ABSTRACT

The study examined the working capital management and corporate performance in quoted manufacturing firms in Nigeria.

More specifically, the study sought to assess working capital management and corporate performance among manufacturer firms.

The study 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).

Random sampling 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,

The research instrument was processed manually through coding and run electronically using Statistical Package for Social Sciences (SPSS) to analyse the information from the financial statement.

Result 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 reasonable maximum.

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.

CHAPTER ONE

INTRODUCTION

1.1  Background to the Study

Working 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.

Every 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.

In 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.

Corporate 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.

Liquidity 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.

In 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

An 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).

Existing 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).

Most 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.

Egbide (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.

Hence, 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.