The Effect of Working Capital Management on the Profitability of Corporate Firms (a Case Study of Unliver, Pz Cusson ,indomie, Viju, Coca Cola Companies)
CHAPTER ONE
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the significant curvilinear relationship between accounts receivable and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist
- To ascertain the significant curvilinear relationship between accounts payable and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist.
- To evaluate the significant curvilinear relationship between inventory and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist
CHAPTER TWO
REVIEW OF RELATED LITERATURE
WORKING CAPITAL MANAGEMENT
The term working capital has several meanings in business and economic development finance. In accounting and financial statement analysis, working capital defined as the firm’s short-term or current assets and current liabilities. Net working capital represents the excess of current assets over current liabilities and is an indicator of the firm’s ability to meet its short-term financial obligations (Brealey & Myers, 2002). Effective working capital management consists of applying the methods which remove the risk and lack of ability in paying short term commitments in one side and prevent over investment in these assets in the other side by planning and controlling current assets and liabilities (Lazaridis & Tryfonidis, 2006). Working Capital Management is the administration of current assets and current liabilities. It deals with the management of current assets and current liabilities, directly affects the liquidity and profitability of the company (Deloof, 2003; Eljelly, 2004; Raheman and Nasri, 2007; Appuhami, 2008; Christopher and Kamalavalli, 2009; Dash and Ravipati, 2009). Current liquidity crisis has highlighted the significance of working capital management. Management of working capital has profitability and liquidity implications and proposes a familiar front for profitability and liquidity of the company. To reach optimal working capital management firm manager should control the tradeoff between profitability maximization and liquidity accurately (Raheman & Mohamed, 2007). An optimal working capital management is expected to contribute positively to the creation of firm value (Howorth & Weshead, 2003; Deloof, 2003; Afza & Nazir, 2007). Working capital management is important due to many reasons. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment. However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations Horne and Wachowicz, (2000). Efficient working capital management involves planning and controlling. According to Harris (2005) Working capital management is a simple and straightforward concept of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities. Nevertheless, complete mean and approach preferred to cover all its company’s activities related to vendors, customer and product, (Hall, 2002).
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
The data set for this quantitative study included quarterly financial information from publicly traded companies listed on the Nigeria Stock Exchage (NSE). Quarterly data from non-financial firms in the Nigeria Stock Exchage (NSE) for the years 2003-2012 was collected. The period was chosen to analyze a full economic cycle to examine in Nigeria (Visan, & Ailenei, 2013). A full economic cycle for this study consisted of an increase of production of the economy from boom to bust (Visan, & Ailenei, 2013).
This research study utilized standard data panel analysis to examine the selected data set. Panel data analysis allowed for control of unobservable heterogeneity since firms are heterogeneous and have difficulty measuring characteristics that influence firm value (Baños-Caballero, Garcia-Teruel, & Martinez-Solano, 2014). Examination of only non-financial firms offered consistent insight into working capital management and firm value since financial firms do not have the same working capital structure as non-financial companies (Tauringana & Afrifa, 2013).
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Statistics and Data Analysis
Table 1 describes the descriptive statistics after winsorization of the data (Note 3). The descriptive statistics included the mean, standard deviation, minimum, maximum, the 25th percentile, and the 75th percentile.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was the effect of working capital management on the profitability of corporate firms a case study of unliver, pz cusson ,indomine, viju, coca cola companies
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the effect of working capital management on the profitability of corporate firms a case study of unliver, pz cusson ,indomine, viju, coca cola companies
Summary
This study was on the effect of working capital management on the profitability of corporate firm in a case study of unliver, pz cusson ,indomine, viju, coca cola companies. Three objectives were raised which included: To ascertain the significant curvilinear relationship between accounts receivable and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist, to ascertain the significant curvilinear relationship between accounts payable and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist, to evaluate the significant curvilinear relationship between inventory and firm value, after accounting for firm size, leverage, financial distress, and sales growth does not exist. In line with these objectives, two research questions and hypotheses were formulated. The total population for the study is 200 selected staff of unliver, pz cusson ,indomine, viju, cocacola companies in Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study.
Conclusion
The conclusion of this study was that when efficient working capital management leads to better financial performance, then one should expect a negative relationship between the financial performance and the working capital measures. The study shows that profitability of manufacturing firms depends upon effective working capital management. Gross operating profit is positively related with average collection period and average payment period. It is therefore profitable to delay payables and invest the money in different profitable ventures/areas. On the other hand firms should collect receivables as soon as possible because it’s better to receive inflows sooner than later. Gross operating profit on the other hand is negatively correlated with the cash conversion cycle. The study therefore concludes that there is a relationship between the various components of working capital indicating that effective working capital management has a great impact on profitability
Recommendation
The relationship between inventory turnover period and firm’s profitability is also negative; this implies that a decrease in inventory turnover days results to increased profitability. The inventory turnover period is the number of days required to order raw materials, produce and sell product. Therefore it depends on both production and sales processes. Production time is subject to nature of product, automation level and technology used. Firms therefore must make a trade-off between speed of production, product quality and cost of innovation. Sales process elsewhere depends on product readiness to satisfy customer needs when required. Merits of firms reducing inventories includes reduced warehouse space, reduced obsoleteness of products, low depreciation and low deadweight costs associated with inventories such as cash tied up in raw materials or work-in-progress which could be profitability used elsewhere. The study recommends that the longer the accounts payable, the better the profitability this could be due to good name created by suppliers and suppliers will not interrupt supplies to the firm which in turn leads to smooth operation during the year and ends up with better profitability.
REFERENCES
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- Brealey-Myers (2002), ‘Principles of corporate Finance,’ 6th ed. Mc Graw-Hill Book Company, New-York, 445.
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