The Management Of The Working Capital In Manufacturing Companies

Description

ABSTRACT

Working capital represents short-term assets available to a business for meeting financial obligations such as payroll, creditors and suppliers. A company with insufficient working capital can have liquidity problems even when their asset position and profitability is healthy. Manufacturing companies are subject to working capital challenges because supplier and production expenses frequently require payment several months before goods are sold to customers.

Working capital is near the top of the list among business challenges currently faced by manufacturing companies. The only issue ranked as a more serious concern — escalating costs — is also directly related to working capital and cash flow. One accounting description of working capital is expressed as a financial formula in which net working capital equals current assets minus current liabilities. When this calculation produces a negative number, a business has negative working capital and should be alert for near-term cash flow problems. Working capital management by manufacturers and other businesses is designed to anticipate and resolve such difficulties before they cause normal payments to be delayed. Manufacturing financial managers have several potential strategies to review for cash flow improvement. Two of these are lean manufacturing and asset financing. The aim of this study is to examine the effect of working capital management on liquidity, profitability and overall management of the manufacturing companies.

TABLE OF CONTENT

COVER PAGE

APPROVAL PAGE

DEDICATION

ACKNOWLEDGEMENT

TABLE OF CONTENT

• INTRODUCTION

1.1BACKGROUND OF THE STUDY

1.2 STATEMENT OF THE PROBLEM

1.3 RESEARCH QUESTION

1.4      OBJECTIVE OF THE STUDY

1.5 RESEARCH HYPOTHESIS

1.6 SIGNIFICANCE OF THE STUDY

1.7 SCOPE OF THE STUDY

1.8 DEFINATION OF TERM

CHAPTER TWO

2.0   LITERATURE REVIEW

2.1   CONCEPT OF WORKING CAPITAL MANAGEMENT

2.3 EMPHIRICAL REVIEW

CHAPTER THREE

3.1 RESEARCH DESIGN

3.2 POPULATION OF THE STUDY

3.3 METHOD OF DATA COLLECTION

3.4 SAMPLING SIZE AND SAMPLING TECHNIQUE

SAMPLING METHOD

3.5 SOURCE OF DATA

3.6 METHOD OF DATA ANALYSIS

CHAPTER FOUR

4.1 PRESENTATION AND ANALYSIS

4.1. 1 PRESENTATION OF DATA AND ANALYSIS

4.2 TESTING OF HYPOTHESIS

4.3 DISCUSSION OF FINDINGS

CHAPTER FIVE

5.0 SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY

5.2 CONCLUSION

5.3 RECOMMENDATIONS

CHAPTER ONE

• INTRODUCTION

1.1BACKGROUND OF THE STUDY

It is surprising that most of the companies go bankrupt and collapse not because they are not profitable but because their inability to meet their mature obligations. This is usually due to the inefficient management of their working capital, particularly in manufacturing companies. Therefore, the survival of a company depends largely on the availability of adequate working capital as well as the proper management of each of its component to have optimality.

Working Capital management involves the relationship between a firms short term assets and its short term liabilities. The basic goal of the working capital is to ensure that a firm is able to continue its operation and has sufficient ability to satisfy both maturing short term debts and upcoming operational expenses. This is done so as to avoid two ugly situations of our capitalization and under capitalization.

Over capitalization according to olowe (2007) is an inefficient working capital management that results in excessive stocks, debtors and cash with very few creditors. The implication of this is that, it impairs te firm’s profitability as idle investment earns nothing. The idle investment could have been invested in other profitable investment like marketable securities.

Under capitalization on the other hand occurs if a firm is trying to support large volume of production with little long term capital at its disposal.

The implication is that it can threaten the solvency of a firm because of its inability to meet its current and manufacturing obligation.

Thus the ultimate aim of management of working capital is to maintain an optimum level of working . in maintaining an optimum level of working capital the company must avoid our capitalization and under capitalization.

1.2 STATEMENT OF THE PROBLEM

The survival of a business firm or company depends largely on its ability to properly manage its working capital components. The prevailing issue of management of resources in the country particularly the manufacturing companies has made it to be paramount importance to look into the management of working capital in this sector.

An efficient working capital management lead to over trading or under trading. The result of these two unfavorable condition lead to insolvency or lower return on capital employed. It adversely affects the profitability and liquidity of a company. This study intend to address the problem of inefficiency in the management of working capital in manufacturing companies by solving the problem, the manufacturing company in particular should be able to manage the components of its working capital in order to maintain an optimum level of working capital.

1.3 RESEARCH QUESTION

This study provided answers to the following research questions

1. How effective does the working capital management of LUBCON Nigeria LTD enhances its profitability?
2. Has LUBCON Nigeria ltd been able to manage its trade debtors, stock and trade creditors efficiency?

1.4      OBJECTIVE OF THE STUDY

       The main objective of the study is to examine the effect of working capital management on liquidity, profitability and overall management of the manufacturing companies

Sequences to this, the following are specific objective of the study

1. To assess the impact of working capital on the liquidity and profitability as well overall management of the company
2. To examine the optimal level of working capital, which the company should maintain in order to avoid over trading and under trading.

1.5 RESEARCH HYPOTHESIS

In order to achieve the stated objectives and to solve the problem earlier highlighted, the following hypothesis stated below would be tested empirically.

HYPOTHESIS 1

HO: Efficient management of the working capital does not enhance liquidity and profitability of the business

HYPOTHESIS 2

HO: Efficient working capital management enhances overall performance of the company.

1.6 SIGNIFICANCE OF THE STUDY

The preparation of working capital cycle serves the following purpose

1. It gives insight into the amount of cash investment required to finance working capital cycle, the higher the cash investment required and vice-versa
2. It serves as an improvement in working capital ratio for control purpose.
3. The comparison of a company’s present working capital companies in the same industry may reveal area where liquidity can be improved upon

1.7 SCOPE OF THE STUDY

The scope of the study covered the management of the working capital in manufacturing companies of LUBCON Nigeria limited in particular. It takes care of the management of working capital and its impact the liquidity, profitability as well as the overall management of LUBCON Nigeria limited. The case study is needed in order to keep us written the management of LUBCON Nig limited.

1.8 DEFINATION OF TERM

             This Is the Definition of Some Key Term that are basically used in the cause of discussion on the study

1. LUDUIDITY: it is the amount of cash asset that a company has or can obtain to transact business with or finance it operation
2. CURRENT ASSEST: these are asset which can be converted into cash within and accounting period usually a year.
3. CURRENT LIABILITIES: There are liabilities which fall due within a year. These include trade creditor banks overdraft and accrued expenses.
4. OVER TRADING: this term is use to describe a situation where an organization operate than what its resource can cope with.
5. UNDER TRADING: This is an inefficient working capital management that results in excessive stocks, debtors, cash.

CHAPTER TWO

• LITERATURE REVIEW
• CONCEPT OF WORKING CAPITAL MANAGEMENT

This chapter will discuss the review of related literature on management of each components of working capital such as cash, debtors, inventories and track creditor with regard to the impact on liquidity and profitability.

According to message and shows. H(2002) working capital refers to cash of a business required for day to day operation or more specially for financing the conversation of raw materials into finished goods which the company sells for payment (Olowe 2002) defined working capital by calculating as current assets less current liabilities of the company