CHAPTER ONE
Firms needs cash to pay for all their day – to – day activities. They have pay wages, pay for raw materials, pay bills and so on. The money available to them to carry out all these responsibilities is known as the firm’s working capital.
In financial management, it is generally believed that liquidity is more important than profitability. One of the reasons for this is that most organizations makes profits, but do not posses enough or adequate liquidity assets to off set it’s current obligations. The inability of a firm to make payment as and when due may definitely have serious consequences on the organization and this situation may lead to loss of goodwill and may as well as result to technical insolvency which may lead the organization into liquidation.
Another reason is that uncertainty inherent in this present day’s economic business environment threatens the survival of every business, thus making sound liquidity and cash management a necessity of focal point in corporate planning. This claim, is substantiated in recent times by the fact that the importance of management of liquid assets has been gradually and systematically gained prominence and growth in most manufacturing firms. So, this incidental prominence and growth of liquidity management makes it very apparent that no organization or firm can survive without an effective and efficient management of it’s liquid resources which is the working capital.
The life wire of any business or organization depends on the working capital of that business or organization, i.e it is the lifeblood of any business and if you take it away, such business will surely expire. Infact, it is particularly important for the daily maintenance and running expenses involving cash. Therefore working capital management refers to the efficient administration of both the current assets and current liabilities.
Finally, efficient management of working capital is very important to both large and small scale businesses especially in this present times of instability in the economy, so as to enhance a proper corporate performance.
1.1 STATEMENT OF PROBLEM
It has been discovered that one of the problems faced by the present day businesses or firms is the effective and efficient management of the firm’s resources at it’s disposal. This problem is worsened considering the present fiscal policy of banning the importation of some essential raw materials, thereby leaving the manufacturing firms with meager source of locally few produced raw materials.
Decisions affecting liquid assets are influenced by an obvious fact and subjective judgment of most companies. The financial controller of a company may have some of the facts of the cost of borrowing from a bank but these facts are only part of the information that he requires. On the other hand, there are also subjective benefits arising from having more cash. The financial manager may decide to insure the firm against financial illiquidity by arranging and paying for a credit agreement committing a bank to lend up to an agreed sum.
Despite all these explicit and implicit costs, still in profits, liquid assets may not mean shortage n profits. According to Scapers, (1977), “profits may appear satisfactory while operations are claiming financial resources of the business”. Still in the same view, Harthey (1985) said that “profitable firms have been known to go bankrupt while firms making losses have been known to have a considerable cash surplus”.
Therefore on this note, the problem is to identify the difficulties most manufacturing firms are facing now in that when they perceive that profits mature to the detriment of running illiquid and this will go a long way to identify the relationship existing between the management of working capital and corporate performance.
Working capital is a critical factor in the sustainability and viability of any firm/business. It uncommon to find a firm/business overloaded with inventories and other investments when cash is in short supply for payments and other cash commitments. It is also not uncommon to find some firms heavily overloaded with idle cash when there are many profitable investments that would have tampered with some of such cash. On the other hand, over-investments in fixed assets, poor collections or receivables, bad debts and unbalanced obsolete inventories can quickly transform a profitable company over-trading on creditors cash and bank loan into a company with solvency problems. The concretionary monetary policy by this present military administration and its subsequent effort on each squeeze of banks has made it easy for firms to obtain short term financing from financial institutions.
The fixster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within a business. Good management of working capital will generate cash which will help improve profits and reduce risks.
According to mabogunjo, “the restrictive monetary policy introduced to curb inflation by reducing excess liquidity has brought Nigerian private sectors and manufacturing companies face to face with the most important objective of a business. With the reduction of naria in circulation and the increase in the price level occasioned by foreign exchange market (FEM), companies are faced with excess stock which they are unable to dispose off, owing to a fall in the customer’s demand. The purpose of carrying out this research is to:
Finally, it is believed that the outcome/result of this research study will provide useful information that will help the management of marshal points and chemical company Ltd, Enugu to improve in their decision making process.
The significance of this study cannot be overlooked as it will be of great help to readers, business men and women, manufactures especially those in the point industries, corporate bodies and the government. It will go a long way to enlighten the importance of effective working capital management and corporate performance, especially in the point industry.
It will as well highlight the measures to be taken by corporate bodies such as point factories in order to attain economic stability, self – reliance, investments and required autonomy and flexibility in decision making. Also, it will aid most point factories to realize their mistakes for not attaining the much needed importance in the concept effective working capital management and corporate performance.
This project will also be of good assistance to students of Accountancy, Banking and Finance, Business Administration and Management etc. because it will aid them to know more about the effectiveness of proper management of working capital and corporate performance. Indeed, effective working capital management and corporate performance is an important goal to be achieved in a manufacturing firm for maximum profitability.
This study will also enhance the understanding of most organizations as regards their working capital position, develop a plan to improve it’s effectiveness and implement a smart flaw management techniques tailored to the industry. Good management of working capital and corporate performance will help improve profits and reduce risks.
Lastly, the findings and recommendations to this project work will create a step towards the improvement of effective working capital management and corporate performance in point industries and other corporate bodies.
Most firms do not understand the concept of working capital management and corporate performance; in fact they do not see the need of understanding the company’s working capital cycle, reviewing the company’s procedures through out the entire supply chain. Since it is not practiced, this research project is therefore directed towards finding out whether manufacturing firms that has not been practicing this concept of working capital management and has been loosing profits from this policy.
To enable the researcher carry out these test, the under listed would be critically tested:
HO: Effective working capital management improves the performance of manufacturing firms.
HI: Effective working capital management does not improve the performance of manufacturing firms.
HO: The management of funds in marshal paints and chemical company is efficient.
HI: The management of funds in marshal paints & chemical company is not efficient.
The essence of carrying out this research is to appraise the “effective working capital management and corporate performance in the paint industry. Although, this research work is only restricted to marshal paints and chemical company Ltd, Enugu. For the purpose of industrial average, some after painting industries were also considered. With reference to effective working capital management, the concepts covered are shown below:
In view of the above concepts, the researcher is to concentrate more on paper study of these concepts, so as to enable their effects to be critically examined on the performances positions of marshal paints and chemical company Ltd.
1.6 LIMITATION OF THE STUDY
The major constraint encountered while carrying out this study was the limited time given to me not minding the poor postal services in the country. The questionnaire sent to the management of marshal paints was delayed for three weeks before returning it and also ignorance on the side of the respondents gave rise to delay in the completion and return of questionnaires. The biases and prejudices of the respondents together with the demand for gratification contributed further to the limitation of this research work.
Secondly, another major limitation faced was the lack of finance to expand the study by way if visiting all the paints industries or factories in the state or country and that is why this study is restricted to only marshal paints and chemical company Ltd, Enugu.
Thirdly, the response from respondents were not encouraging event though I explained my reason of carrying out the research. Also when I assured them that the information obtained shall be kept secret and used only for academic purposes, although for some obvious competitive reasons in the paint industry, the company management cancelled some official information which would have enhanced the validity, objectivity and reliability of this research work. Some respondents had the feeling that the researcher must have received some grants from the sponsoring institution or the government to carry out the study. There were also lots of claims of unnecessary official protocols and the use of the word “come today, come tomorrow” syndromes. This syndrome had a great on the researcher considering the tight schedule and the distance of the firm.
Finally, the researcher will gladly appreciate and accept any error, inadequacy of this research work and any of this research work and any constructive criticism by anybody research project.
1.7 DEFINITION OF TERMS
The researcher wishes to define the following terms do that the subject matter will not suffer from conceptual misunderstandings concealed under a semantic smokescreen.
WORKING CAPITAL
Working capital refers to a firm’s investment in short term assets – cash marketable securities, trade debtors and stock, less current liabilities used to finance assets.
WORKING CAPITAL MANAGEMENT
Working capital management means the planning and controlling of both current assets and current liabilities. It involves the administration of cash receivables, inventories, marketable securities, debtors, bills receivable and the current liabilities.
GROSS WORKING CAPITAL:
Gross working capital refers to a firm’s investment in current assets.
NET WORKING CAPITAL
This refers to the difference between assets and current liabilities.
ASSETS
This refers to all items owned by a business firm or individual (including properties rights) which do have a money value. It can as well be all items listed on the right hand side of a balance sheet.
CURRENT ASSETS
These are assets that can be expected to be converted into cash or generally expected to be converted within one year. If constitutes more than half of the assets of a business.
CURRENT LIABILITIES
These are items due and payable within one year.
ACID TEST RATIO
Ratio of a company’s current assets (excluding inventories) to its current liabilities. It is used as a supplementary measure of the extent to which liquid resources are immediately available to met current obligation.
CURRENT RATIO
This is the relationship between the current assets of a firm and it’s current liabilities or measuring obligations. It is not only a measure of liquidity, but also a measure of the margin of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds.
LIQUIDITY
This refers to the ability to convert into cash and liquid assets with the shortest possible time for a price about which there is a little uncertainty.
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