The Effect of Working Capital Management on Firm Financial Performance of Quoted Manufacturing Firms in Nigeria

Reference code: c044

ABSTRACT

This research project investigated the effect of working capital management on the financial performance of quoted manufacturing companies in Nigeria. For the purpose of the study, accounts receivable period and accounts payable period were used as proxies for working capital management while return on asset and return on equity were used as proxies for financial performance. Data for the study was collected from the annual financial reports of 20 manufacturing companies for a period of 5 years. The research data which was analyzed using multiple regression analyses showed that: there is a positive relationship between Accounts Receivable Period and the Return on Asset of manufacturing companies. The findings further show a positive relationship between accounts payable period and the return on asset of quoted manufacturing companies in Nigeria. The findings also show that there is a negative correlation between accounts receivable period and the return on equity of listed manufacturing companies. Finally, the findings show that there is a positive relationship between accounts payable period and the return on equity of manufacturing companies in Nigeria. From our findings as summarized above we conclude that: Accounts receivable period and accounts payable periods as measures of working capital management cannot be relied as determining factors for return on Asset. We also conclude that Accounts receivable period and accounts payable periods as measures of working capital management are not important factors in the financial performance of manufacturing companies. Considering the conclusions of the study, we make the following recommendations: Manufacturing companies in Nigeria should work with their suppliers and distributors in order to have a better understanding of the dynamics of accounts receivable and accounts payable periods in order not to hamper firm financial performance.

INTRODUCTION

................ Working capital management which deals with the management of current assets and current liabilities directly affects profitability and market valuation of the firm.(Sunday, Abiola and Lawrencia 2012). In order to run its activity, firm need two type of assets, fixed assets and current assets. Fixed assets which include, building, plant, machinery, furniture, fixture and fitting among others are not only purchased for the purpose of resale, but also for operational purposes (Singh and Pandey, 2008). On the other hand, current assets are seen as key components of the firm`s total assets. A firm may be able to reduce its investment on fixed assets by leasing, but this becomes practically difficult for current assets. (Afza and Nazir 2008).Working capital is the capital available for conducting the day-to-day operations of the business and consists of a current assets and current liabilities. Business needs funds for short-term purposes to finance current operations like cash inventories, debtors,bank deposits, short term securities and accounts receivables.

Every business need working capital even a business which is fully equipped cannot survive without efficient management of working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Efficient working capital management involves planning and controlling the current assets and current liabilities in a manner that eliminates the risk of the inability of a firm to meet due short-term obligations on one hand, and avoid excessive investment in these assets, on the other hand (Eijelly, 2004). Success of every business centers on how well it manages its working capital. 

At one given time both the current assets and current liabilities exist in the business. The current assets and current liabilities are flowing round in a business like an electric current. However “The working capital plays the same role in the business as the role of heart in human body. Working capital funds are generated and these funds are circulated in the business. As and when this circulation stops the business become lifeless, it is because of this reason that the working capital is known as the circulating capital as it circulates in the business like blood in the human body”. Agarwal (2002, as cited in Wobshet Mengesha,2014)

It therefore follows that the way in which working capital is managed can have a significant impact on both Liquidity and profitability of the firm (Deloof, 2003) the profitability liquidity tradeoff is important because if working capital management is not given due considerations, then the firms are likely to fail and face bankruptcy. Liquidity and profitability are both the two different sides of the same coin optimum level of liquidity guarantees a firm to meet their short term debt and the proper management of flow can be promised by a profitable business.        

There exist two concepts of working capital namely: gross and net. The gross working capital deals with the different components of current assets like cash inventories, work-in. Progress marketable securities etc. while the networking capital is the difference between current assets and current liabilities. For many manufacturing firms the current assets account for over half of the total asset. Current assets are assets whose useful economics lives do not exceed one year.  (Robert 20014). According to (ojiuko, 2005) “management of current asset is one of the financial mangers time consuming jobs because with its short turnover , circulating capital is continually absorbing and releasing cash.”  To minimize the company investment, the financial manager should keep the circulating capital at the lowest ............... 

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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 5
1.3 Purpose of the Study 7
1.4 Research Questions 8
1.5 Research Hypothesis 8
1.6 Significance of the Study 9
1.7 Scope of the study 10
1.8 Limitation of the Study 10
1.9 Organization of the Study 10
1.10 Definition of Unfamiliar Terms 11
REFERENCE 12

CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Theoretical Framework 13
2.1.1 Agency/Stakeholder Theory   14
2.2 Conceptual Framework         15
2.2.1 Concept of Working Capital Management 16
2.2.2 Current Assets 17
2.2.3 Current Liabilities 18
2.2.4 What is Working Capital? 19
2.2.5Need for Working Capital 19
2.2.6Management of Working Capital 20
2.5.3 Management of Receivables 23
2.5.4Management of Payables 24
2.2.7Metrics of Working Capital Management
2.2.7 Cash Conversion Cycle 28
2.2.8 Profitability and Liquidity Measures 28
2.2.9Importance of Working Capital Management 30
2.3 Empirical Framework 31
REFERENCES 36

CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION 39
3.1Research Design 39
 3.2 Population and Sample Size 40
3.3 Sample and Sampling Technique 40
 3.4 Data Collection 41
3.5 Data Analysis 41
3.6 Measurement of Variable 42

CHAPTER FOUR
DATA PRESENTATION AND INTERPRETATION
4.1     INTRODUCTION 44
4.2 DATA PRESENTATION 44
4.3 DATA ANALYSES 47
4.4 TEST OF HYPOTHESES 49

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 INTRODUCTION 52
5.1 SUMMARY OF FINDINGS 52
5.2 CONCLUSION 54
5.4. RECOMMENDATIONS 54
APPENDIX 56

 71 Pages

Reference code: c044
Reference code: c044

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