Importance of Working Capital Management on the Profitability of the Manufacturing Companies (a Case Study of Pz Cussoms Industries Plc)
CHAPTER ONE
OBJECTIVE OF THE STUDY
The broad objective of this study is to examine the importance of working capital management on the profitability of manufacturing firm. The specific objective is to:
- Identify the various components of working capital in Pz cussoms industries PLC;
- Identify the level of working capital management in Pz cussoms industries PLC
- Evaluate the impact of working capital management on the profitability of Pz cussoms industries PLC
CHAPTER TWO
REVIEW OF RELATED LITERATURE
CONCEPT OF WORKING CAPITAL MANAGEMENT
Working capital management is that area of finance that is concerned with ensuring adequate levels of current assets to meet current liabilities (Hampton 2007). The management of assets and liabilities concerns management of working capital (Khan and Jain 2007). Also, working capital management is an organization’s ability to efficiently control current assets and current liabilities with a view of maximizing returns on its assets while minimizing the payment of its liabilities (Adelman and Marks 2007). Furthermore, working capital management is concerned with a firm’s decisions which determine the firm’s composition of working capital. It refers to utilization of current assets namely: cash, account receivables, and inventory, and current liabilities: outstanding expenses, account payable, etc (VanHorne and Wachowicz 2008). This involves all those activities which concern the firm’s receipts and payment of cash (Ross, Westerfield, Jaffe and Jordan 2008). Hofmann and Kotzap (2010) concluded that working capital management includes all aspects of the administration of current assets and liabilities. The composition of working capital is always changing with respect to the phases of operations. Breadey, Myers and Marcus (2011) propose that net working capital is a better indicator of current assets and liabilities while cash conversion cycle is considered as effective and adequate indicator of working capital management. The introduction of cash conversion cycle approach by Hager (1976) as a dynamic method of measuring liquidity as against the traditional static liquidity ratios has received recommendation by Largay and Stickney (1980). Brealey, Myers and Marcus (2011) viewed cash conversion cycle as “the longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay payment for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital” (p. 181). Richards and Laughlin (1980) indicate that cash conversion cycle is the interval between the time of actual cash expenditure for production resources and the time cash is received from the sale of the product.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought importance of working capital management on the profitability of the manufacturing companies
Sources of data collection
Data were collected from two main sources namely:
Primary source and Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain importance of working capital management on the profitability of the manufacturing 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 importance of working capital management on the profitability of the manufacturing companies
Summary
This study was on importance of working capital management on the profitability of the manufacturing companies. Three objectives were raised which included: Identify the various components of working capital in Pz cussoms industries PLC, identify the level of working capital management in Pz cussoms industries PLC, evaluate the impact of working capital management on the profitability of Pz cussoms industries PLC. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Pz cussoms industries plc, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made production managers, trade managers, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
This paper examined the importance of working capital management on profitability of Pz cussoms industries plc. From the findings of the study, it became apparent that there exist an inverse relationship between the components of working capital and profitability. It can therefore be concluded that working capital management has significant impact on profitability of manufacturing companies. This means that, managers of manufacturing companies can create more profits for their companies and share holders by keeping each different component of working capital to a possible optimum level.
Recommendation
Based on these findings, the study puts forward the following recommendations:
- Companies should put in place proper inventory management policies to ensure that an optimal level of inventory is kept.
- Managers should ensure that optimum cash balance is held at any point in time.
- Managers should ensure that sound credit collection policies are instituted within the organisation.
- Efforts should also be made to ensure that payments to creditors are not stretched beyond the credit period.
- Finally, companies should make concerted effort to manage their cash, accounts receivables, inventories and accounts payable with a view to reducing the cash conversion cycle so as to increase their profitability
REFERENCES
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- Brealey, R., Myers, S, and Allen, F. Fundamentals of corporate finance,3rd ed.Boston: McGraw-HillPrimis Custom Publishing, 2011.
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- Hager, H. C. “ Cash management and the cash cycle.” Management Accounting, 57; (1976): 78-79
- Hampton, J. J. Financial decision making, concepts, problems and cases, 4th ed. New Delhi: Prentice Hall of India Private Limited, 2007.
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