CHAPTER ONE

1.1 Background of the Study

The profitability and growth of a company show how effective and efficient the working

capital has been employed. The optimum use of working capital is an evidence of effective,

efficient and adherence to the working capital policy of a company. In order to run the

company successfully, the fixed and the current asset play a commendable role. Managing the

working capital is mandatory because it’s has a major significance on profitability and liquidity

of the business concern. Usually it was observed that, if firms want to take a bigger risk for

bumper profit and losses, it minimizes the dimension of it’s working capital in relation to the

revenue it generates, if it is willing to improve its liquidity that in turn raises the level of it’s

working capital. Nevertheless this technique might tend to reduce the sales volume and

consequently, it would affect the profitability. Thus a company needs to strike a balance the

liquidity and the profitability. The importance of working capital management lies on the fact

that it is the blood of any organization without which the establishment will cease to be a going

concern.

Therefore, its strategic importance to corporate survival necessitates that it should be prudently

managed in order to ensure its continuous presence adequacy. As much as its in efficiency can

lead to corporate deficit. Also, over investment in working capital can be equally disastrous

since money that could have been profitably invested elsewhere to yield return is being tied up

in working capital that is under utilized. Hence, it should be an essential managerial target,

investment of working capital should be optimized.

Appropriate source must be found to finance working capital requirement and viable

investment areas must be found to invest excess fund, which can be immediately realized and

use to supplement the working capital base whenever it pledges. Working capital management
consists of decision relating to arranging current asset and the short term credit used to finance

them. But current assets of a firm often constitute more than a half of total investment of that

business concern. Therefore, defects in the management of current asset will most likely affect

the whole business. It is not that the management of non current asset and their financing is

less important, but while investment is non current asset can be minimized through lending or

leasing of equipment and plant, there is no way a firm can avoid investment in cash account

receivable and inventory.

1.2 Statement of The Problem

Various companies met difficulties or even liquidate in the event of in efficient management of

their working capital. This study is arrived at by identifying the effectiveness of working

capital management on the profitability and growth of an organization, put in question form,

i. Can effective management of working capital improve the financial position of the

industry.

ii. Inappropriate appreciation of the effective of under/over investment in working capital

on corporate survival.

iii. Can inability of management to direct and normalize over/under investment in working

capital?

1.3 Purpose of The Study

This research work is carried out so as to ascertain the following purposes which are associated

with the company’s profitability and growth.

i. The impact of the working capital management or company’s profitability and growth.

ii. Working capital management to avoid excessive or inadequate working capital.

iii. A. The effect of inadequate working capital under capitalization.

B. The effect of excessive working capital over capitalization.

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1.4 Research Question

The research considers the following research questions necessary during the research work.

The researcher therefore bases his conclusion and recommendation on the answer to

those questions.

The following are the research question:

i. Does working capital really affect the profit of an organization?

ii. Does working capital management have any impact on the company’s growth?

iii. Does working capital management determine the optimal level of an organization?

iv. Does working capital management have any impact on the company’s growth

1.5 Research Hypotheses

Hypotheses are statement that need to be ascertained or statement that awaiting verification. It

is note-worthy to state that hypothesis is derived from the combination of problems directed

and the consequent research question highlighted.

Ho: Working capital management have no importance to the profitability of a company.

Hi: Working capital management are of importance to the profitability of a company.

Ho: Working capital management does not have an impact on company’s growth.

Hi: Working capital management have an impact on company’s growth.

Ho: Working capital management does not determine optimal level of organizations

performance.

Hi: Working capital management determines optional level of organization’s performance.

1.6 Significance Of The Study

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This research is relevant in that, it examines an area which is critical to financial management

as well as to corporate survival, its relevance also lays in the fact that it collabosdrates and

improves finding the earlier research embark upon by the eminent scholars.

Therefore, the research paper will be of internet and useful to the general public, the

government and will no doubt highlight the benefit and bottlenecks associated with the

management of working capital. This will contribute to the existing knowledge and also assist

the management of the company in the maintenance of adequate working capital. Moreover,

potential research in this aspect of accounting will find this research paper a very reliable

reference base.

1.7 Definition Of Terms

Working Capital: This is the capital made for the running of the business that is day-to-day

operation of an organization. It is current asset less current liabilities.

Working capital management: This refers to the administration of all aspect of current assets

and current liabilities

Cash management: This involves cash planning i.e. cash budgeting or cash forecasting

managing cash flows (managing collection or disbursement) and deciding the optimum cash

level.

Current asset: These are those assets expected to be converted into cash in one year or one

operating cycles.

Current / liabilities: These are the liabilities that a firm must satisfy within one year. They are

called creditor’s falling due within one year in the balance sheet format of CAMD 90.

Return of capital employed (ROCE): This ratio shows the overall profitability and efficiency

of the business. This ratio is calculated.

4
ROCE = profit before income tax x 100
Capital employed 1

Stock management: This is concerned with official management of stock to achieve optimum

level of stock in the company’s working capital. The stock constitutes significant part in

working capital.

Cash discount: This is the allowance given to the customers by the firm who settles their

account within the credit period allowed that is a slight reduction in the cost price of the goods

sold on credit by the firm.

Collection policy: This refers to the procedures the term follows to obtain payment of the over

due account.

Commercial bank deposit: This is the money created by the commercial system. That is

when a person deposit money for save keeping in the bank, then the bank creates money by

issuing promise to pay on demand on slight and or upon given notice.

Credit period: This is the investment for which credit is extended to the customers.

Current investment: this is the investment that is capable of being realized. That is, the

benefit of this type of investment is realized during the current accounting periods.

Financial statement: This is the statement which contains summarized information of a firm

financial affairs organized by systematically, it is the means by which a firm present the

financial situation of a firm to the owners (shareholders) creditors and general public. This

contains.

i. statement of financial position

ii. Profit or loss accounts (income statement)

iii. Five year financial summary

iv. Auditor report

v. Auditor committee report

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vi. Notes to the account etc.

CHAPTER TWO

LITERATURE REVIEW

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2.0 Introduction

Working capital management is concerned with short-term financial decision. Shortage of

funds of working capital has caused many businesses to fail and in many cases, has retarded

their growth, lack of efficient and effective utilization of working capitals leads to earn low

rate of return on capital employed or even compel to sustain losses. The need for skilled

working capital management has thus become greater in recent years.

A firm invests a part of its permanent capital in non – current asset and keeps a part of its

permanent capital i.e. for meeting the day to day requirement. We still hardly find a firm which

does not require any amount of working capital varies from firm to firm depending upon the

nature of business, production policy, market conditions, seasonally of operation, condition of

supply etc.

Working capital to a company is like the blood of human body, it is most vital ingredient of a

business. Working capital management if carried out effectively, efficiently and consistently

will assume the health of and organization Femi, O.A. (1989).

2.1 Definition Of Working Capital

Oyetade (2008) defined working capital “as the excess of current assets over current

liabilities”. Current assets are those asset which will be converted into cash within the current

accounting period or within the next year as a result of the ordinary operation of the business.

They are cash or near cash resources; these include:

i. Cash and bank balance

ii. Receivable

iii. Inventory

 Raw materials, store and spares

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  Work – in – progress

 Finished goods

iv. Prepared expenses

v. Short term advance

vi. Short Term Investment

The value represented by these assets circulates among several items. Cash is used to buy raw

– materials to pay wages and to meet other manufacturing expenses. These are held as

inventories when these are sold, account receivable are created. Current liabilities are the debt

of the firm that have to be paid during ht current accounting period or within a year. These

include:

a. Trade payable

b. Outstanding expenses being done but not paid

c. Short term borrowing

d. Advance received against sakes

e. Taxes and individual payable

f. Other liabilities maturing within a year

Below is the diagram showing the circulation of current assets.

Circulation of working capital

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 Cash

Inventories

Receivables

2.2 Objectives Of Working Capital Management

The basic objectives of working capital management are as follows:

1. By optimizing the investment in current asset and by reducing the level of current

liabilities, the company can reduce the locking up of funds in working capital thereby;

it can improve the return on capital employed in the business.

2. The second objective of working capital management is that the company is always in a

position to meet its current obligation which would be properly supported by current

asset available with the fund.

3. The firm manages it current asset in such a way that the marginal return on investment

in these assets is not less than the cost of capital employed to finance the current asset.

2.3 Effect Of Inadequate Working Capital

According to Nwako, G.O (1991), inadequate working capital means that the owner of

the owner of the business has no money to run the business on a day to day basis and

will therefore force the owner of the business to go in for an overdraft. The following

are the effect of inadequate working capital management.

i. If affect growth by making it difficult for capital to undertake profitable projects.

ii. Opportunity to invest in an attractive short – term venture are loss.

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 iii. Operate plans / budgets become difficult to implement.

iv. The company may loss its reputation because of its failure to fulfill short – term

obligation.

2.3.1 Effect Of Excess Working Capital

i. It is an indication of a defective credit policy and lack collection period.

ii. It may lead to bad and loss of profit.

iii. It results in unnecessary build – up of inventory, which increase the incidence of

determination, mishandling and high insurance cost.

2.3.2 Factors Affecting Level Of Working Capital

The following factors may affect the level at which each component of working capital is

maintained.

i. The nature of industry or business

ii. The growth pattern of a particular company

iii. The financial management style and capabilities.

iv. The relationship of the company with supplies and customer.

v. Available investment opportunities

vi. Borrowing fluctuations

vii. Dividend policy

viii. Credit policy

ix. Price changes

2.4 Working Capital Cycle

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John Carvalho (2010), the working capital cycle “is the amount of time it takes to turn the net

current asset and current liabilities into cash”. The longer the cycle is, the longer the business is

tying up capital in its working capital without earning a return on it. Therefore, companies

strive to reduce it working capital cycle by collecting receivable quicker or sometimes

stretching account payable.

Divestopedia” explain working capital cycle (WCC) a positive working capital balances

incoming and outgoing to minimize net working capital and maximize free cash flow. For

example, a company that pays its supplies in 30 days but take 60 days to collect its receivable

has a working cycle of 30days.

This 30days cycle usually needs to be funded through a bank operating line, and the interest on

his financing is a carrying cost that reduces the company’s profitability. Growing business

require cash, and being able to free up cash by shortening the working capital cycle is the most

inexpensive way to grow. Sophisticated buyers review closely a target working capital cycle

because it provides them with an idea of the management effectiveness at managing their

balance sheet and generating free cash flow. By John Carvalho (2010), above all working

capital cycle is the period between the payment of creditor of raw materials and the receipt of

cash from the debtors, in other word it is the period between cash outflow. Below is the

diagram showing working capital cycle or operating cycle.

Receipt
payment of 11
Receives raw materials
finished goods
The above circle is broken down into two:

(1). Cash Circle: Is just a period between when we pay our suppliers of raw materials and

we receives money from the issuer of finished goods.

(2). Operating Cycle: Is the time between the time raw materials is received and the cash is

been received from finished goods.

Element of Working Capital

1. Cash in hand

2. Cash in bank

3. Debtors

4. Stock

5. Short

6. Prepayment

7. Bill of exchange

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The networking capitals– means the element of the working capital less the current obligation

i.e. current asset – current liability.

2.4.1 Factors Influencing the Amount of Investment in the Working Capital

1. Producing cycle

2. Nature of the business

3. Size of the business

4. Business fluctuation

5. Credit policy

6. Availability of credit

7. Price charges

8. Dividend policy

2.5 Determinants of working capital

Abbey, F.O. (2012) there are no set rules or formulae to determine the working capital

management of a firm. The cooperate management has to consider the various factors in

making decision regarding working capital balances. The following are the various

determinant.

a. Nature of Business: If we look at the balance sheet of any trading organizations, we

find major parts of the resources are deployed on current asset. Particularly inventories

in trade. Whereas in a case of a transport organization major part of funds would be

locked up inn non – current asset like motor vehicles. Spares and work sheet etc. and the

working capital component would be negligible .The services organization or public

utilities need lesser working capital than trading financial organization. Therefore, the

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 determinant of working capital depends on the nature of business carried by the

organization.

b. Manufacturing Cycle: Time span required for conversion of raw materials into

finished goods is a block periods. The period in reality extends a little before and after

the work – in – progress. The cycle determines the needs for working capital.

c. Business Cycle Fluctuation: this is another factor which determines the need level

barring exceptional cases. There are variation in the demands of goods / serve handled

by any organization. Economic boom or recession have their influence on the transition

and consequently on the quantum of working capital required.

d. Seasonal Variations: variation apart, seasonally factor creates production or over

storage problems. Mustard and many other oil seeds and Rabi crops. Therefore to be

purchased in a season to ensure continuous operation of oil plant.

e. Scale of Operation: operation level determine working capital demand during a given

period. Higher the scale, higher will be the need for working capital. However, place of

sales turnover [quick or slow] is another factor. Quick turnover calls for lesser

investment in inventory while low rate necessitates larger investment.

f. Production Policy: Firms whose productive capacities can be utilize for

manufacturing varied products can have the advantage of diversified actives and solve

their working capital problems.

g. Credit Policy: Credit policy of the business organization include to whom, when and,

to what extent credit may be allowed. Amount of money locked up in account

receivable has its impact on working capital. In many cases, account receivable is strive

and sticky and thereby they have forfeited the right to be classified as current assets.

Trade credit has the historical presence in the trading world. Availability of normal

14
 credit supplies as well as trade credit facilities working capital supply and reduces the

need for bank finance.

h. Availability of Credit: the working capital requirement of a firm can affect the credit

terms granted by its creditors. A firm will need less working capital if leberd credit

terms are available to it.

i. Growth and development of business: Growth and diversification of business call for

larger volume working fund. The need for increased working capital does not follow

the growth of business operations but precedes it.

j. Profit margin and profit appropriation: Firms differ to their capacity to generate

profit from business operation firm’s policy to retain or distribute profits has a bearing

on working capital.

2.6 Cash Management

Cash is the most important current assets for the operation of a business. It is the basic input

needed to keep a business running on a continuous basis. It is also the ultimate output expected

to be relied on by selling the product manufactured by the firm. The firm should keep

sufficient cash for its operation, cash storage will disrupt the firms manufacturing operation

while excessive cash will remain idle without contributing anything towards the firm’s

profitability. Thus, a major function of the financial managers is to maintain a sound cash

position (Oyetade, 2008).

Generally, when a firm has excess cash, it invests it in marketable securities. This kind of

investment contributes some profit to the firm. Cash management is concerned with the

managing of:

i. Cash flow in and out of the firm

ii. Cash flow within the firm

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 iii. Cash balance held by the firm at a point in time by financing deficit or investing surplus

cash.

Cash management assumes more importance than other current assets because cash is the most

significant and the least product i.e. asset that a firm hold. It is significant because, it is used to

pay the firm’s obligation. Unlike fixed assets or inventories, it does not produce goods for

sales. Therefore, the aim of cash management is to maintain adequate control over cash

position to keep the firm sufficiently liquid and to use excess cash in some profitable way. In

order to resolve the uncertainty about some flow prediction and lack of synchronization

between cash receipts and payment, the firm should involve strategies regarding the following

four facets of cash management.

Cash planning:- Cash inflows and outflows should be planned to project cash surplus or

deficit for each period of the planning period. Cash budget should be prepared for this purpose.

Managing the cash flows: the flow of cash should be properly managed, the cash inflows

should be reduced as far as possible.

Optimum cash level: the firm should decided about the appropriate level of cash balance. The

cost of excess cash and danger of cash deficiency should be matched to determine the optimum

level of cash balance.

Investing surplus cash: The firm should cash balances should be properly invested to earn

profit. The firm should decide about the division of such cash balance between bank deposits,

marketable securities and inter corporate lending.

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2.7 Motives of Holding Cash

Edge (1998) viewed cash management in business organization as holding cash for three

reasons:

1. Transaction motive

2. Precautionary motive

3. Speculative motive

Transaction motives: The transaction motive require a firm to hold cash to conduct its

because in the ordinary course. The firm needs cash primarily to meet payment for purchases,

wages and salaries, the operating expenses, taxes, dividends etc the need to hold cash would

not arise if there were perfect synchronies action between cash receipt and cash payment, i.e.

enough cash is received when the payment has to be made for transaction purpose, a firm may

invest its cash in marketable securities.

Usually, the firm will purchase securities whose maturing corresponds with some anticipated

payments, such as dividend, or taxes in future. Transaction motive mainly refers to holding

cash to meet anticipated payment whose timing is perfectly included in cash receipts.

Precautionary Motives: this is the need to hold cash in order to takes advantages of any

bargain purchases that may arise or for inventing in profit making opportunities. The

precautionary amount of cash depends upon the predictability of cash flows if cash flow can be

predicted with accurate, less cash will be maintained for an emergency. The amount of cash set

aside for precautionary reasons is not expected to earn anything: therefore, the firm should

attempt earn some profit on it. Such funds should be invested in high liquid and low – risk

marketable securities. Precautionary balance should thus, be held more in marketable securities

and relatively less in cash.

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Speculative Motives: The speculative motive relates to the holding of cash for investing in

profit making opportunities as and when they arise. The opportunity to make profit may arise

when the securities prices change. The firm will hold cash, when it is expected that inters rates

will fall. The firm may also speculate know materials prices. If it is expected that materials

prices will fall, the firm can postpone materials purchasing and make purchases in future when

price actually falls.

2.9 Factors affecting the amount of cash to hold

i. The expected cash inflows and outputs based on the cash budget and forecasts,

encompassing long and short range cash need of the firm.

ii. The degree of deviation between the expected and actual net cash flows.

iii. The maturity structure of the firm’s liabilities

iv. The firm’s ability to borrow at short notice in the event of any emergency.

v. The philosophy of management regarding liquidity and risk of insolvency.

vi. The efficient planning and control of cash.

2.10 Uses of Cash Management

Cash management involves the use of:

1. Cash budget

2. Cash monitoring

Cash Budget: The cash budget involves the treasure to indentify the period of deficit, he is

required to arrange for financial assistance through the company’s bank and during the period

of surplus. He is to ensure that no funds is made idle. He will be required to invest such a

surplus funds to attract at least a minimal rate of interest.

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Cash Monitoring: This involves a system whereby the company monitors its debtors for early

payment of amount overall. The company could also grant discount in order to encourage his

customers to effect payment in time or as at when due.

2.11 Working Capital Ratio

According to invenstopedia (2011) working capital ratio is the same as the current ratio. It is
the relative proportion of an entry’s current asset to its current liabilities, and is intended to
show the ability of a business to pay for its current liabilities with its current asset. A working
capital ratio of less than 1.0 is a strong indicates that there will be liquidity problems in the
future, while a ratio in the vicinity of 2.0 is considered to represent good short-term liquidity.
To calculate the working capital ratio, divide current asset by all current liabilities. The
formula is:
Current asset
Current liabilities
2.11.1 Problem with the Working Capital Ratio
The working capital ratio can be misleading if a company current assets are heavily weighted
in favour of inventories, since this current asset can be difficult to liquidate in the short time.
This problem is most obvious if there is a low inventory ratio. A similar problem can arise if
accounts receivable payment terms are quite length [which may be indicative of unrecognized
depts.].the working capital ratio will look abnormally low for those entitles that are drawing
are down cash from a line of credit, since they will tend to keep cash balances at a minimum,
and only replenish their cash when it is absolutely required to pay for liabilities.
Current ratio/ working capital ratio
It compares a company entire current asset to all of its current liabilities, it also measures the
number of time. Current asset can turn over current liabilities in theory ratio 2.1 is appropriate.
Omolehin, E.O. [2004].
Stock turnover: it measures the average time goods are in stock before sales, it is measured
by:
Formula: cost of sales
Average stock
Average stock= (opening stock + closing stock)

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Credit payment period: it is the average time taken to pay supplier on credit. It is measured
by
Formula: average credit x 265days
Creditor sales 1
Interest coverage: it indicates what portion of dept unit is covered by a company’s cash flow.
Activity ratio: it helps determine the company cash flow cycle, giving a picture of how
efficiently asset are been used.
Acid test ratio/ quick ratio: it indicates whether a firm, without selling inventory has enough
short – term assets to cover its immediate liability, it is measured by.
Formula: current asset – stock
Current liabilities
Working capital to sales ratio: this ratio is computed by dividing sales by working capital. It
ratio helps to measure the efficiency of the utilization of working capital it signifies that for an
amount of sales, a relatives amount of working capital is needed, it is measured by.
Formula: Sales
Working capital
2.9 Management of Inventory

Inventopedia (2014), the overseeing and controlling of the ordering, storage and use of

component that a company will use in production of the item with securities. In a

manufacturing process that is usually about 20 to 30% of the total assets and in the form of

inventory any attempt or effort in stock control will bring major benefit for the enterprise. An

efficient management of inventory is an essential requirement for the success of the enterprise.

Basically, there are three types of inventory;

Raw Materials: It includes direct materials used in the manufacture of a product and it also

includes the component, fuels etc used in the manufacture.

Work-in progress: It includes partly finished goods and material sub-assemblies etc held

between manufacturing stages.

Finished goods: The goods ready for sale or distribution will come under this category.

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2.9.1 Economic Order Quantity (EOQ): Is the most economical quantity of materials to

order at a time. It is the quantity that will minimize the total cost associated with purchase

storing inventories. It is an optimum quantity of materials to be order after consideration of the

following three categories of costs:

Ordering cost: the cost of ordering inventory include the following:

- Preparation of purchase order

- Cost of receiving goods

- Documentation processing costs

- Transport costs

- Intermittent cost of chasing orders, rejecting faulty goods.

Carrying cost: the carrying cost of inventory include the following:

- Handling cost

- Insurance and securities costs

- Audit, stock taking or perpetual inventory cost

- Obsolesce and determination costs

The stock out costs are associated with running of stock which include the following.

- Loss of customer goodwill

- Labour frustration over stoppages

- Loss of future sales because customers go elsewhere.

Assumption of EOQ

1. Purchase price per unit is known and constant

2. Rate of demand or consumption is known and constant

3. Annual demand is known

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4. Cost per order is known

5. Holding cost per unit is known and constant

6. Lead time or recorded period is known and constant

7. Stock is build up instantaneously

However, there are factors to be considered in determining the EOQ these are :

- Deterioration rate of materials

- Ordering cost / holding cost

- Availability of fund

- Size of warehouse.

Total cost

Carrying cost

EOQ

Source: Adeniyi Adeniyi (2009)

From the diagram above, average investment in stock depends on:

1. How frequent orders are placed

2. The size of each order

If ordering cost and carrying cost are added together the sum represent total cost of

ordering stocks. The lowest point on the cost curve (TTC) represent the optimal otder

quantity.

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 The formula is finding this is;

EOQ 2DC
H0
2.10 Management of Marketable Securities

This involves proper management of investment in marketable securities. Therefore there is a

close relationship between cash and marketable securities, in that excess cash are normally

invested in marketable securities which can be conveniently and promptly be converted into

cash.

A number of marketable securities are available in the market, and therefore in closing the

appropriate securities to invest in, the following three basic factors must be examined.

Safety: To minimize the change of risk and ensure safety of principal or interest, the firm

should invest in safe securities.

Maturity: This refers to the time period over which interest and principal are to be made, the

price of long term security fluctuate more widely with the interest rate changes than the price

of short – term security. Therefore, the long – term security is relatively more risky, but for

safety reasons, short – term securities are preferred by the firm for the purpose of investing

excess cash

Marketable: This refers to the convenient and speed with which security can be converted into

cash. The two important factors of marketability are price and marketable.

2.10.1 Over capitalization (under trading)

This occurs where a company comments excessive capital into the company trading activities,

so that there are excess inventories, receivables, cash and very few current liabilities. The

ratios that can assist in judging whether the investment in working capital is reasonable are:

23
a. Sale/working capital: There volume of sales are multiple of the working capital

investment should indicate whether in comparison with previous years or within similar

companies, the total volume of working capital is too high.

b. Liquidity Ratio: A current ratio in excess of 2.1or guide ratio in excess of 1.1 may

indicate over-investment in working capital.

c. Turnover period: Excessive turnover periods for stocks and debtors or a few period of

credit taken from suppler would indicate whether the volume of stock on debtor creditors too

low.

2.10.2 Under capitalization [over trading]:

Overtrading occurs when a company tries to do too much quickly with too little capital, so that

it is trying to support too large a volume of trade with the little capital resources at its disposal.

Syraptotas of overtrading:

- A rapid increase to sales turnover

- Increase in assets financed by a small increase in proprietors financed by;

Trade creditors repayment period to creditors becomes much slower

- Overhead cost might increase substantially so that net profit may fall.

2.11 Source of working capital finance

Working capital can be financed from the following source:

a. Short bank loan/ other loans

b. Overdraft

c. Factoring

d. Franchising

e. Retain earnings

f. Acceptable credit

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 g. Commercial papers

h. Equity

2.12 implication and importance of working capital management on profitability

An enterprise requires fixed as well as working capital. Firms can minimize their investment in

fixed assets by renting or leasing plant and equipment, but they cannot avoid investment in

current asset. A firm can exist and survive without making profit but cannot survive without

capital. Thus, working capital management is important because of its effect on the firm’s

profitability and risk consequently its value (Smith, 1980). The literature of finance

traditionally focused on long-term financial decision. There has been a concerted effort by

theoretical economic to analyze financial decisions of business firms within the context of the

equilibrium models of financial markets. While these models have been employed to analyze

the long term corporate investment and financial decisions, virtually no research has been

conducted in an attempt to apply them to working capital decision (Cohn and Pringle, 1975).

The literature of finance has neglected the short term financial decision, which is working

capital as well as the uncontrolled over-expansion of working capital has caused many

businesses to fail and in less service cases have stunted their growth (Grass, 1972) especially in

small firms, working capital management may be the factor that decides success or failure in

large firms, efficient working capital management can significantly affect the firm risk, return

on shares (Gitman, 1982) researchers have particularly offered status analyzing investment,

capital structure, dividends and company valuation.

However, the investment that firm’s make in current asset and the resources used with

maturities one year represent the main share of items on a firm’s balance sheet which appears

to have been relatively neglected in research.

25
Working capital management is the management of current assets, current liabilities,

maintaining high inventory levels reduces the cost of possible interruption in the production

process or of loss of business due to the scarcity of products, reduces supply costs and protect

against price fluctuations among other advantages (Blinder, and Mancceni, 1991) granting

trade credit favours the firm’s sales in various ways. Trade credit can act as an effective price

cut (Breman et al, 1988 and Petessen and Regan, 1997) and an incentive to customers to

acquire merchandise at times of low demand (Emey, 1987), however firms that invest heavily

in inventory and account receivables can suffer low profit.

Thus , greater the investment in current asset, however is the risk, and profitability obtained.

Similarly, trade credit is spontaneous source of financing that reduces the amount required to

finance the sums tied up in the inventory and account receivable. The trade credit can have a

very high implicit of early payment discount are available. In fact, the opportunity cost may

exceed 20 percentage depending on the discount percentage and the discount period granted

(Ng ET AL, 1999 AND Wilner, 2000).

Profitability and liquidity comprises the salient and all too often conflicting goals of working

capital management. The conflict arises because the maximization of the firm’s return could

seriously threaten liquidity, and on the other hand, the pursuit of liquidity has a tendency to

dilute returns. Over the years, analysts have employed traditional ratio analysis as a primary in

the measurement of corporate liquidity in the firm, of well-established ration such as the

current and quick ratios (Smith 1997).

Teruel and Salano (2007) conducted a study to identify the effect of working capital

management on profitability of small and medium, sized firms. From the study it is found that

there is significant negative relationship between a small and medium scale enterprises

profitability and number of days of account receivable to identify the trends in working capital

26
management and it impact on Mauritian small manufacturing firms (Pandachi, 2006) identified

that the working capital needs of an organization change over time as does its internal case

generation rate. As such, the small firms should ensure a good synchronization of its asset and

liabilities. The analysis done by Kersien and Rai (2007) tried to examine the market reaction to

positive and negative earnings charges influenced by large unexpected working capital

accruals (LWCAS) and prevents the circumstances where (LWCAS lead varying market

expectations of earning quality. This literature argues that the market is more likely to suspect

earnings management and view earnings as being of lower quality when firm’s report small

increase in earnings with the help of positive or negative large working capital accruals).

Reheman and Nasr (2007) conducted a study to analyze the relationship between working

capital management and profitability in case of Pakistani firms. The result shows that, there is

a strong negative relationship between variables of working capital management and

profitability of the firm, it means that as the cash conversion cycle increases it will lead to

decreasing profitability of the firm and managers can create positive value for the shareholder

by reducing the cash conversion cycle to a possible minimum level. There is a significant

negative relationship between liquidity and profitability. It is also find that there is positive

relationship between size of the firm and its profitability. It is also find that there is positive

relationship between size of the firm and its profitability as well as significant relationship

between debt used by the firm and its profitability Nazir and Afza (2009) investigate the

traditional relationship between working capital management policies and a firm’s

profitability. It is found that managers can create value if they adopt a conservative approach

towards working capital investment and working capital financing policies. The study also

finds that investors give weight to the stock of those firms that adopt an aggressive approach to

managing their short-term liabilities.

27
Above all, working capital is an important part of fiancé and has an impact on the liquidity of

an organization. The management of working capital is important to the financial health of

businesses of all sizes. The amount invested in working capital are often high in proportion to

the total assets employed and so it is vital that these amount are used in an efficient and

effective manner. Excess working capital leads to unremunerated use of scarce resources and

inadequate working capital interrupts the smooth flow of business activity and profitability.

28
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

Research Methodology: Is behavioral science. Research means the in structuring

aimed at identifying variables and their relationship to one another. This is used for the

purpose of obtaining data to enable the researcher to test hypothesis or answer research

question. Research methodology or research design is the blue- print that allow a

researcher to provide solution to the problems of what to study, when to study and how

to generate data in research situation.

3.1 Research design: The purpose of this chapter is to describe the method and procedure

used in carrying out the study and the problem encountered in the process.

3.2 Research population: The populations of this study consist of workers of Unilever

Nigeria plc, Agbara. in the finance department between the junior cadre and the senior

cadre.

3.3 Sample and sampling techniques

A random sampling was used for the research work. The total number of workers

between level 1-4 who study accountancy as their area of specialization are randomly

selected. The total number of workers selected are 60 in numbers draw from finance

department from Unilever Nigeria Plc Agbara, were 25 are from the junior cadre while

the remaining 35 are from the senior cadre. It is expected that an overview of the whole

workers population in Unilever Nigeria Plc Agbara serve as a basis for generalization.

29
3.4 Research instrument

The major instrument used in collecting data for the research questionnaire was designed and

used by the researcher in order to facilitate easy response to the question by the respondents.

Working capital management: its important and implication on profitability, items indicating

the cadre and level, age, sex of the worker. The respondent to tick correct answers given to the

questions. In the questionnaire and tick [strongly agree, agreed, strongly disagree] responses.

Direct interview and discussion was also held with the workers of finance department in

Unilever Nigeria plc, with a view of obtaining information from them.

3.5 Validity of the Instrument

The instrument used for this research work was highly revalidated by my supervisor after the

construction of the questionnaire before administering the questionnaire to the respondents.

3.6 Reliability of Instrument

The instrument used for this research was reliable in that the questionnaire was administered to

the respondent and the information supply by the respondent were reliable.

3.7 Administration of Instrument

The researcher visited the worker of the finance department, within the level of 1-4, i.e the

junior cadre personally to administered the questionnaire to the workers who were selected as

the case study.

Effort were made to explain some aspect of the questionnaire, which were not clear to the

respondent. Some of them feel reluctant accept and respond to the questionnaire because they

felt the information supplied might be used against them, but after they have been given

adequate assurance and the purposes of the study explained to them, they later accept and feel

relax to fill the questionnaire.

30
3.8 Method of data Collection

Questionnaire was the major instrument used for collection of data. The researcher collected

the questionnaire which has been answered by the respondents himself. The research

administrated the questionnaire and waited in the company for the workers to complete them

while he collect them while he collect them back. Enough time was given to the respondents to

answer the question and the questionnaire were collected from each workers after completion.

3.9 Method of Data Analysis

The methodology adopted in colleting data in this study is that of oral interview and

questionnaire. The data collected through the research instrument are designed and analyzed

using chi- square method.

Formula for chi – square

Ex = 0-E2
E
2
X Cal = chi – square
0 = Observed Frequency
E = Expected Frequency
∑ = Summation
X2tab = Critical
0.05 = Significant level
3.10 Method of data Interpretation

Questionnaire coded were constructed and statistical package for social scientist was used to

analyze information. The chi – square test was used to determine the roles, and relation ship for

the testing of hypothesis and analyze the data.

31
 CHAPTER FOUR

ANALYSIS OF DATA AND INTERPRETATION OF RESULT

4.0 Introduction

This chapter gives the details of how the data collected were analyzed and examined. The

descriptive of the mathematical and statistical techniques used was discussed.

Moreover, presentation of data according to the research question was made. Data were

analyzed and suggestion based on the results of the hypothesis tested were given at the end of

the findings.

4.1 Data Analyzed

Fagbohungbe (1993) emphasized that data analysis forms the bedrock of any scientific

enquiring or research. It assists in determining whether to accept or reject the hypothesis

proposal for the study. The analysis if the questionnaire will be based on the numbers of

questionnaire reformed.

4.2 Administer Questionnaire

For the purpose of this research work, respondent refers to the set of people that completed the

questionnaire. The questionnaires were completed manually, collected and the data name

reported upon of table which shows the response percentage. Sixty (60) questions was given

out and the same sixty were returned. The questionnaire is divided into two section, section A

and B.

Characteristic of findings

Table 4.0 sex of respondents

Sex Frequency
Male 31
Female 29
Total 60

32
From the above table 4.0, 31 respondents are male while 29 respondents are

Female respondents are female responded to the questionnaire given. This implies that, there

are more male worker/respondents than female.

Table 4.1 Age of respondents

CATEGORIES AGE FREQUENCY

21-30 1 14

31-40 2 25

41-60 3 21

Total 60

From the above table 4.1, it shows that there are highest rate of workers (employed) at age 31-

40 years which is 25 than other categories age.

Table 4.2 Marital Status of respondents

STATUS FREQUENCY

Single 14

Married 46

Total 60

From the above table 4.2, 46 respondents are married while 14 respondents are single.

Table 4.3 Education Qualification of Respondents

CATEGORIES FREQUENCY
MBA 11
B.SC 10
ACA 6
HND 15
OND 6
NCE 9
Other 3
Total 60

33
From table 4.3 above, the number of MBA staff are 11,10 respondents are B.sc, 6 respondents

are ACA, 15 respondents are HND, 6 respondents are OND, 9 respondents are 3 in numbers.

Table 4.4 Status of respondent

Status Frequency

Junior staff 25

Senior staff 35

Total 60

From the above table 4.4, 25 respondents are junior staff while 35 respondents are senior staff

respectively.

Hypothesis 1

Ho: working capital management has no significance importance to the profitability of a

company.

Table 4.5 Responses of Individual

S/N Questions SA A SD D TOTAL

1. Working capital management has any importance in the 20 15 9 16 60

running of your organization.

2. Working capital management has enormous impact on the 19 24 8 9 60

profitability of an organization.

3. Working capital management has not decided nor has role to 3 5 20 32 60

play in the organization.

4. Working capital management enhance the effectiveness and 23 25 4 8 60

efficiency of an organization.

Total 65 69 41 65 240

34
 Computation of expected frequency for table 4.5
Formula E = Row total x column total
Total number
Row1 – Cell1 = 60x65
240 = 16.25
Cell2 = 60x65
240 = 16.25
Cell3 = 60x65
240 = 16.25
Cell4 = 60x65
240 = 16.25
Row2 cell1 = 60x69
240 = 17.25
Cell2 = 60x69
240 = 17.25
Cell3 = 60x69
240 = 17.25
Cell4 = 60x69
240 = 17.25
Row3 cell1 = 60x41
240 = 10.25
Cell2 = 60x41
240 = 10.25
Cell3 = 60x41
240 = 10.25
Cell4 = 60x41
240 = 10.25
Row4 – Cell1 = 60x65
240 = 16.25
Cell2 = 60x65
240 = 16.25
Cell3 = 60x65
240 = 16.25
Cell4 = 60x65
240 = 16.25

35
Table 4.5

Result of chi- square computation

Row Question Observed Expected 0-e (0-e)2 (0-e)2

frequency frequency -E
1 1 20 16.25 -3.75 14.6625 0.87
15 16.25 -1.25 1.5625 0.096
9 16.25 -7.23 52.5625 3.23
16 16.25 -0.15 0.0625 0.0038
2 2 19 17.25 1.76 3.0625 0.18
24 17.25 6.75 45.5625 2.64
8 17.25 -9.25 85.5625 4.96
9 17.25 -8.25 68.25 3.95
3 3 3 10.25 10.25 -7.25 5.13
5 10.25 10.25 -5.25 2.69
20 10.25 10.25 9.75 9.27
32 10.25 10.25 21.75 46.15
4 4 23 16.25 16.25 45.5625 2.80
25 16.25 8.75 76.5625 4.71
4 16.25 -12.25 150.0625 9.24
8 16.25 -8.25 08.0625 4.19
100.1098
To obtain the above chi-square distribution
0.05 Wd.f = (r-1) (c-1)

Where r =number of row =4

C= number of column =4

:- (4-1) (4-1)

3x3 =9

36
0.05 = 16.919

Decision rule

The calculated x2 value is computes with the critical x2 value , if the calculated x2 value is

greater than the critical x2 value, then we reject the null hypothesis and vice-versa.

Computation of critical value x2 using the above degree of freedom

Degree of Cal x2 Tab x2 Level of Decision

freedom significance

9 100 16.915 0.05 Reject

Discussion of result findings (result)

The table of sampling distribution of x for 9 d.f and 0.05 level of significance is 16.919. the

calculated value is 100.11 and critical x2 value of 16.919 (cal x2). Hence we reject the null

hypothesis, this implies that working capital management are of importance to the profitability

of a company.

Hypothesis 2

Ho: working capital management does not have an impact on company growth.

S/N Questions SA A SD D TOTAL

1. Working capital management has any importance in the 21 25 8 6 60
running of your organization.
2. Working capital management has enormous impact on the 26 20 4 10 60
profitability of an organization.
3. Working capital management has not decided nor has role 31 24 2 3 60
to play in the organization.
4. Working capital management enhance the effectiveness and 27 28 2 3 60
efficiency of an organization.
37
 Total 105 97 16 22 240

Computation of expected frequency for table 4.5

Formula E = Row total x column total
Total number
Row1 – Cell1 = 60x105
240 = 26.25
Cell2 = 60x105
240 = 26.25
Cell3 = 60x105
240 = 26.25
Cell4 = 60x105
240 = 26.25
Row2 cell1 = 60x97
240 = 24.25
Cell2 = 60x97
240 = 24.25
Cell3 = 60x97
240 = 24.25
Cell4 = 60x97
240 = 24.25
Row3 cell1 = 60x16
240 = 4.0
Cell2 = 60x16
240 = 4.0
Cell3 = 60x16
240 = 4.0
Cell4 = 60x16
240 = 10.25
Row4 – Cell1 = 60x22
240 = 16.25
Cell2 = 60x22
240 = 16.25
Cell3 = 60x22
240 = 16.25
Cell4 = 60x22
240 = 16.25

38
Result of chi- square computation

Row Question Observed Expected 0-e (0-e)2 (0-e)2

frequency frequency -E

1 1 21 25.25 -4.25 18.06625 0.72

25 25.25 -0.25 0.0625 0.0025

8 25.25 -17.25 297.5625 11.78

6 25.25 -19.25 370.5625 14.68

2 2 26 24.25 1.75 3.0625 0.13

20 24.25 -4.25 18.0625 0.72

4 24.25 -20.25 410.0625 16.91

10 24.25 -14,25 203.0625 8.38

3 3 31 4.0 27 729 192.25

24 4.0 20 400 100

2 4.0 -2 4 1

3 4.0 -1 1 0.25

4 4 27 5.5 21.5 462.25 84.05

28 5.5 22.5 506.25 92.05

2 5.5 -3.5 12.25 2.23

3 5.5 2.5 6.25 1.14

39
 116.3125

To obtain the above chi- square distribution

0.05 wd.f = (r-1) (c-1)

Where r- = number of row = 4

C = number of row = 4

:- (4-1) (4-1)

3x3 = 9

0.05 = 16.919

Decision rule

The calculated x2 value is computes with the critical x2 value , if the calculated x2 value is

greater than the critical x2 value, then we reject the null hypothesis and vice-versa.

Computation of critical value x2 using the above degree of freedom

Degree of Cal x2 Tab x2 Level of Decision

freedom significance

9 516.31 16.919 0.05 Reject

Discussion of result findings (result)

The table of sampling distribution of x for 9 d.f and 0.05 level of significance. The critical x 2

value for 9 d.f and 0.05level of significance is 16.919. The calculated value is 516.31is greater

than the critical x2 value of 16.919 (cal x2 > tab x2). Hence we reject the null hypothesis, This

implies that working capital management are of importance to the profitability of a company

growth.

S/N Questions SA A SD D TOTAL

40
1. Over or under investment of working capital cannot be 8 7 19 26 60
detected.
2. Working capital management does not describe firm’s 21 24 10 5 60
investment in current asset.
3. Firm’s maintain adequate working capital 15 19 13 13 60
4. Working capital management does not describe the 9 8 19 24 60
company position in the market.
Total 53 58 61 68 240

Computation of expected frequency for table 4.7

Formula E = Row total x column total

Total number

Row1 – Cell1 = 60x53

240 = 13.25
Cell2 = 60x53
240 = 13.25
Cell3 = 60x53
240 = 13.25
Cell4 = 60x53
240 = 13.25
Row2 cell1 = 60x58
240 = 14.25
Cell2 = 60x58
240 = 14.25
Cell3 = 60x58
240 = 14.25
Cell4 = 60x58
240 = 14.25
Row3 cell1 = 60x61
240 = 15.25
Cell2 = 60x61
240 = 15.25
Cell3 = 60x61
240 = 15.25
Cell4 = 60x61
240 = 15.25
Row4 – Cell1 = 60x68

41
 240 = 17.0
Cell2 = 60x68
240 = 17.0
Cell3 = 60x68
240 = 17.0
Cell4 = 60x68
240 = 17.0

Result Of Chi- Square Computation

Row Question Observed Expected 0-e (0-e)2 (0-e)2

frequency frequency -E

1 1 8 13.25 -5.25 27.5625 2.08

7 13.25 -6.25 39.0625 2.95

19 13.25 -57.25 33.0625 2.49

26 13.25 12.75 162.5625 12.27

2 2 21 14.5 6.5 42.25 2.91

24 14.5 9.5 90.25 6.2

10 14.5 -4.5 20.25 1.89

5 14.5 -9.5 90.25 6.26

3 3 15 15.25 -0.25 0.00625 0.004

19 15.25 3.75 14.0625 0.92

13 15.25 -2.25 5.0625 0.33

13 15.25 -2.25 5.0625 0.33

4 4 9 17.0 8 64 3.76

8 17.0 -9 81 4.76

42
 19 17.0 2 4 0.24

24 17.0 7 49 2.88

49.754

To obtain the above chi- square distribution

0.05 wd.f = (r-1) (c-1)

Where r- = number of row = 4

C = number of row = 4

:- (4-1) (4-1)

3x3 = 9

0.05 = 16.919

Decision rule

The calculated x2 value is computes with the critical x2 value , if the calculated x2 value is

greater than the critical x2 value, then we reject the null hypothesis and vice-versa.

Computation of critical value x2 using the above degree of freedom

Degree of Cal x2 Tab x2 Level of Decision

freedom significance
9 49.75 16.919 0.05 Reject

Discussion of result findings (result)

The table of sampling distribution of x for 9 d.f and 0.05 level of significance. The critical x 2

value for 9 d.f and 0.05 level of significance is 16.919. The calculated value is 516.31is greater

than the critical x2 value of (cal x2 > tab x2). Hence we reject the null hypothesis, This implies

that working capital management are of importance to the profitability of a company growth.

43
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

Working capital management has been proved to be very important and crucial element in an

organizational profitability and growth. The importance of working capital management cannot

be over emphasized and cannot be fully discussed in this research work.

The analysis of the study in the proceeding chapters revealed the following factors. That

adequate working capital management is strategies to adding the goals o organization, which is

the ability to create and maximize wealth. That adequate working capital management will

leads to efficiency in organization. That it basic necessities lies in the fact that it provide liquid

fund needed for the day to day running of the business.

5.2 Conclusion

Effective working capital management enable the organization to cope with the challenges of

development and growth for the capital management to be effective, it must be well designed,

well articulated and adopted by the management. The findings of the research disclosed that

44
the effective management of working capital is a small measure in the achievement of Unilever

Nigeria plc objectives as a leading edge in the manufacturing sector of Nigeria economy.

The study revealed that effective management of working capital is beneficial to an

organization. The study therefore, concluded that gains increase remains accruable to the

organization through its effective working capital management. It has created a question in

there efficiency of the organization likewise. It would be that working capital has tremendously

improved the survival level of Unilever Nigeria Plc.

5.3 Recommendation

This study therefore strongly recommends that working capital should be prudently

managed as it is the life mire of the business. In this regarded management should Endeavour

to ensure that the organization is not operating too much or less working capital and should be

employed for co- whatever is available operate survival, solvency and growth. Effective

management of working capital also calls for measure that will assist in improving liquidity.

Cooperate liquidity can be altered through:

a. Establishment and implementation of internal controls

b. Increasing inventory turnover by not investing scarce resources on absolute and show

moving items.

c. Formulating policies and credit terms to debtor and delaying payment to creditor.

d. Granting discount and credit terms to distort any deploying payment to creditor

Above all , management should ensure that inflation is taken into consideration when creating

working requirement in order to avoid consequent over testing.

45
 REFERENCE

Abdul Raheman & Mohammed Nasr (2007): working capital management and profitability,

Ibadan, Nigeria.

Adeniyi, A. Adeniji (2008): principle of financial management. Second edition, john wiley.

Beaton, E.G (1987): financial management and corporate strategy: Neo victory publisher Ikoyi,

Lagos.

Fagbohungbe, O.B. (2008): the basic of research methodology, Kotleb publishers, Lagos.

Ibiyoye, S.O. (1993): managing your working capital, evans brother Nigeria publishers limited.

Kith, v. smith (1997): introduction to modern business seventh edition. New jersey, financial

policy corporation fifth edition, new York, Ronald press company.

Olowe, R.A. (2009): financial management: concepts, analysis & capital investment, briefly

Jones

Olusegun, P.O. (2008): purchasing and materials management, Eji production, Lagos.

Omolumo, (1993): financial management and company policy, Isolo Lagos, Omolumo consult

Omotosho, B.O. (2008): finance for Non Executive Management, Education Trainee Ltd,

Lagos.

46
Panedy, I.M. (2002): financial management 3rd edition new deihi: vikas publishing.

Simeon leon, (1998): The Basic Arts of Financial Management Buter worth Henzemen.

Van Harne, J.C. (1998): Financial Management and Policy, 8 th Edition Eaglewood Cliff N.I.

Prentice Hall.

Western, J.F. and brigham, E.F. (2002): Essential of Management Finance, Chicago, The

Dyden Press, Sixth Edition.

Olomoiyete, A.W. (2003): Managing Accounting Process, Published by Wolly Investments,

Toyin Street, Ikeja.

APPENDIX

OGUN STATE INSTITUTE OF TECHNOLOGY IGBESA OGUN STATE

I am TOGBO SEMAKO (G) by name, student of ACCOUNTING DEPARTMENT

carrying out a research work on the topic working capital management; its importance and

implication on profitability

SECTION A

Sex of respondent: Male [ ] Female[ ]

Age of respondents: 21-30 [ ] 31-40 [ ] 41-60[ ]

Marital Status: single [ ] Married [ ]

Educational qualification of respondent: M.BA [ ]

47
 B.SC [ ] A.CA [ ]

HND [ ] OND [ ]

NCE [ ] others [ ]

Status of respondents: junior staff [ ] senior staff [ ]

SECTION B

S/N ITEMS SA A SD A
1. Working capital management has any importance in the running of
your organization

2. Working capital management has enormous impact on the

profitability of an organization

3. Working capital management does not decide nor has no role play in
the organization

4. Working capital management enhances the effectiveness and

efficiency of an organization

5. Working capital management has any impact on the financial

position of an organization

6. Working capital management has an impact on company growth

7. Working capital management regulate the liquidity position of an

organization

8. Has the application of working capital management positively to the

growth of an organization

48
9. Over or under investment of working capital cannot be detected

10. Working capital management describes firms investment in current

asset

11. Firm maintain adequate working capital

12. Working capital management does not describe the company

position in the market.

49