Impact of Working Capital Management on Corporate Profitability of Nigerian Manufacturing Firms

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Category: GTIN: 12345678

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Impact of Working Capital Management on Corporate Profitability of Nigerian Manufacturing Firms is a well researched Project Topic, it can be used as a guide or framework for your Academic Research

Abstract

This study examined the impact of working capital management on the Corporate profitability of Nigerian Manufacturing firms. The working capital variables studied comprise accounts payable, accounts receivable, cash conversion cycle, stock/inventory turnover, and liquidity.

This study also used sales growth and Debt as control variables in examining the impact of working capital management on the profitability of Nigerian firms. Secondary sources of data were sourced from the Annual Reports of the 22 manufacturing firms selected for this study for the period 2000-2011.

Five Hypotheses were estimated with the use of Generalized least square multiple regression. The findings of the study show that accounts payable ratio [AP] had a negative relationship with the industries’ profitability. On the other hand, the accounts Receivable ratio [AR] had a positive and significant relationship with the profitability of the firms studied.

The stock turnover ratio had a negative and significant relationship with the profitability of the firms under study. Results also show that firm’s cash conversion cycle [CCC] had a positive but non-significant relationship with the industries’ profitability, and Liquidity ratio had a negative relationship with the industries’ profitability. Based on the findings of the study, the following recommendations were made; there should be a balance between liquidity and profitability.

They should also avoid stock-outs because of the huge sales they made during the years under study. They are encouraged to reduce their cost of sales to make more profit. There should also increase their credit sales so as to have enough cash to settle their obligations.

Specialized persons should be hired by these companies for expert advice on working capital management. One of the greatest contributions of this study is the perspective we followed in the measurement of variables (Descriptive and four functional models of multiple regression).

CHAPTER ONE
INTRODUCTION

The sustainability of a firm heavily depends on the ability and success of its financial management function (Karaduman et al 2011). Traditionally, corporate finance involves capital budgeting, capital structure, and working capital management, capital budgeting and structure, such as investments in fixed assets are about the management of long-term capital and attract more attention than working capital management in finance literature.

However, working capital management is also a very important field of corporate finance, because of its considerable effects on the firm’s profitability and liquidity (Nazir and Afza, 2009, Chiou, et al 2006, and Alshubiri; 2011) In order to maintain its activity firms typically need two types of assets, fixed assets, and current assets.

Fixed assets which include, building, plant, machinery, furniture, fixture, and fitting among others are not only purchased for the purpose of resale, but also for operational purposes (Singh and Pandey, 2008). On the other hand, current assets are seen as key components of the firm`s total assets.

A firm may be able to reduce its investment on fixed assets by leasing, but this becomes practically difficult for current assets. (Afza and Nazir 2008) A firm’s investment in current assets such as cash, bank deposits, short term securities, accounts receivables, and inventories is called working capital.

To put it differently, net working capital is the surplus of current assets over the short term liabilities and represents the liquidity margin available to meet the cash demands in order to maintain the daily operations and benefit from the profitable investment opportunities (Yaday, Kamtt, and Manjrekar, 2009, Padachi, 2006).

Therefore it is possible to say that working capital can be regarded as livewire of the firm and its efficient management can ensure the success and the sustainability of the firm while its inefficient management may lead the firm to bankruptcy (Padachi, 2006).

In this framework, working capital management represents the decision about the manipulation of ratios which involves managing the relationship between a firm’s current assets and current liabilities. One of the main purposes of working capital management is to provide sufficient liquidity to sustain a firm’s operations and to have to meet its obligations (Ejelly, 2004).

All firms, regardless of their size and industry need to acquire positive cash flow and liquidity (Stewart,1995). The way that working capital is managed has also noted unworthy effects on the firm’s Profitability (Deloof, 2003). For a firm’s trading activities, working capital can be considered as a spontaneous fund, and the number of funds tied up to current assets can exceed that of fixed assets in many firms (Sathyamoorithi and Wally-Drima, 2008).

In this context, funds committed to working capital can be seen as hidden sources that can be used for improving a firm’s profitability (Alshubiri, 2011). Hence it is the fact that working capital management involves a trade-off between profitability and risk. According to the theory of risk and return, investments with higher risk may create higher returns. Thus a firm with high liquidity of working capital will have low risk to meet its obligation and low profitability at the same time (Garciateruel and Martine Solano, 2007, Zariyawati et all 2009).

Therefore, efficient working capital management plays a significant role in overall corporate strategy in order to increase shareholder value (Dong and Su 2010) by determining the composition and level of investments on current assets, the level,l sources, and mix of short-term debt (Nwankwo and Osho, 2010). Especially efficient working capital management can enable a firm to react quickly and genuinely to unexpected changes in the economic environment and gain competitive advantages over its rivals (Alshubiri, 2011).

Efficient working capital management primarily aims to ensure an optimum balance between profitability and risk (Ricci and Viho, 2000). This objective can be achieved by continuous monitoring of working capital components such as accounts payable, accounts receivable and inventories.

Receivables for instance are directly affected by the credit collection policy of the firm and the frequency of converting these receivables into cash matters in the working capital management. However, the operating cycle theory tends to be deceptive in that it suggests that current liabilities are not important in the course of firm’s operation.

Payables are understood to be sources of financing the firm’s activities given. this inadequacy of the operating cycle theory it is essential to infuse current liabilities in the picture to enhance the analysis and understanding. Cash conversion theory integrates both sides of working capital that is current assets and current liabilities.

In their published seminar paper, Richard and Laughlin (1980 devised this method of working capital as part of a framework of analysis known as the working capital cycle. It claims that the method is superior to other forms of working capital analysis. In this study, Nigeria is used as a case study because of the problems she is experiencing like other countries of the world.

This area of working capital management of firms has been neglected in spite of its importance. To the best of the Researcher’s knowledge, only a few Nigerians had studied on this topic. It is on this note that the researcher has deemed it necessary to carry out a study on this area to fill the gap. Using a population sample of all the
Nigerian manufacturing companies quoted on the Nigerian stock exchange (NSE for the period 2000-2011. The study is aimed at examining the impact of working capital management as a measure to profitability.

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Additional information

Type

Project Topic and Material

Category

Accounting

No of Chapters

5

Reference

Yes 

Format

PDF

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