Accounting Project Topics

Working Capital Management and Corporate Performance in Quoted Manufacturing Firms in Nigeria

Working Capital Management and Corporate Performance in Quoted Manufacturing Firms in Nigeria

Chapter One

1.3      Objectives of the Study

The main objective is to examine the impact of working capital management on the corporate performance of quoted manufacturing firms in Nigeria using case studies of Guinness, Dangote, Nestle, Cadbury, and Unilever.

The specific objectives include:

  1. To examine the impact of average collection period on corporate performance of quoted manufacturing firms in Nigeria.
  2. To examine the impact of inventory conversion period of corporate performance of quoted manufacturing firms in Nigeria.
  3. To examine the impact of average payment period on corporate performance of quoted manufacturing firms in Nigeria.
  4. To examine the impact of cash conversion cycle on corporate performance of quoted manufacturing firms in Nigeria.




The term working capital has several meanings in business and economic development finance. In accounting and financial statement analysis, working capital defined as the firm’s short-term or current assets and current liabilities. Net working capital represents the excess of current assets over current liabilities and is an indicator of the firm’s ability to meet its short-term financial obligations (Brealey & Myers, 2002). Effective working capital management consists of applying the methods which remove the risk and lack of ability in paying short term commitments in one side and prevent over investment in these assets in the other side by planning and controlling current assets and liabilities (Lazaridis & Tryfonidis, 2006). Working Capital Management is the administration of current assets and current liabilities. It deals with the management of current assets and current liabilities, directly affects the liquidity and profitability of the company (Deloof, 2003; Eljelly, 2004; Raheman and Nasri, 2007; Appuhami, 2008; Christopher and Kamalavalli, 2009; Dash and Ravipati, 2009). Current liquidity crisis has highlighted the significance of working capital management. Management of working capital has profitability and liquidity implications and proposes a familiar front for profitability and liquidity of the company. To reach optimal working capital management firm manager should control the tradeoff between profitability maximization and liquidity accurately (Raheman & Mohamed, 2007). An optimal working capital management is expected to contribute positively to the creation of firm value (Howorth & Weshead, 2003; Deloof, 2003; Afza & Nazir, 2007). Working capital management is important due to many reasons. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment. However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations Horne and Wachowicz, (2000). Efficient working capital management involves planning and controlling. According to Harris (2005) Working capital management is a simple and straightforward concept of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities. Nevertheless, complete mean and approach preferred to cover all its company’s activities related to vendors, customer and product, (Hall, 2002). Now a day working capital management has considered as the main central issues in the firms and financial managers are trying to identify the basic drivers and level of working capital management (Lamberson, 1995).


-Working capital cycle: This is the circulating or operating capital of the business regularly and routinely turned over many times in a year in the course of generating income for the firm ( Ibenta, 2005). This implies the duration between the outlay of cash for raw materials and the inflow of cash from the saleof the goods. Put differently, it is the average time that raw materials remain in stock less the period of credit taken from suppliers plus the time taken for producing the goods, plus the time taken by customers to pay for the goods.

Gross Working Capital: This is concern with firm’s investment in current assets. Current assets here refers to assets that can be easily converted to cash within an accounting period and this involves cash, short-term securities debts ie accounts receivables or book debt, stock (inventory) and bills receivables.

Net Working Capital: This has to do with the current assets and current liability differences. Current liabilities are those claims of outsider which are expected to mature for payment within an accounting period. Thus accounts payables, outstanding expenses. If current assets exceeds current liabilities, a positive net working capital has occurred and vice-versa. Current assets management is concerned with two aspects that is (a) Optimization of investment in current assets and (b) how to finance current assets (Pandy, 2005).He further opines that investment in current assets should just be made adequate to meet the needs of the firm instead of excessive, stating that excessive investment in current assets impairs the firm’s profitability as idle investment earns nothing. Pandy (2005) also stated that inadequate amount of working capital can threaten solvency of the firm because of its inability to meets its current obligation as they fall due.


The Working Capital Management of a firm in part affects its profitability. The ultimate objective of any firm is to maximize the profit. But, preserving liquidity of the firm is an important objective too. The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm (Shin and Soenen, 1998). Therefore, there must be a trade- off between these two objectives of the firms. One objective should not be at cost of the other because both have their importance. If we do not care about profit, we cannot survive for a longer period. On the other hand, if we do not care about liquidity, we may face the problem of insolvency or bankruptcy. For these reasons working capital management should be given proper consideration and will ultimately affect the profitability of the firm. Firms may have an optimal level of working capital that maximizes their value (Afza and Nazir, 2009) Working Capital Management has its effect on liquidity as well as on profitability of the firm. The study analyzed the relationship between different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio and the gross operating profit. Debt ratio, size of the firm (measured in terms of natural logarithm of assets) and financial assets to total assets ratio were used as control variables. Working capital management efficiency is vital especially for manufacturing firms, where a major part of assets is composed of current assets (Horne and Wachowitz, 2000). It directly affects the profitability and liquidity of firms (Raheman and Nasr, 2007). 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 (Kargar and Bluementhal, 1994). The significance of working capital management efficiency is irrefutable (Filbeck and Krueger, 2005). Working capital is known as life giving force for any economic unit and its management is considered among the most important function of corporate management. Every organization whether, profit oriented or not, irrespective of size and nature of business, requires necessary amount of working capital. Working capital is the most crucial factor for maintaining liquidity, survival, solvency and profitability of business (Mukhopadhyay, 2004). Working capital management is one of the most important areas while making the liquidity and profitability comparisons among firms (Eljelly, 2004), involving the decision of the amount and composition of current assets and the financing of these assets. The management of Working capital is important to the financial health of business of all sizes. Working capital meets the short term financial requirements of a business enterprise. It is a trading capital not retained in the business in a particular form for longer than a year. The money invested in it changes form and substance during the normal course of business operations. The need for maintaining an adequate Working capital can hardly be questioned. Just as the circulation of blood is very important in the human body to maintain life, the flow of funds is very necessary to maintain business. If it becomes weak, the business can hardly prosper and survive. Working capital starvation is generally credited as the major course if not a major course of small business failure in many developed and developing countries (Rafuse, 1996). The success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursement. Given these peculiarities efficient management of working capital and more recently good credit management practice is pivotal to the health and performance of the small firm sector, (Peel and Wilson, 1996). The study conducted revealed that 60% enterprises suffer from cash flow problems. From such study there is the need for many industries to improve their return on capital employed (ROCE) by focusing on some critical areas such as cost containment, reducing investment in working capital and improving working capital efficiency. Based on the information from the above findings, there is a negative relationship between profitability and the cash conversion cycle, inventory receivable days, accounts payable days and accounts receivable days which was used as a measure of working capital management efficacy. Therefore it seems that operational profitability dictates how managers or owners will act in terms of managing the working capital of the firm. The negative relationship between accounts receivables and firms’ profitability suggests that less profitable firms will pursue a decrease of their accounts receivables in an attempt to reduce their cash gap in the cash conversion cycle. Likewise the negative relationship between number of days in inventory and corporate profitability suggests that in the case of a sudden drop in sales accompanied with a mismanagement of inventory will lead to tying up excess capital at the expense of profitable operations. Therefore managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level. Padachi (2006) indicate that the profitability and liquidity are the most fundamental concerns in managing working capital. Here, liquidity is directly linked to the ability of a firm to meet shortterm obligations. Bagchi and Khamreei (2012) indicate that the WCM is a vital component in financial management. Irrespective of the profit-orientation, size and the nature of business, all firms require an optimum level of WCM. Inefficiency of WCM may lead the firm into a pitfall (Niresh, 2012). Optimal WCM positively contributes to the creation of firm value. On the one hand, cost of liquidity brings a serious problem and stands against profitability (Dong & Su, 2010). On the other hand, a firm cannot survive without sufficient liquidity because the firm may face the problem of insolvency. Therefore, a balance between profitability and liquidity must always be maintained. Padachi (2006) stated that a well-designed and executed WCM is anticipated to contribute positive value to the firm.




Research design

The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to working capital management and corporate performance in quoted manufacturing firms in Nigeria

Sources of data collection

Data were collected from two main sources namely:

(i)Primary source and

(ii)Secondary source

Primary source:

These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.

Secondary source:

These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.

Population of the study

Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information on working capital management and corporate performance in quoted manufacturing firms in Nigeria. 200 staff of selected manufacturing companies in Lagos state was selected randomly by the researcher as the population of the study.



4.1 Introduction

Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey.  This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.



5.1 Introduction

It is important to ascertain that the objective of this study was working capital management and corporate performance in quoted manufacturing firms in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of working capital management and corporate performance


This study was on working capital management and corporate performance in quoted manufacturing firms in Nigeria. Five objectives were raised which included: To examine the impact of average collection period on corporate performance of quoted manufacturing firms in Nigeria ,to examine the impact of inventory conversion period of corporate performance of quoted manufacturing firms in Nigeria, to examine the impact of average payment period on corporate performance of quoted manufacturing firms in Nigeria and to examine the impact of cash conversion cycle on corporate performance of quoted manufacturing firms in Nigeria.. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of selected manufacturing firms. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made managers, sale representatives, senior staffs and junior staffs were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

 5.3 Conclusion

 Therefore, the study concludes that working capital management impact on financial performance of manufacturing firms in Nigeria


The management of manufacturing firms in Nigeria should exhibit carefulness in handling of stock/investors at least to ensure that their stock level will not be below the minimum stock level.

– Increase the time at which customers make payments to the company for goods bought.

– Professionals should be hired by these companies to ensure effective and efficient working capital management

– Much attention should be paid to cost of sales to ensure that it will not negatively affect prices of stock.


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