LIQUIDITY MANAGEMENT AND PERFORMANCE OF MANUFACTURING COMPANIES

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

In recent time, the importance of the management of liquid assets is gradually and systematically getting prominence in most manufacturing firms. This is due to the adequate recognition which financial managers and accountants accord liquid assets. Most companies make profit, but they do not have sufficient liquid assets to set off their current obligation hence they close down, such situation does not guarantee the continued survival of the firm.

Financial managers however, are always faced with the problems of current assets management. Profitability is very important for the survival of a firm and also for a firm to maintain reasonable cash to off set its obligation. This problem could be solved, if the assets of companies are properly and efficiently maintained and managed. The management of current assets is concerned with plans and procedures to ensure that there is no inadequate or excess liquidity in a company.

Profitability is the yardstick for measuring efficiency in the use of resources of an enterprise. It is arrived at for an accounting period after the preparation of income statement.

If a company is liquid, it does not necessarily means that the company is profitable. A company can also be profitable and yet not liquid, if the company is making profit, it means the sales margin is increasing. A high sales margin on the other hand means negative impact on sales volume. Nevertheless, a firm may need to improve its volume of sales through longer credit facilities to customer. This shows that there is a strong relationship between firm’s liquidity and profitability.

This research work is carried out to examine the liquidity management techniques and the resulting effects on the performance of manufacturing companies in Nigeria with a particular reference to Nigerian Breweries Plc.      

1.2       Statement of the Problem

Firms in Nigeria may be making profit but go into liquidation. This is due to their neglect of liquidity requirements.

Urma (1983) is of the opinion that no matter how the financial manager allocated his available resources, he cannot perfectly satisfy the twin objectives of liquidity and profitability in an organization.

Some of the challenges that are associated with the liquidity management in an organization include the following among others:

1. 1. The top management may not be committed to the broad concept of liquidity management.

1. 1. Another usual problem has to do with improving the efficiency of cash management including the question of how to invest excess fund and kick out the problem of inadequate liquidity.

1. 1. Many managers do not know how to implement organization’s credit policy this usually makes the process of recouping credit facilities given to the customers difficult.  

1. 1. Many firms do not know how to exploit the benefit of idle assets. A firm can invest in marketable securities, which satisfy the three basic conditions of marketability, safety and returns.

This project therefore is aimed at examine the challenges and the prospects of liquidity management in a manufacturing company. Efforts will also be made to highlight the various liquidity management techniques which are adopted by Nigeria Breweries Plc.

1.3       Research Question

This study will attempt to answer the following questions:

1. 1. Is there positive relationship between liquidity management and profitability of an organization?

1. 1. Is the cause of liquidity problem as result of poor and fraudulent financial management?

1. 1. Is ineffective use of credit facilities is another source of liquidity problem?   

Some of the above questions form the basis of the statement of hypothesis for this study.

Hi:       There is a significant correlation between liquidity management and level of sales.

Ho:      There is no correlation between liquidity management and the level of sales

Hi:       There significant relationship between profitability and liquidity management.      

Ho:      There is no significant relationship between profitability and liquidity management.      

1.4       Purpose of the Study

The main purpose of carrying out this study is to examine liquidity management practices in manufacturing companies in Nigeria. Other specific purpose of the study includes these among others:

1. 1. To find out the existing liquidity management practices in Nigeria Breweries Plc.

1. 1. To examine the assets to which either its excess or inadequate management effects profitability position of the organization.

1. 1. To identify the criteria for investment of idle cash balance.

1. 1. To ascertain the benefit that firms could gain from effective liquidity management techniques.

1. 1. To investigate the effectiveness and efficiency of liquidity management practices through objectives analysis of general operations of the organization against the concept and model of liquidity administration.

1.5       Scope of the Study

Attempts have been by made by different scholars to investigate the liquidity management and performance of the manufacturing companies in Nigeria. Manufacturing companies adopt different methods of managing their liquidity; it will be impossible for the researcher to investigate the whole list of manufacturing companies in Nigeria. Therefore this study focuses on liquidity management and profitability of Nigeria Breweries Plc, Ibadan. The study also examined the liquidity condition of the company whether it has a positive or negative effect on a company’s profit level.

It is hoped that the outcome of the study, recommendations and suggestions will improve profitability and liquidity management of companies in Nigeria.

1.6       Limitation of the Study

The depth this study was constrained by some factors which include limited financial resources and time. The conservative nature of workers of Nigerian Breweries Plc, especially in the area of supplying information was also a challenge.

However, these constraints did not have adverse effect on the study. At the end of the day credible information was collected for the study.

1.7       Significant of the Study

It is hoped that result obtained from this study will provide among others the following benefits:

i.          It will be helpful to business concerns especially; manufacturing companies by making them realize the need to adopt reasonable policies on administration of liquidity assets and the need to closely monitor these policies for optimality.

ii.         The study will generate information that will be vital in management planning and decision making.

iii.        It will serve as a bias for further research on the subject of efficient management of liquidity assets in manufacturing companies in Nigeria.         

1. 1. 1. It will provide idea on how to avoid business failure, which often arises from company’s liability not to meet their matured financial obligation.

1.8       Definition of Terms

a.         Liquidity: Liquidity can be defined as the ability of any assets which permits it to be turned into cash quickly without any appreciation loss. Is the rate and potential of covering cash and current assets within the shortest period of time. It is also known as the state of owing things in terms of assets of value which can easily be changed into cash.

b.         Liquidity ratio: Is the type of ratio that indicate the ability of a company to meet to short term liabilities as they due fall it short term assets. It also shows the company has sufficient cash assets to settle its on time.

c.         Working Capital: Is the efficiency to ensure company’s long term success and to achieve the overall goals, maximization of the owner’s wealth. It also shows the relationship between current assets and current liabilities and also known as not currents. It is calculated by current assets less current liabilities WC = CA – CL

d.         Reality Liquidity Ratio: It indicates the ability of the firm to fulfill short term liabilities.

e.         Acid Test Ratio: It measures the company’s ability to meet short term obligation from its most liquid. It is also indicate the relative amount of assets in cash availability to meet short – term liabilities. It is calculated by subtracting stock from current assets an divided by current liabilities.

Acid test ratio =  Current Assets – Stock

                                                                               Current Liabilities           

            i.e. working capital, total assets, labour with the aims or objective of maximizing profits and is calculated by dividing not profit over turnover and multiply by hundred percentage (100%) show that, answer should be in percentage.

                        Net profit        x          100

                        Turnover                        1