1.1 Background to the Study
The current scarcity of cash and credit
is threatening the survival of many businesses in all over the world
primarily in Nigeria as its considered the sources of company’s working
assets and liabilities referred to as working capital. it is a fact that
corporations could not exist without working capital and this is
undeniable. Eventually, the management of working capital (WCM)
necessitates short term decisions in working capital (WC) and financing
of all aspects of both firms short term assets and liabilities.
This explains the fact that firms with
inadequate working capital are in financial strait jacket. As the name
implies, working capital refers to the funds that are required for the
day to day running of the activities of a firm. it is the excess of
current assets over current liabilities. Working capital management
involves the relationship between a firms short term assets and its
short term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has
sufficient ability to satisfy both maturing short term debt and upcoming
operational expenses. In view of that, working capital management has
become one of the most important issues in the organizations where many
financial executives strive to identify the basic working capital
drivers and the appropriate level of working capital (Lamberson 1995).
The management of working capital
involves managing inventories, account payables, account receivables and
cash. Large numbers of business failure has been attributed to the
inability of financial managers to plan and control the current assets
and current liabilities of their respective organizations. This explains
why working capital management is vital to firms with limited access to
the long term capital market. The working capital measures both a
company’s efficiencies and its short term financial health. It also
gives investors an idea of the companies underlying operational
efficiency. The working capital shows a company’s efficiency, financial
strength and cash flow health which also helps in determining the
profitability and risk as well as its value (Smith 1980).
The significant of working capital had
been highlighted in most of the literature of WCM i.e. Eljelly (2004)
described that the efficient WCM are engaged with planning and
controlling current assets and liabilities in such a way that eliminates
the risk of inability to meet short term obligations in hands with the
avoidance of excessive investments in these assets. Siddiquee and khan
(2009) indicate that the inefficient management of WC not only reduces
profitability but ultimately may also lead a concern to financial crisis
thus every organization irrespective of its profit orientation, size
and nature of business needs requisite amount of WC. Consequently, the
efficient WCM is the most crucial factor in maintaining survival,
liquidity, solvency and profitability of the concerned business
organization. Thus, we could say that approach in managing working
capital has enormous influence to the firm’s performance.
The importance of working capital in the
day to day running of the business activities of a firm are stated in
the books. Having said that working capital is the live wire of a
business, it is expected that effective provision of it will ensure
greater success of a company while in — effective management of it will
lead to ultimate downfall of what otherwise might be considered as a
prosperous concern. Working capital is important to the operations of a
firm but the maintenance of a working capital is more crucial. This is
because excessive working capital means holding costs and idle funds
which earns no profits for the firms is dangerous while inadequate
working capital which means not having sufficient funds only limits the
firm’s profitability but also results in production interruptions and
inefficiencies and sales disruptions.
1.2 Statement of the Problem
Working capital management is a
managerial accounting strategy focusing on maintaining efficient levels
of both components of working capital, current assets and current
liabilities in respect to each other. Generally speaking, the immediate
problem facing most financial managers always centers on the best way to
ensure suitable survival of the business as well as its expansion in
terms of working capital management.
A firm or company should be in a sound
working capital position. It should have adequate working capital to run
its business operations. One should note that both excessive as well as
inadequate working capital position are dangerous to any business,
therefore a company is required to maintain a balance between liquidity
and profitability which are sometimes conflicting objectives while
conducting its day to day activities.
However, financial managers are faced
with the major problem of obtaining an optimum level of working capital
which is a situation whereby working capital managers are able to avoid
the problem of holding idle funds which earns no profit for the firm and
inadequate working capital which reduces the firm’s profitability as
well as production interruptions and inefficiencies. The credit policy
of a firm is another bottleneck confronting working capital management. A
flexible credit policy adopted by the management in most cases results
in writing off a high proportion of bad debts while a rigid credit
policy reduces the level of sales and also scares away customers.
Therefore, financial managers are faced with the problem of determining
an effective and efficient credit policy which should be in line with
their company’s goals and objectives.
Fraud is almost in every organization
and this is also a big problem to working capital managers since working
capital management requires a substantial part of the capital held in
liquid cash so as to run the day to day activities of a firm. Financial
managers are faced with the task of providing adequate security in order
to prevent embezzle of money meant for the organization. Working
capital management is mostly important to firms in developing economics
because they are faced with many problems such as; low investment, low
sales, lack of resources, low level of product and process technology,
small market, lack of access to capital, lack of physical
infrastructure, production capacity to satisfy demand (because they are
small), thereby, making inventory management more crucial. Most of the
Nigerian firms do not have access to capital and lack the opportunity of
getting the benefit of financial market.
Working capital policy is one of the
minimizing committed finance whereas working capital management is an
optimizing process aimed at filling the minimization policy to
operational requirement. This implies that inefficient and ineffective
management of working capital will hinder the growth and survival of the
A survey of empirical literature on the
determinants of working capital and its effect on profitability showed
that few studies have been conducted on these issues in both developed
and developing countries. Many of these studies identified such factors
as size, leverage, operating cash flow among others as major
determinants of working capital while few found negative effect of
working capital management on profitability. However, it was observed
that most of the existing studies focused only on developed economies.
Not many studies have focused on firms’ in developing countries. In
addition, none of the existing studies has addressed the issue of long
run relationship between working capital and profitability and the
direction of causation between the two phenomena. These are the main
gaps that this study intends to fill. Firstly, this study is focused on
firms’ in Nigeria. Secondly, it does not only examine the determinants
of working capital and its effect on profitability but also investigates
the relationship between working capital management and profitability.
1.3 Objectives of the Study
The broad objective of this study is to
examine the effect of working capital management on the profitability of
manufacturing firm. The specific objective is to:
(i) Investigate the various components of working capital in Cadbury Nigeria PLC.
(ii) Examine the level of working capital management in Cadbury Nigeria PLC and
(iii) evaluate the impact of working capital management on the profitability of Cadbury Nigeria PLC.
1.4 Research Questions
This study intends to provide answers to the following questions;
(i) What are the components of working capital management in Cadbury Nigeria PLC?
(ii) How effective does the working capital management of Cadbury Nigeria PLC enhances its profitability?
(iii) Has Cadbury Nigeria PLC been able to manage its trade debtors, stock and trade creditors effectively?
1.5 Research Hypotheses
The main purpose of this study is to
examine the effect of working capital management on profitability, This
will form the basis for formulating the hypotheses which will be tested
and validated with a view to making some recommendations.
Ho: Working Capital Management of Cadbury Nigeria PLC does not enhance its profitability
Hi: Working Capital Management of Cadbury Nigeria PLC enhances its profitability
Ho: Cadbury Nigeria PLC does not have an optimum level of working capital management
Hi: Cadbury Nigeria PLC has an optimum level of working capital management.
1.6 Significance of the Study
This study is generally designed for the
benefits of all investors and owners of manufacturing companies who
have not adopted any policy on working capital management. To investors
and owners of firms, a good working capital management indicates sound
liquidity position of the company meaning that the company is well
managed, financed and sound. From the research, the firm ability to
finance long and short term liabilities is determined. Since investors
wish to invest therefore, proper study of the firm’s working capital
position must not be overlooked.
Apart from the above, the study will
also highlight certain problems associated with the management of
working capital and equally give useful information on the possible
means of improvements in the university’s library and for other students
who may wish to embark on the research of working capital management in
Finally, the general public may find
this work useful in areas where they wish to broaden their knowledge on
working capital management in business organization.
1.7 Scope of the Study
This project is meant to cover the
working capital management in manufacturing companies with particular
reference to Cadbury Nigeria PLC. However, it is restricted to the
general management of current assets and current liabilities. The study
shall cover a period of 5 years from 2009- 2014 .Because of the
importance of working capital management as a tool for cost reduction
and improvement in profitability, the study is been conducted in other
to evaluate the effect of working capital management on firm’s