Impact of Working Capital Management Policy on Profitability
Chapter One
The objective of the study is to find out whether a deliberate and carefully planned working capital management policy affects the profitability and growth of small and medium-scale enterprises (Eko Supreme Agbara Ogun state). The other specific objectives of this study include:
- To ascertain if working capital will determine the profitability of a SMEs
- To determine whether the failure of most SMEs in Nigeria is due to their ineffective management of working capital.
- To find out if there is any relationship between effective working capital management and the productivity of SMEs.
In essence, we would want to see the impact of the adoption or neglect of an effective working capital management strategy in the development of small and medium-scale enterprises in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
The importance of working capital in any business set – up cannot be over emphasized, hence, a lot of literatures have been produce in the subject and a good number of them shall be reviewed in this chapter.
CONCEPTUAL FRAMEWORK
Dixon (2011) has defined working capital as a firm’s investment in short – term assets – cash, short – term securities, trade debtors and stocks. He further defined Gross Working Capital as the firm’s total current assets and Networking Capital as current assets minus current liabilities. As long as a firm’s current assets exceed its current liabilities, it has net working capital.
Under their study of short – term finance and planning Ross et al (2012) referred to working capital as short – term capital involving cash flows and outflows that occur within a year.
Hampton (2012) has defined working capital as all short – term assets used in daily operations by firms. This consists primarily of cash, marketable securities, accounts receivable and inventory. Networking capital was further defined as the difference between current assets (working capital and current liabilities). It is a measure of liquidity, which is defined as the adequacy of near – term cash to meet the firm’s obligation. In the light of the above definitions, working capital can be referred to as the capital that is available for conducting the day – to – day operation of a business. It is the excess of current asset over current liabilities. It has, also been described as the financial wheel of a business as it gives an indication as to the ability of a business to weather bad financial storm. Working Capital emphasizes the liquidity objectives of a business, which is one of many and sometimes conflicting with other objectives. It makes sense therefore to pursue other objective only to the extent that they conform to the liquidity objective.
WORKING CAPITAL – HISTORICAL PERSPECTIVE
The term working capital originated with the Yankee Peddler who would load up his wagon with goods and then go off on route peddles his wares. The merchandise was his working capital because it was what he actually sold, or “turned over” to produce his profits.
The Wagon and horse were his fixed assets. He generally owned the horse and wagon, so they were financed with “equity” capital but he borrowed the funds to buy the merchandise. The borrowing were called working capital loan, and they had to be repaid after each trip to demonstrate to the bank that the credit was sound.
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THE NEED FOR WORKING CAPITAL
The need for working capital to run the day – to – day business activities cannot be over emphasized Pandey (2000) it is hard to find a business firm, which does not require any amount of working capital. Indeed, firm differ in their requirement of the working capital. A firm should always aim at maximizing the wealth of its shareholders Hampton (2012). In its endeavour to do so, a firm should earn sufficient return from it operations. Earning a steady amount of profit require successful sales activity. The firm has invest enough funds in current assets for generating sales Dixon (2014). Current assets are needed because sales do not convert into cash instantaneously hence a study of this nature is necessary in highlighting and effective way of managing it.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This chapter focuses on the method of gathering and collection of the necessary information that would lead to possible solutions to research problems. The purpose here is to highlight on the aspects of the methods used for conducting the study, which include the population of the study, sample and sampling procedure restatement of hypothesis to be tested and method of analysis.
RESEARCH DESIGN
The design use for this study was survey method. The research design presents the plan to be followed during the study.
This method will collect relevant data, describe, analyze and interpreted the result of the analyses and make relevant recommendation.
POPULATION OF THE STUDY
The population of this study is carried out in Eko-supreme, Agbara Estate a small business in Ogun State. This defines the limits within which the research findings are applicable. Given a generalizing view on the investigations to be carried out. The population under study is approximately 75 Questionnaires.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND HYPOTHESIS TESTING
INTRODUCTION
The objective of this chapter is to collate, present and analyze the data gotten from the research instrument. In collecting the data for this study, the researcher administered 100 questionnaires out of which 75 were returned, giving a response rate of 75%. Hypothesis of the research topic were then tested and inference were subsequently made based on the analyzed data.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
INTRODUCTION
The aim of this chapter is to give an overview of what was the outcome of findings of the reasonable conclusion on the outcome of the study. Recommendations suggested thereafter are based on the outcome of conclusions of the study. Recommendations suggested thereafter are based on the outcome of conclusions of the study. Recommendation were also made for potential researcher who may want to explore the area of study further on the future focal point and areas to concentrate more efforts to in order to be able to make additional input and contribute to knowledge generation.
SUMMARY OF MAJOR FINDINGS
In furtherance of the inference made earlier, the findings in this research can be summarized as follow:
- Although there is a relationship beyond doubt, between an effective working capital management and profitability of small and medium scale businesses, there are other more important factors/elements that contributed profitability of an enterprise.
- Furthermore, effective working capital management will reduce the small and medium scalebusiness mortality rate, through its in built mechanisms of financial checks and balances.
- The findings have established that the problem of failure of small and medium scale business lies with the absence of or ineffective working capital management.
- The financial government, cost capital (interest rate), as well as general macro – economic environment makes it all the more important for small and medium scale businesses to embrace effective working capital management.
- The research, through the questionnaire administered was able to confirm that the concept of working capital management is desirable and workable in every form and size of business organization.
- More than 90% of the respondents that participated in the research through the questionnaires believe that there is a relationship between effective working capital management and performance/productivity of a small and medium scale business.
CONCLUSIONS
Working capital implies the short – term asset and liability components of a firm balance sheet, otherwise referred to as current assets and current liabilities. It is very important to maintain at all times current assets which can cover and exceeds current liabilities. Since this is critical to an organizational financial health and liquidity in particular, apart from constituting a large proportion of its total financing, changes in working capital gives clues to a firms future financial needs.
Whereas the predictability of current liabilities is relatively easy, the need for current assets to exceed that of current liabilities of a firm is even more important not only for its liquidity but also the perception by the various stakeholders (employees, investors, government agencies e.t.c) as to the amount of risk it represent.
These underline the importance of the application of working capital management for small and medium scale enterprise not only for its growth and profitability but also for its survival and continued survival.
RECOMMENDATIONS
As a result of the findings and conclusions reached in this work, researcher finds it necessary to make the following recommendations:
- Asa matter of urgency, small and medium scale enterprise should be conscious of and knowledgeable about the concept of working capital management for effective
- Considering the Nigerian business environment, its application should not be too strict, but be flexible enough to take care of onward circumstances that do arise in our volatile, legal, political, sectorial, economic, technological, and cultural and business
- Where the organization is big enough, it might be more economical to employ and/or consult a professional financial adviser.
- However, this job should not be left to just one person handing financial matter, it should be broad based, cut across the whole organization to allow for cross fertilization of
- Financial issues and working capital management should not just be an isolated functions within an organization, it should form part of the organizational management philosophy and effectively communicated to all the ranks and the within the
SUGGESTION FOR FURTHER RESEARCHES
Considering the limitations and scope of this study, the following recommendations are made for a potential researcher who may want to explore the area of study further.
- The scope of this studied population could be expanded to cover more states oreven nationwide for more valid findings and generalization.
- Considering other limiting factors, the researcher should devote more time and resources in order to conduct a more credible research.
- The nature of working capital management is such that it comprise of various components could be explored individually in relation to working capital management.
For example: The impact of cash flow on an organizational working capital management. This could be done to other components of working capital management (Inventory control, debtor’s management, creditor’s management) which will give a more insight into the study.
REFERENCES
- LINUS OSUAWGU (1999), Small Business and Entrepreneurship Management.LAGOS; GREY RESOURCES LTD.
- DAVID DAVIES (1992), The Art of Managing Finance, ENGLNAD; Mc GRAW HILL BOOK COMPANY EUROPE.
- B.O. OMOTOSHO (1991), Finance for Non – Finance Executives, LAGOS MANAGEMENT EDUCATION AND TRAINING LTD.
- I.M PANDEY (2000), Financing Management. INDIA VIKAS PUBLISHING HOUSE PVT LTD.
- JAMES C. VAN HORNE (1985), Fundamental of Financial Management NEW JERSEY PRENTICE HALL INC.
- JOHN J. HAMPTON (1992), Concepts Problems and Cases.INDIA PRENTICE HALL OF INDIA PRIVATE LIMITED.
- ROSS, WESTERFIELD AND JAFFE (1998), Fundamental of Corporate Finance.LONDON, IRWIN/MC GRAW – HILL PUBLICATIONS.
- DIXON(1986), A Practical Approach to Financial Management FINANCIAL TRAINING PUBLICATION.
- EUGENE F. BRIGHAM (1988), Fundamental of Financial Management. LONDON, THE DRYDEN PRESS PUBLICATIONS.
