WORKING CAPITAL MANAGEMENT AND FIRMS PERFORMANCE: A STUDY OF MANUFACTURING COMPANIES IN NIGERIA

ABSTRACT

This study investigated the relationship between working capital management measured by account receivable period (ACRP), inventory period (INVP), cash conversion cycle (CCC) and sales Growth (SG) and profitability performance measured by returns on assets (ROA). The study utilized secondary data obtained from the annual financial statements of Nigerian Manufacturing companies listed on the Nigerian Stock Exchange (NSE) for period 2008 – 2012. Multiple regression model were adopted for testing all the hypotheses and the study result reveals that there was a negative significant relationship between the account receivable period and profitability of the Nigerian Manufacturing companies. It also reveals that the profit is significantly influenced by the number of days inventory were held (INVP) and that the profitability performance negatively and significantly related to the cash conversion cycle (CCC). These results suggest that effective policies must be formulated for the individual components of working capital. Furthermore, efficient management and financing of working capital (current assets and liabilities) can increase the operating profitability of manufacturing firms.

CHAPTER ONE

INTRODUCTION

1.1             Background To The Study

Working Capital management of a firm, which deals with the management of current assets and current liabilities, has been recognized as an important area in financial management. Working capital (WC) refers to the firm’s investment in short-term assets.  Pandey, (2005) classified working capital into gross and net concepts.  He defined gross working capital as the firm’s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and these include; cash, short-term securities, debtors, bills receivables and stocks. He described net working capital as the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. These include trade creditors, bills payable, bank overdraft and short- term loan. Home van, (2000) described working capital management as involving the administration of these assets namely cash, marketable securities, receivables and inventories and the administration of current liabilities.

Management of these short-term assets and liabilities is important to the financial health of business of all sizes.