Accounting Project Topics

Liquidity, Foreign Exchange Fluctuation, and Financial Performance in Nigeria’s Manufacturing Industry

Liquidity, Foreign Exchange Fluctuation, and Financial Performance in Nigeria’s Manufacturing Industry

Liquidity, Foreign Exchange Fluctuation, and Financial Performance in Nigeria’s Manufacturing Industry

Chapter One


The main objective of the study is to find out the impact of liquidity and foreign exchange flunctuation on the financial performances in manufacturing industries Nigeria.

Other objectives may include:

  1. Ascertain the effect of exchange rate fluctuation on Return on Capital Employed (ROCE).
  2. Determine the effect of exchange rate fluctuation on Return on Asset (ROA).
  3. Examine the effect of exchange rate fluctuation on Return on Equity (ROE).



 Conceptual Review

Cash is used in starting a business as well as in liquidating the same for its breakup value (Pandey, 2004). It is made up of cash on hand and demand deposit while cash equivalents are short term highly liquid investment that are readily convertible to known amount of cash although subject to insignificant risks of changes in value (IFRS 7). Meanwhile, financial management is concerned with three roles: management of non-current assets, management of long-term liabilities including capital and management of current assets and current liabilities. Cash management, however, involves planning and control of components of current assets: accounts receivables (trade and other debtors), cash, prepayments, cash equivalents / short term investments; and current liabilities: accounts payables (trade and other creditors), accruals, bills payables and short term financing (Brealey, Myers and Marcus, 2007).

Cash management has been vastly described by experts. Their opinions fortunately are convergent. According to the Chartered Institute of Bankers of Nigeria (CIBN, 2000), Cash management is employed in planning, monitoring and controlling cash inflows, cash outflows and the firm’s cash position aimed at optimizing its liquidity. Uwuigbe, Uwalomwa and Egbide (2012) described cash management as a tool for discerning the firm’s expected cash receipts and disbursements, choosing an optimal source of alternative financing and maximizing expected returns from investing idle cash. Larsson and Hammarlund (2005) opined that such items as receivables system, payables system, currency management and risks, liquid funds management, trade and other debtors, trade and other creditors and short term financing should form part of the cash management.

Effective cash management practices are imperative if firms in the manufacturing sector desire to satisfy the diverse interests of stakeholders. Firms that manage their cash and cash equivalents effectively optimize use of current assets and current liabilities during each financial / accounting year, speed up collections, delay disbursements / payments reasonably, manage risks of keeping idle and or little cash and make appropriate use of feedback (Allman-Ward and Saguer, 2003). Regrettably, the practice is quite distinct in Nigeria. These firms employ such cash management method as fixed percentage of sales, purchases, cost of sales, etc. The management of these firms relies on rote memory, hunches and past experience to manage working capital components notwithstanding these practices are forgone alternatives of firms in advanced economics including multinational / transnational companies (Okafor, 2012).

The number of listed manufacturing firms on the Nigerian Stock Exchange dwindled. As a result, the Nigeria capital markets (Abuja Stock Exchange and Nigerian Stock Exchange) experienced near collapse. It had a profound negative effect on shareholders, debenture holders, and other investors including oversea investors. In particular, foreign investors withdrew most of their interest through capital flight from the country, otherwise divestment from the industry including banks. The GFC seems to have perpetuated via the current liquidity squeeze / freeze. Hence, the efficiency of liquidity and cash flow management systems need to be optimized.

Thus, the components of cash management mechanisms are most likely to include cash flow management, synchronization of cash inflows and outflows, shorter cash conversion cycle through speeding up collections and controlling disbursements, using cash concentration to make funds available where and when needed, short term investment of cash surpluses, cheaper short term financing of cash deficits using cash flow forecasting, liquidity risk management and bank relationship / account reconciliation.

Profitability is the ability of a firm to generate revenue in excess of associated expenses incurred in the process. In general, it refers to the relationship between the profits generated by the company and the investments that gave rise to these profits (Alshatti, 2015). It is the ability of the firm to generate profits from all business activities. It is used in measuring the efficiency of operations executed by management and productivity of capital employed (Tulsian, 2015).


Exchange rate is the rate at which a currency is exchanged for another currency. It is referred to as the ratio at which a unit of currency of one country is expressed in terms of another currency. The rate is normally determined in the foreign exchange market. The foreign exchange market is a market where currencies of different countries are bought and sold. It is a market where the values of local and foreign currencies are determined. As noted by Jhingan (2004), the national currencies of all countries are the stock-in-trade of the foreign exchange market, and as such, it is the largest market to be found around the world which functions in every country. Also, Bradley and Moles (2002) defined exchange rate as the price of a unit of foreign currency against domestic currency. Exchange rate is the value of the one unit of foreign currency against local currency and Exchange rate serves as the basic link between the local and the overseas market for various goods, services and financial assets (Reid and Joshua, 2004).

This study considers exchange rate to mean the rate at which a unit of foreign currencies are exchanged for Nigerian Naira. Omagwa (2005) posit that exchange rates like any other commodity are explained by the law of demand and supply. Supply of currency is explained by changes in fiscal policies whereas currency demand is influenced by a wide range of factors such as inflation rates and interest rates. Murthy and Sree (2003) argued that exchange rate enables comparison of prices of commodities quoted in diverse currencies. Thomas (2006) found that since the early 1970s, foreign rate exchange system had been a floating one in most countries. The findings were that such nations permitted exchange rates to change in the market place from day to day as per market forces. Before this eventuality central banks of nations intervened in determinations of the exchange rate. This meant that international transactions were never subjected to exchange rate fluctuations risk and as such international transactions were less dynamic. He further stated that since the collapse of this exchange rate system it is markets forces that determine the exchange rate of a nation’s currency. Thus such rates keep on fluctuating as per market forces and therefore exposing international transactions to exchange fluctuation risks.

The table below illustrates the movement of the USD, Euro, GBP, JPY and CFAFr to the Nigerian naira exchange rate from November, 2006 to April 2019.




 Research Design

The research design employed in this research work is ex- post facto method. This study investigated the extent of foreign exchange currency exposure on the financial performance of quoted Manufacturing firms in Nigeria for the period covering years 2007 to 2018.

Population of the study

The study population consisted of all the quoted Manufacturing firms as at December, 2018. These are: 7-Up Bottling Company, Cadbury Nigeria Plc, Flour Mills Of Nigeria Plc, Guinness Nigeria Plc, National Salt Company Of Nigeria Plc, Nestle Nigeria Plc, Nigerian Breweries Plc, Northern Nigeria Flour Mill Plc, Union Dicon Salt Plc and UTC Nigeria Plc.

The dataset contains detailed financial information about each conglomerate for each financial year as obtained from the financial statements for the 12years period of study. For this study, the eight (8) quoted Manufacturing firms were also used as sample because the population is small and manageable.



The data used in this study and necessary computations made are attached as appendices



Ho: Exchange rate fluctuation has no significant effect on Return on Capital Employed.




In summary, the results of our analyses reveal the following:

  1. Exchange rate fluctuations have significant negative effect on return on capital employed of Manufacturing firms.
  2. Also findings show that exchange rate fluctuations have no significant effect on Return on Assets of Manufacturing firms in Nigeria.
  3. Exchange rate fluctuations have significant negative effect on Return on Equity, but interest rate has positive but insignificant effect on Return on Equity.


The study’s objective was to determine the effects of exchange rate fluctuations on financial performance of quoted Manufacturing firms in Nigeria. This study explored the effects of exchange rates on Return on Capital Employed, Return on Asset and Return on Equity of quoted Manufacturing firms in Nigeria from 2007 to 2018.In line with the findings; we conclude that exchange rate fluctuations have significant negative effects on the financial performance of quoted Manufacturing firms in Nigeria. Although the variations in interest rate tend to yield positive effects but the effect is insignificant probably due to the counter negative effects of inflation rate on performance as indicated by the study


  1. Government should formulate policies that will be very consistent in controlling or managing exchange rate fluctuations, as exchange rate fluctuation has the capacity of distorting labour rate and other cost of material inputs.
  2. Also Authorities in Manufacturing firms should ensure that they engage experts who could forecast accurately the direction of the movement in exchange rate.
  3. Government should uphold the restriction policy on the importation of similar products manufactured in Nigeria. If this is religiously pursued, it will create and open more markets for the locally manufactured goods to thrive. More market share for Nigerian manufacturing sector will improve their return on assets, which is a proof of making maximum utilization of their assets in generating earnings.
  4. Government should try to make available, interest- free- loan to manufacturing sector, which will encourage and strengthen their operations and increase their chances of survival. Also, government should maintain the rate of 14% which has been pegged on interest rate in 2018 to curtail inflationary tendencies.


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  • Agbada, A. O. & Osuji, C. C. (2013) The efficacy of liquidity management and banking performance in Nigeria. International Review of Management and Business Research, 2 (1), 223 – 233.
  • Akinbuli, S. F. (2006) Financial accounting: Principles and applications, Lagos: Blueprint Publishers.
  • Akinbuli, S. F. (2009) Cash management techniques and application for corporate organization. The Nigerian Accountant, 42 (1), 27 – 33.
  • Allman-Ward, A. S. & Saguer, J. M. (2003) Essentials of managing corporate cash. New Jersey: John Wiley & Sons.
  • Almeida, H., Campello, M., Cunha, I. & Weisbach, M. S. (2013) Corporate liquidity management: A conceptual framework and survey. Journal of Finance Forthcoming, 2 (2), 67 – 78.
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