The effect of working capital management on profitability of the organization

The effect of working capital management on profitability of the organization

ABSTRACT

For the successful working of any business organization like Dangote Flour Mills Plc, fixed and current asset play a vital role.  Management of working capital is essential as it has direct impact on organizational performance. An attempt has been made in this research work to study the working capital components and the effects of working capital management on organizational performance of Dangote Flour Mills Plc. The research also makes an attempt to study the correlation between the assets of the organization and their organizational performance. The study is based on a secondary data collected from annual reports of Dangote Flour Mills Plc for the study period of 2002 – 2004. The ratio analysis, percentages method and coefficient of correlate have been used to analyze the data.

CHAPTER ONE

1.1            BACKGROUND OF THE STUDY

Working capital is an important issue during financial decision making since it has being part of the investment in asset that requires appropriate finance in investment. However, working capital always being this regard in financing decision making since it involve investment and financing short term period. Also organization cannot over-rule the indispensability of an orderly organized system needed to account for their activities of the organization. Suitable systems for each organization are therefore designed in accordance with the outlined or tasted goals and objectives.

However, the basis for choice and decision making which is invariably a function of organizational performance could be narrowed down to the provisions of working capital management. Furthermore it could be divulged in time past that the structure of working capital developed was a response to the natural demands of Dangote Flour Mills Plc in Nigeria the crucial part in managing working capital management is required, maintaining its liquidity in day to day operation to ensure its smooth running and meets its obligation (levelly 2004) yet this is not a simple task since managers must make sure that business operations is running in efficient and profitable manner. There are the possibilities of mis-match of current asset and current liability during the process. If this happens and firm’s managers cannot manage it properly then it will affect firm’s growth and profitability. This will further lead to financial distress and finally firms can go bankrupt. The performance of an organization could really be seen from its communicated information juxtapose with the highlighted aims and objectives. This communicated information is a conclusion of a working capital management which serves as a basis in the collection, processing and reporting of data. The relevance of information generated is very essential as this serves as pivotal factor in organizational performance.

According to Van Horne (1977) working capital management is the administration of current assets in the name of can marketable securities, receivable and inventories. Osisioma (1977) described 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 served in order to manage working capital effectively, there must exist two elements as necessary component and desirable qualities. The maintenance of excessive level of current can easily result in a substandard return on a firm’s investments. Current assets may insure shortages and have difficult in smoothly maintaining day to day operations (Horne and Chowiez 2000) efficient working capital  management involves planning and controlling current assets and current liabilities in a manner that eliminates the risks of inability to meet to short term obligations in their assets on the other hand (Eljelly 2004). Many existing research studies have found that management spend a considerable time on day to day working of capital decisions since current asset are short lived investments that are continually being converted into other assets types (RAO 1989). In the case of current liabilities the firm is responsible for paying obligations mentioned under current liability on timely basis liquidity for the on-going firm is reliant rather on the operating cash flows generated by the firms assets (Soremen 1983). As a result, working capital management of a company is very sensitive are in the field of financial management (John 1994). It invoices the decision about the amount and composition of current assets and the financing of those assets. In conclusion the working capital management used by Dangote Flour Mills Plc on the performance of the entity.

1.2            STATEMENT OF THE PROBLEM

Organizations are faced with difficulties in the control of financial resources; they try in reducing fraud theft and his representation that may occur likewise. The value of work, been performed affect calculation. The miscalculation thereby gives different picture and interpretation to the performance of the organization. Any understatement or overstatement in the financial report distorts the true and fairness of such report. Furthermore problem could also be traceable to the skills, experience, knowledge, academic amplification of the employees in the organization. The trained workers are few compared to untrained ones. It is common among the manufacturing organizations that instead of employing five graduates in an organization, they prefer to employ ten or twenty of non-graduates to work; hence those graduates are paid less.

Once more lower delegation of power could be another problem. The work that should be done by expertise are delegated to their junior staffs which results in low productivity.

1.3            OBJECTIVES OF THE STUDY

The objectives of the study include:

a.     To examine the effort of management in the formation of working capital.

b.     To examine the effect of working capital management on profitability of the organization.

c.      To identify the cause of effectiveness and efficient management of working capital in an organization.

1.4            RESEARCH QUESTION

These project work intend to provide answers to the following questions

                               i.      Does the working capital have any significant effect on the going concern of the organization?

                             ii.      Does management performance have any significant effect on the working capital of the organization?

1.5            STATEMENT OF HYPOTHESIS

For the purpose of this research work the following hypothesis is formulated:

HYPOTHESIS 1

Ho: Working capital management has no significant effect on the ongoing concern of the organization.

Hi: Working capital management has significant effect on the ongoing concern of the organization.

HYPOTHESIS 2

Ho: Working capital management has no significant effect on organizational performance

Hi: Working capital management has significant effect on organizational performance

1.6            SIGNIFICANCE OF THE STUDY

The veracity of working capital management in an organization is so much essential to be greatly understood and applied as it is important for successful achievement in an organization.

1.7            SCOPE OF THE STUDY

The research work would have been wide in nature however, it has restricted itself on three major variables; return capital employed (ROCE) leverage and fixed assets financing. It goes along way to review the financial statement of the company for the period between 2002 – 2004.

1.8            DEFINITION OF TERMS

1.     WORKING CAPITAL: This is the excess of the current asset over the current liabilities that is current asset – current liabilities = working capital (A – CL = WC)

2.     CAPITAL: This is the owner’s interest in the assets of the business. It can be referred to as owner’s equity or proprietorship.

3.     LIQUIDITY: It is that state of owing finance of value that can easily be exchanged for cash.

4.     PROFITABILITY: This is the equity of affording gain or benefit or profit.

5.     ORGANIZATION: A collection of persons bound together by a formal relation for the purpose of attaining certain specified goals.

6.     PROCEDURE: A formal or official order or way of doing things. It is series of actions that needs to be completed in order to achieve something.

7.     LIABILITIES: It can be defined as the indebtedness of the business to outsiders. It is the claim on assets of the company. It can be classified into current and long term liabilities.

8.     ASSETS: It is a thing of value that can be used to settle debts. It can be classified into fixed, current, fictitious, intangible liquid, wasting assets. It can also be applied to all from properly and possession which the business hold.

9.     PERFORMANCE: This is any recognized accomplishment.

10.            MANAGEMENT: This is the direction of an enterprise through planning, organizing, coordinating of human and material resources towards achievement of predetermined goals and objectives both effectively and efficiently.

11.            ORGANIZATIONAL PERFORMANCE: The input and the effect of such output produce by an organization in the conduct of its activities towards achieving its mission.

Management need to know much of the factors that affect their organization’s performance either positively or other wise. Functional offices and department managers as well need to be dearly oriented and exposed to the reasons for the existence of their reactions or department as a contributor or to the achievement of organizational goals.

The study however is greatly essential for business owners (sole proprietorship and any other form of business owners). Management cost and financial accountants, managers and other users of information communicated by the organization. The study is also significantly essential to auditors because practically to form the preparation of the accounts have been kept, working capital management is needed.

The research is made so as to make future organization and industrial sector with economy is an off shot of sound working capital with value and complex research programme, organization can borrow a leaf from this complex with a good protection of working capital management.

Researchers also benefit from the study as it can serve as a point or means of enlighten into further study of the effects of working capital management or organizational performance.

CHAPTER TWO

LITERATURE REVIEW

2.0            INTRODUCTION

As working capital is a financial metric which represents operating liquidity available to a business, it is also the excess of the current assets over the current liabilities that is current asset – current liabilities. The working capital management is going to be evaluated, every research taken on working capital management will be evaluated on. Also the conceptual frame work empirical studies on working capital is going to be emphasized on, further, performance of industrial sector in Nigeria, major constraints in the industrial sectors and the theoretical frame work will be evaluated below.