THE STUDYVirtually, continuous growth and development of every business or company depends on its source and roper application of fund generated, which act as its measure of profitability. This topic is therefore significance as it provides a panacea to the profitability problem of companies through product cash management.Inadequacy of cash receivable, which is vital form 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 it’s 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 ration is particularly significant in this regard as it is indicative of the degree of shrinkage in current asset that will not discourage the interest of the current creditors. Therefore, working capital is significant and crucial in this context.