Effect of Working Capital Management or Inventory Management Practices on the Performance of Food Business in Maiduguri Metropolitan Council
Chapter One
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To determine the effect of the Current Ratio as a working capital management tool on the performance of the food business in the Maiduguri Metropolitan Council
- To assess the effect of Quick Ratio as a working capital management tool on the performance of the food business in the Maiduguri Metropolitan Council
- To examine the effect of Cash ratio as a working capital management tool on the performance of food business in the Maiduguri metropolitan council
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Working Capital Management
Gitman (2012) describes working capital management as the regulation, adjustment, and control of the balance of current assets and current liabilities of a firm such that maturing obligations are met, and the fixed assets are properly serviced. Pandey (2013) defines current assets as those assets which in the ordinary activities of the firm will be converted into cash within one year and current liabilities as those liabilities which are intended, at their inception to be paid in the ordinary course of business in a year. According to Bhattacharya (2006), the concept of working capital was perhaps first evolved by Karl Marx, though in a somewhat different form, and the term he used was “variable capital”. Guthmann and Douglas (2011) defined working capital as current assets minus current liabilities and their view was elaborated by Park and Gladson (2013). This definition is also known as net working capital. Current assets are sometimes called as gross working 3 capital. The current assets can be divided to four primary components: cash and cash equivalents; marketable securities; accounts receivable; and inventory and the three major items of current liabilities are: accounts payable; expenses payable, including accrued wages and taxes; and notes payable (Cheng et al., 2009). Narrower definition for working capital is inventory + accounts receivable accounts payable. This definition emphasizes operating efficiency of a firm (Lukkari, 2011). Working capital management involves managing the firm’s inventory, receivables and payables in order to achieve a balance between risk and returns and thereby contribute positively to the creation of a firm value. Excessive investment in inventory and receivables reduces the profit, whereas too little investment increases the risk of not being able to meet commitments as and when they become due. The working capital includes all the items shown on a company’s balance sheet as short term or current assets, while net working capital excludes current liabilities. These measures are considered useful tools in accessing the availability of funds to meet current operations of companies. Therefore, the importance of maintaining an appropriate level of working capital and its contribution to business survival is a concept that should be understood by every company (Harris, 2005). There are different approaches for the management of working capital. Two basic policies of working capital management are namely aggressive working capital management policy and conservative working capital management policy. Aggressive investment policy with high levels of fixed assets and low investment in current assets may generate more profits for a firm. However it also accompanies a risk of insufficient funds for daily operations and for payment of short term debts. A conservative investment policy is opposite to it with less investment in fixed assets and more in current assets. For financing of working capital aggressive policy implies that current liabilities are maintained at a greater portion as compared to long term debts. High level of current liabilities requires more resources to be in liquid form to pay back debts earlier. But current pay outs bear less rate of interest and hence can cause more savings. In conservative working capital financing policy a greater portion of long term debts is used in contrast to current liabilities (Nyabuti and Alala, 2014). The cash conversion cycle is a popular measure of working capital management used in many studies (Deloof 2003 and Jose et al. 2012). It is the time between purchase of raw materials and getting finished goods paid. Longer cash cycle means more investment on working capital. Reducing cash conversion cycle to a reasonable minimum generally leads to improved profitability, but in some cases longer cash cycle might increase profitability because it leads to higher sales (Deloof 2003)
Financial Performance
Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm‟s overall financial health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggression. Financial performances can be measured by the rate of return on investment (Nyabutiand Alala, 2014). The management of a firm working capital affects its performance. Ricci and Vito (2000) argues that the basic purpose of managing working capital is controlling of current financial resources of a firm in such a way that a balance is created between profitability of the firm and risk associated with that profitability he performance of a firm can be measured in several ways. Brigham and Gapenski (2012) argue that the measures of profitability can either be book value based or market value based. They contend that accounting ratios such as Tobin‟s Q, ROE and ROA can be used to measure firm‟s performance Biwott (2011) and Kithii (2008), used (ROA). Aquino (2010) used the ratio of net income after taxes to stockholders’ equity (ROE).
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 effect of working capital management or inventory management practices on performance of food business in Maiduguri metropolitan council
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 effect of working capital management or inventory management practices on performance of food business in Maiduguri metropolitan council. 200 staff of selected food business in Maiduguri, borno state was selected randomly by the researcher as the population of the study.
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 effect of working capital management or inventory management practices on performance of food business in Maiduguri metropolitan council. 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 working capital management or inventory management practices on performance of food business in Maiduguri metropolitan council
Summary
This study was on effect of working capital management or inventory management practices on performance of food business in Maiduguri metropolitan council. Three objectives were raised which included: To determine the effect of Current Ratio as a working capital management tool on the performance of food business in Maiduguri metropolitan council, to assess the effect of Quick Ratio as a working capital management tool on the performance of food business in Maiduguri metropolitan council, to examine the effect of Cash ratio as a working capital management tool on the performance of food business in Maiduguri metropolitan council. 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 food business in maiduguri. 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 managers, sale representatives, senior staffs and junior staffs were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
Working capital management is a very important component of financial performance because it directly affects the liquidity and profitability of the company Management performance would be improved by managing working capital efficiently. Ordinary Least Square (OLS) regression found that cash conversion cycle is positively associated to the Return on Equity (ROE). The results show that managers can improve their performance by managing working capital efficiently. Accounts payables period and inventory turnover period components of cash conversion cycle have positive relationship with return on Equity. This study found that the relationship between the Accounts Receivables and Return on Equity is negative. This implied that an increase in Accounts Receivables results to a decrease in return on assets .This is in agreement to Atrill (2006) who attributes low receivable collection potential among the SMES to lack of proper debt collection procedures such as prompt invoicing and sending out regular statements. This 38 causes the increase risk of late payment and defaulting debtors. Deloof (2003) also found that firms can increase their profitability by reducing the debtors‟ collection period.
Recommendation
There is need for a more comprehensive sector wise study on the relationship between working Capital and financial performance among food businesses. This could be necessary since the various sectors are uniquely constituted. Another study is also recommended taking into account macroeconomic factors such as inflation and prevailing interest rates which would be more representative of the real business environment.
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