WORKING CAPITAL MANAGEMENT AND CORPORATE PERFORMANCE IN QUOTED MANUFACTURING FIRMS IN NIGERIA
examined the working capital management and corporate performance in quoted
manufacturing firms in Nigeria.
specifically, the study sought to assess working capital management and
corporate performance among manufacturer firms.
consist of five (5) out of twenty four (24) companies listed on the Nigerian
Stock Exchange (NSE) in the manufacturing sector of the economy (Guinness Plc,
Dangote Plc, Nestle Plc, Cadbury Plc and Unilever Plc).
technique was employed in determining the sample size, furthermore the research
design adopted secondary data which involves comparative analysis of the
variables which are working capital management and corporate performance and
were represented with proxies such as return on asset, return on equity, and
net profit margin,
instrument was processed manually through coding and run electronically using
Statistical Package for Social Sciences (SPSS) to analyse the information from
the financial statement.
from the study indicated that Firm’s
size and current ratio has positive and significant effect on corporate performance.
Also managers should
create value for their shareholders by reducing the number of day’s account
receivable and increasing the accounts payment period and inventories to a
Base on this, the study advised that
manufacturing firms should improve their stock management in order to tie up
less cash inventories., secondly, manufacturing firms should source for long
term funds to replace short term borrowings and build up cash reserves., and
latsly, manufacturing firms should embrace a dividend policy that retains
profits within the company.
1.1 Background to the Study
capital management of a firm has been recognized as an important area in
financial management. The main goal of working capital management is to teach
and keep an optimized balance between each component of working capital
(Gitmen, 2009). Traditional concept of working capital is the difference
between current assets and current liabilities, which does not provide an accurate
concept of corporate liquidity.
organization whether profit oriented or not and irrespective of size and nature
of the business requires necessary amount of working capital. Working capital
is the most crucial factor for maintaining liquidity, survival, solvency and
profitability of business (Mukhopadhyay, 2004). All individual components of
working capital include cash, marketable securities, account receivables and
inventory management play a vital role in the performance of any firm.
the management of working capital, the firm is faced with two key questions.
First, given the level of sales and the relevant cost considerations, what are
the optimal amounts of cash assets, account receivable, and inventories that a
firm should choose to maintain? Second, given these optimal amounts, what is
the most economical way to finance these working capital investments? To
produce the best possible returns, firms should keep no unproductive assets and
should finance with the cheapest available sources of funds.
performance is a composite assessment of how well an organization executes on
its most important parameters, typically financial, market and shareholder
performance. It is a subset of business analytics /business intelligence that
is concerned with the health of the organization, which is traditionally
measured in terms of financial performance. However, in recent years, the
concept of corporate health has become broader.
and profitability are two important and major aspects of corporate business
life (Dr K.S.Vataliya, 2009). The problem is that increasing profits at the
cost of liquidity can bring serious problems to the firm. Therefore, there must
be a trade-off between the liquidity and profitability of firms. One of these should
not be at the cost of the other because both have their own importance. If
firms do not care about profit, they cannot survive for a longer period. Also,
if firms do not care about liquidity, they may face the problem of insolvency
or bankruptcy. For these reasons, managers of firms should give utmost
consideration for working capital management as it does ultimately affect the
profitability of firms. As a result, companies can achieve maximum
profitability and can maintain adequate liquidity with the help of efficient
and effective management of working capital.
addition, the effective working capital management is very important because it
affects the performance and liquidity of the firms (Taleb et al., 2010). The
main objective of working capital management is to reach optimal balance
between working capital management components (Gill, 2011).
1.2 Statement of Research Problem
ideal business requires sufficient resources to keep it going and ensures that
such resources are maximally utilized to enhance its profitability and overall
performance. Working capital and its effect on firms’ Performance has been
studied by different researchers (Padachi, K. (2006); F.Finau, (2011); Fathi
and Tavakkoli (2009).
researchers among whom are; Filbeck and Kruger(2005), Nyabwanga, Ojera,
Lumumba,Odondo, Otieno (2012) to mention a few, have stated that most
successful organisation do not have problem with management of working capital
components, but this is actually misleading, because this research work has
identified a gap in this findings, by establishing that successful organisation
still have problems with management of working capital components which is in
agreement with the study of mathuva,(2010), Rahman et al.,(2010).
of these and other researchers identify significant association between working
capital and corporate performance. It has however been discovered that some
methods that managers use in practice to make working capital decisions do not
rely on the principles of finance, rather vague rules of thumb or poorly
constructed models are used (Emery, Finnerty and Stowe, 2004). This, however,
makes the managers not to effectively manage the various mix of working capital
component which is available to them, and as such, the organization may either
be overcapitalized or undercapitalized or worst still, liquidate.
(2009) finds out that a large number of business failures in the past have been
blamed on the inability of the financial manager to plan and control the
working capital of their respective firms. These reported inadequacies among
financial managers is still practiced today in many organizations in the form
of high bad debts, high inventory cost etc, which in turn adversely affect
their operating performance.
lack of proper research study and utilization of the working capital for the
improvement of corporation in terms of performance in Nigeria has constituted
the problem of limited awareness in relation to working capital to increase
firms’ performances. Hence, there is the need to study the effect of working
capital to enhance the performance of corporations in Nigeria.