Appraisal of Financial Control System on Organizational Profitability. (a Study of Selected Manufacturing Companies in Ikorodu, Lagos)

Chapter One

Objective of the study

The objectives of the study are;

To investigate the relationship between the use of financial control system and profitability in selected manufacturing companies in ikorodu, Lagos
To ascertain the establish some of the financial control system that significantly contribute to the profitability performance of selected manufacturing companies in ikorodu, Lagos
To Suggest some measures that will enhance the effectiveness of the use of financial control system for better profitability performance of the selected manufacturing companies in ikorodu, Lagos.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 CONCEPTUAL AND THEORETICAL FRAMEWORK

After the comprehensive design and implementation of strategies and plans, it is essential that they are systematically reviewed, evaluated and controlled. Controls are the task to ensure that strategies and plans are executed as agreed and/or adjustments are effected where it becomes necessary. Control has, therefore, become a vital function of management. Control could be seen as a ‘system’ as viewed by the system theorist which is likened to a system where feedback information is obtained, possible adjustment made to the system to attain its goal. Control could be a ‘management function’ which plan and take corrective action where necessary or a ‘process’ that ensures that anticipated results are achieved (Uwuigbe, et al, 2011: and Harley and Emery, 2016). The framework for control consists of four distinct parts namely: the setting of standards, measuring performance, comparing the performance against standards and taking appropriate corrective action when and where necessary ( Kotov 2012; and Ajonbadi et al, 2014). However, some researchers have viewed control as influence exercised on the subordinates to induce compliance with organizational goals (Levine, 2012; and Osadchy and Akhmetshin, 2015). Financial control has been construed as the analysis of a firm’s actual results, compared to its short, medium and long-term objectives and business plans. These analyses require adjustment processes to ensure that business plans are being adhered to and that they are also amended in the event of any anomalies, irregularities or unpredicted circumstances. The need for control as opined by Prempeh, (2015) is that organizations operate in an imperfect world where strategies do not always work as planned, hence control becomes inevitable because of the dynamism in the environment and behavioral factors associated with employees’ motivation. Also it therefore, becomes essential that control measures are incorporated in business strategies to accomplish planned performance. Financial control is a management tool that allows for quick identification and elimination of factors that are not conducive for efficient attainment of goals. These tools could be budgetary control, improved financial reporting, reducing administrative cost reduction and improving efficiency, eliminating or managing unnecessary business risk. (Becker, et al. 2011; and McCrindell, 2015). The concept of profitability has also been a source of concern to managers of firms, this is because of present performance and the uncertainty that lies with the future (Agbaje and Funson, 2018). Sometimes the two terms; profit and profitability could be used interchangeably. However, in a real sense, there are differences between the two words. Whereas the word Profit is an absolute concept, profitability is a comparative term. Profit refers to the total income/sales earned net of total expenses incurred by the firm during a specified period of time, while profitability is a term that relates to how efficient the operations of the firm is. It is the ability of the firm to make profit on sales, which is to get a sufficient return on the capital, land and labor used in the business operations. There are three widely known determine of profitability: Return on Investment (ROI), Return on Asset (ROA) and Return on Equity (ROE) Chowdhury et al., (2018). However, there are divergent opinions among scholars on the supremacy of one measure over the other as a good measurement of profitability. Levine, (2012) posits that the firm’s profitability has a direct relationship with financial development and economic growth in both developed and developing countries

Theoretical Review: Rent Theory of Profitability

The theoretical framework underpinning this study is the rent theory of profitability, which was first propounded by an American Economist, Walker. This was founded on the ideas of Senior and renowned economist J.S. Mill. This theory of profit states that profit is the ‘rent’ of superior entrepreneur over marginal earnings of a less efficient entrepreneur. To them, there was a high level of resemblance between the two terms: rent and profit. Rent is the compensation for the use of land while profit is the return for the ability deployed by the entrepreneur. Just as land differs in terms of fertility, so also, entrepreneurs differ in their abilities. According to the critics of this theory, there cannot be a perfect likeness between these two terms; rent and profit. While rent is generally positive and in rare cases cannot be zero, when entrepreneurs suffer loses, profit can be negative. The theory explains profit as differential surplus rather than a reward for an entrepreneur. (Hunt and Lautzenheiser, 2011).

Importance of Financial Controls

Cash flow maintenance

Efficient financial control measures contribute significantly to the cash flow maintenance of an organization. When an effective control mechanism is in place, the overall cash inflows and outflows are monitored and planned, which results in efficient operations.

Resource management

The financial resources of an organization are at the very core of any organization’s operational efficiency. Financial resources make available all other resources needed for operating a business. Hence, financial resource management crucial in order to manage all other resources. Effective financial control measures hence are crucial to ensure resource management in an organization.

Operational efficiency

An effective financial control mechanism ensures overall operational efficiency in an organization.

Profitability

Ensuring an organization’s overall operational efficiency leads to the smooth functioning of every organizational department. It, in turn, increases productivity. which comes with a direct, positive relationship with Profitability Index The Profitability Index (PI) measures the ratio between the present value of future cash flows to the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment. The Profitability Index is also known as the Profit Investment Ratio (PIR) or the Value Investment Ratio (VIR).. Hence, establishing effective financial control measures ensures improved profitability of any business.

Fraud prevention

Financial control serves as a preventative measure against fraudulent activities in an organization. It can help prevent any undesirable activities such as employee fraud, online theft, and many others by monitoring the inflow and outflow of financial resources.

Examples of Financial Controls

Overall financial management and implementation

Placing certain qualification restrictions and employing only certified, qualified financial managers and staff working with the formulation and implementation of financial management policies
Establishing an efficient, direct chain of communication among the accounting staff, financial managers, and senior-level managers, including the CFO
Periodic training sessions and information sessions among accounting staff, etc. to ensure being updated with the changing laws and evolving business environment concerning business finance
Periodic, thorough financial analysis and evaluation of financial ratios and statements wherever fluctuations are significant
Delegation of financial duties in a segregated and hierarchical fashion in order to establish a chain of operation and efficiency via specialization

Cash inflows

Stringent credit reporting policy for all customers before entering into a creditor-debtor relationship with them
Periodic reconciliation of bank statements to the general ledger in addition to annual reporting for more efficient financial control
Establishing a periodic review policy with all existing customers that the business establishes a creditor-debtor The key difference between a debtor vs. creditor is that both concepts denote two counterparties in a lending arrangement. The distinction also results in a relationship with. It ensures the ongoing creditworthiness of customers and eliminates the probability of bad debts
Support files and backups for all financial data in a separate secured database with access only permitted to senior management staff

Cash outflows

Automatic/subscription payments to be monitored and requiring proper authorization in order to control extravagant business expenditure
Maintaining a vendor database with detailed purchase records with restricted access in order to monitor cash outflow efficiently
Periodic reconciliation of bank statements to the general ledger
Clear and precise expense reimbursement policy to be maintained, including detailed expense reports and receipt verifications in order to curb extravagant business expenses and employee fraud

Empirical Review

Asset Control and Profitability

Iqbal and Mati (2012) examined the relationship between fixed Assets and Firm’s Profitability the scope of research is related to the firm’s profitability and the relationship with the noncurrent assets as managing working capital and capital expenditure efficiently affects the profitability of the firm. Last ten years data of non – financial firms listed at KSE 100 index was taken. It includes Cement, Manufacturing, Engineering, Chemical, Paper, Sugar, Textile, Transport, Tobacco, Vanaspati and Jute etc. For this purpose multiple regression analysis has been utilized to find out the effects of fixed assets (I.V.) on profitability (D.V). It is concluded that there is an association between fixed Asset and firms Profitability indicating hypothesis is accepted. Lydia (2018) assessed the effect of assets management on profitability of deposit taking SACCOs in Nakuru County. The study used explanatory research design, stratified proportional sampling and random sampling technique. The study used both primary and secondary data. Primary data was collected using structured questionnaires. The target population was branch and operations managers from each of the Saccos in Nakuru and management staff from various departments of the Deposit Taking SACCOs from the main office. Data was analyzed using descriptive statistics and inferential statistics methods with the assistance of SPSS as the tool of analysis. A significant moderate positive correlation exists between fixed assets management and profitability of deposits taking Saccos in Nakuru County. Muhammad (2015) examined the efficiency of fixed assets management practices of the selected firms in sugar sector, cement sector and textile sector. The study uses data of listed corporation in the Karachi Stock Exchange, as the sample. The study is based on sample of three sectors (sugar, cement, and textile) over five year period from 2010 to 2014. 15 companies were selected from KSE 100 index and primary data is used for research. There was positive correlation between EPS and fixed asset quality of Textile, cement, and sugar sector when it was analyzed independently while it gave a positive relationship when analyzed together with other performance indicators. Effective use of resources plays important role increasing firm profitability.

Accounting Control System and Profitability

Nunow (2016) sought to find out the effect of accounting control system on small and mediumenterprises profitability in Nairobi. The total population of this study comprised of all registered small and medium sized enterprises in Nairobi with the Federation of Small and micro enterprises estimated at one thousand six hundred from which using a stratified random sampling a sample size of one hundred and sixty. Data was collected using structured questionnaire with the assistance of trained research assistants. The study revealed uncertainty on business sometimes being unable to pay its suppliers on time and if it receives cash discounts from its suppliers upon payment within a stipulated period. From the regression analysis, the results revealed that accounting control system had a positive relationship with profitability. Ademola (2014) examined the effect of accounting control system on the profitability of food and Beverages manufacturing firms in Nigeria. The expost factor research design was used because it involves events that have already taken place in the past. The records observed were from 2000-2011, a period of twelve years .Multiple regression analytical tool was used to test the hypotheses. Data were sourced from Annual Reports of the companies under study. The results show that accounting control system had a negative significant effect with the profitability ratio

Audit Control and Profitability

Internal and External are two types of audit. The objectives of an audit are effectiveness and efficiency of operations. Reliability and integrity of financial and operational information. Safeguarding of assets. Compliance with laws, regulations, and contracts. Auditing helps us to detect error and fraud at an early stage and also helps management to improve with better strategies to quality management system (Arshad, Satar, Hussain & Naseem, 2011). Mugo (2013) investigated and sought to establish the relationship between internal Audit control systems and profitability in Technical Training Institutions in Kenya. The research was conducted using both quantitative and qualitative approaches using Survey, Correlation and Case study as Research Designs. Data was collected using Questionnaires as well as review of available documents and records targeting basically. The study established a significant relationship between audit control system and profitability

Budgetary Control and Profitability

Chircir and Simiyu (2017) examined the influence of budgetary control processes on profitability of Almasi Beverages Group Ltd, Kenya. The study utilized concurrent triangulation research design. The respondents for the study were departmental heads and supervisors numbering 126. The HODs were selected through purposive sampling methods while the supervisors were selected through stratified random sampling method. Questionnaires and interview guide were used to collect primary data. Secondary information was obtained from document analysis of the groups’ financial statements. MLR statistics showed that change in profitability of ABGL was influenced by the four factors studied under budgetary control (human factors, monitoring and evaluation). Nafisatu (2018) sought to evaluate the effect of budgetary control system on the performance of the East African Portland Cement Company Limited. Descriptive research design was used to describe the independent variable whereas explanatory research design was used to describe the relationship between the independent and dependent variables in the study .Questionnaires were used to collect primary data whereas secondary data was obtained from the published accounts of East African Portland Cement Company for the period 2012-2016. A total of 45 staff was sampled using the purposive sampling technique, and data obtained was subjected to regression analysis. The study concluded that there was a high positive correlation of 54.4% between budgetary control and firm’s profitability measured in terms of profit before.

Financial Performance

A well designed and implemented financial management is expected to contribute positively to the creation of a firm’s value (Kiringai, 2002). Dilemma in financial management is to achieve desired trade- off between liquidity, solvency and profitability (Lazaridis & Tryfonidis, 2006).The subject of financial performance has received significant attention from scholars in the various areas of business and strategic management. It has also been the primary concern of business practitioners in all types of organizations since financial performance has implications to organization’s health and ultimately its survival. High performance reflects management effectiveness and efficiency in making use of company’s resources and this in turn contributes to the country’s economy at large (Naser and Mokhtar, 2004). There are various measures of financial performance. For example return on sales reveals how much a company earns in relation to its sales, return on assets determines an organization’s ability to make use of its assets and return on equity reveals what return investors take for their investments. The advantages of financial measures are the easiness of calculation and that definitions are agreed worldwide. Traditionally, the success of a manufacturing system or company has been evaluated by the use of financial measures (Hope and Frazer, 2003). Liquidity measures the ability of the business to meet financial obligations as they come due, without disrupting the normal, ongoing operations of the business. Liquidity can be analyzed both structurally and operationally. Structural liquidity refers to balance sheet measures of the relationships between assets and liabilities and operational liquidity refers to cash flow measures. Solvency measures the amount of borrowed capital used by the business relative the amount of owner’s equity capital invested in the business. In other words, solvency measures provide an indication of the business ability to repay all indebtedness if all of the assets were sold. Solvency measures also provide an indication of the business’ ability to withstand risks by providing information about the operation’s ability to continue operating after a major financial adversity (Harrington and Wilson, 1989). Profitability measures the extent to which a business generates a profit from the factors of production: labor, management and capital. Profitability analysis focuses on the relationship between revenues and expenses and on the level of profits relative to the size of investment in the business. Four useful measures of profitability are the rate of return on assets (ROA), the rate of return on equity (ROE), operating profit margin and net income (Hansen and Mowen, 2005). Repayment capacity measures the ability to repay debt from both operation and non-operation income. It evaluates the capacity of the business to service additional debt or to invest in additional capital after meeting all other cash commitments. Measures of repayment capacity are developed around an accrual net income figure. The short-term ability to generate a positive cash flow margin does not guarantee long-term survivability (Jelic and Briston, 2001). Financial efficiency measures the degree of efficiency in using labor, management and capital. Efficiency analysis deals with the relationships between inputs and outputs. Because inputs can be measured in both physical and financial terms, a large number of efficiency measures in addition to financial measures are usually possible (Tangen, 2003).

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 to appraisal of financial control system on organizational profitability. (A study of selected manufacturing companies in ikorodu, Lagos)

Sources of data collection

Data were collected from two main sources namely:

(i)Primary source and

(ii)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.

Population of the study

Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information on appraisal of financial control system on organizational profitability. 200 staff of selected manufacturing companies in ikorodu, Lagos state was selected randomly by the researcher as the population of the study.

Sample and sampling procedure

Sample is the set people or items which constitute part of a given population sampling. Due to large size of the target population, the researcher used the Taro Yamani formula to arrive at the sample population of the study.

n= N

1+N (e)²

n= 200

1+200(0.05)²

= 200

1+200(0.0025)

= 200 200

1+0.5 = 1.5 = 133.

CHAPTER FOUR

PRESENTATION ANALYSIS INTERPRETATION OF DATA

4.1 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

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain Appraisal of financial control system on organizational profitability. (A study of selected manufacturing companies in ikorodu, Lagos).

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 financial control system on organizational profitability.

5.2 Summary

This study was on Appraisal of financial control system on organizational profitability. (A study of selected manufacturing companies in ikorodu, Lagos). Three objectives were raised which included: To investigate the relationship between the use of financial control system and profitability in selected manufacturing companies in ikorodu, Lagos, to ascertain the establish some of the financial control system that significantly contribute to the profitability performance of selected manufacturing companies in ikorodu, Lagos and to Suggest some measures that will enhance the effectiveness of the use of financial control system for better profitability performance of the selected manufacturing companies in ikorodu, Lagos. 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 selected manufacturing companies in ikorodu, Lagos. 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 up managers, production managers, supervisors and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

The financial control function is paramount for every firm to adopt. This is because many studies have revealed that the application of quality financial control mechanisms brings about efficiency and effectiveness in operations that snowball to superior performances. Since, the business environment is dynamic and highly competitive therefore strategic planning is a fundamental prerequisite for survival and growth. However, planning without control is incomplete, because control ensures monitoring and evaluation of the plan. The manufacturing sector is vital because the sector generates employment opportunity to many Nigerians even in the face of decaying infrastructure and the harsh current economic reality on the ground. The sector has contributed to the country’s GDP, improving the standard of living and has served as the engine room for achieving the much desired economic transformation program, tagged as Nigeria Vision 20: 2020.

Recommendation

To achieve this vision, the sector needs to take advantage of the cluster development strategy for manufacturing and processing industries.

Financial control and profitability performance of the participating firms suggest the need to extend the study beyond the manufacturing firms to other sectors of the economy in other make a meaningful contribution to the economic growth and development of the nation.

References

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