THE EFFECT OF WORKING CAPITAL MANAGEMENT ON CASH HOLDING

BY

OLAYIWOLA OPEYEMI SAMUEL REG NO: 2007/DEGR/DL/4965

BEING A PROJECT PAPER SUBMITTED TO THE FACULTY OF BUSINESS ADMINSTRATION DEPARTMENT OF MANAGEMENT FOR THE PARTIAL FULFILMENT FOR THE AWARD OF A BACHELOR OF SCIENCE (B.SC) DEGREE IN BUSINESS MANAGEMENT

JULY, 2012 TITLE PAGE THE EFFECT OF WORKING CAPITAL MANAGEMENT ON CASH HOLDING

CERTIFICATION
This is to certify that this project written by OLAYIWOLA OPEYEMI SAMUEL with Reg. No 2007/Degr/dl/4965 presented to the department of Management is original and has not been admitted for award of any Degree or Diploma either in this or any other tertiary institution.

. OLAYIWOLA OPEYEMI SAMUEL Researcher

Date

APPROVAL PAGE This project titled THE EFFECT OF WORKING CAPITAL MANAGEMENT ON CASH HOLDING written by OLAYIWOLA OPEYEMI SAMUEL with Registration No 2007/DEGR/DL/4965 has been certified and approved as meeting the standard required in partial fulfillment for the award of Bachelor of Science (B.sc) Degree in Management of University of Nigeria, Nsukka.

. DR (MRS) ANN.I. OGBO

. DATE

.. DR. (MRS) E. EZIGBO

. DATE

. EXTERNAL EXAMINER

.. DATE

DEDICATION
This work is dedicated to God Almighty and my beloved parents Pastor and Mrs. Jacob Olayiwola.

ACKNOWLEDGEMENTS With all humility, love, affection, devotion and deep sense of respect, my inestimable gratitude goes to Almighty God the creator of all things for making this research project a reality and seeing me through the University. I sincerely appreciate and acknowledge the immense contribution of my supervisor Dr. (Mrs) Ann I. Ogbo. My sincere appreciation goes to the family of Mr. and Mrs. Jacob Olayiwola for their open hands throughout my years of study. May God bless you. I place my appreciation also on my dependable family Segun Olayiwola, Bose Olayiwola, Sola Olayiwola, Bola Olayiwola for their support and encouragement throughout this season. May God continue to bless and empower them. My appreciation also goes to my friends, Shola, Fanimi, Taiwo, Ali and laye. You guys are the best.

OLAYIWOLA OPEYEMI SAMUEL

2007/DEGR/DL/4965 ABSTRACT

TABLE OF COONTENT Title Page Certification Dedication Acknowledgement Abstract Table of Content

CHAPTER ONE INTRODUCTION

1. Background of the Study 2. Statement of the Problem 3. Objectives of the Study 4. Research Questions 5. Research Hypothesis 6. Significance of the Study

7. Limitation of the study 8. Area and Scope of Study 9. Operational Definition of terms 10. References

CHAPTER TWO LITERATURE REVIEW 2.0 Introduction 2.1 2.2 2.3 2.4

CHAPTER THREE RESEARCH METHODOLOGY 3.1 3.2 Research Design Sampling

3.3 34 3.5 3.6

Population Reliability and Validity of instrument Techniques Data Collections Description of Data Presentation and Analysis Tools

CHAPTER FOUR DATA PRESENTATION, ANALYSIS AND INTERPRETATION 4.1 4.2 4.3 4.4 4.5 4.6 Introduction Data Presentation and Analysis Cross Tabled Analysis Hypothesis Testing Software Used for Data Analysis Summary of Result

CHAPTIVE FIVE SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 5.1 Introduction

5.2 5.3 5.4

Findings Summary Conclusion

Bibliography Appendix Questionnaire

CHAPTER ONE INTRODUCION 1.1 BACKGROUND OF THE STUDY

The concept of Working Capital includes Current Assets and Current Liabilities. There are two concepts of Working Capital which are Gross and Net Working Capital. 1. Gross Working Capital: Gross Working Capital refers to the firm's investment in Current Assets. Current Assets are the assets, which can be converted into cash within an accounting year or operating cycle. It includes cash, short-term securities, debtors (account receivables or book debts), bills receivables and stock (inventory). 2. Net Working Capital: Net Working Capital refers to the difference between Current Assets and Current Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. It includes creditors or accounts payables, bills payables and outstanding expenses. Net Working Capital can be positive or negative.

The concept of Gross Working Capital focuses attention on two aspects of Current Assets' management. They are: a) Way of optimizing investment in Current Assets. b) Way of financing current assets. a. Optimizing investment in Current Assets: Investment in Current Assets should be just adequate i.e., neither in excess nor deficit because excess investment increases liquidity but reduces profitability as idle investment earns nothing and inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its obligation. It is taken into consideration that the Working Capital needs of the firm may be fluctuating with changing business activities which may cause excess or shortage of Working Capital frequently and prompt management can control the imbalances. b. Way of financing Current Assets: This aspect points to the need of arranging funds to finance Company Assets. It says whenever a need for working Capital arises; financing arrangement should be made quickly. The financial manager should have the knowledge of sources of the working Capital funds as wheel as investment avenues where idle funds can be temporarily invested. 1.2 STATEMENT OF THE PROBLEM

In looking at the effect of working capital on business profitability, some of the questions easily come to mind are:
1. What are root causes of working capital on business? 2. What are the major effects on accounts receivable? 3. what is the nature of relationship between working capital and capital

employed/
4.

What steps should be taken to ensure that it effect on the profit of the firm will not be negative?

5. how can working capital be managed/ 6. What make up the working capital cycle? 7. How can debtors be controlled? 1.3 OBJECTIVE OF THE STUDY

The main objective of the study is to determine the effect of working capital on business profitability which has to do with...................................
Maintenance of working capital at appropriate level, and Availability of ample funds as and when they are needed

To accomplishment of these two objectives, the management has to consider the composition of current assets pool. The working capital position sets the various policies in the business with respect to general operations like purchasing, financing, expansion and dividend etc,

The subsidiary Objective of Working Capital Management is to provide adequate support for the smooth functioning of the normal business operations of a company. This Objective can be sub-divided into 2 parts:-

1. 2.

Liquidity Profitability

1) Liquidity The quantum of Investment in Current Assets has to be made in a manner that it not only meets the needs of the forecasted sales but also provides a built in cushion in the form of safety stocks to meet unforeseen contingencies arising out of factors such as delays in arrival of Raw Material, sudden spurts in demand etc. Consequently, the investment in current assets for a given level of forecasted sales will be higher if the management follows a conservative attitude than when it follows an aggressive attitude. Thus, a company following a conservative approach is subject to a lower degree of risk than the one following an aggressive approach. Further, in the former situation the high amount of Investment in Current Assets imparts greater liquidity to the company than under the latter situation wherein the quantum of investment in Current Asset is less. This aspect exclusively covers the liquidity dimension of Working Capital.

2) Profitability Once we recognize the fact that the total amount of financial resources at the disposal of a company is limited and these can be put to alternative uses, the larger the amount of investment in current assets, the smaller will be the amount available for investment in other profitable avenues at hand with the company. A conservative approach in respect of Investment in Current Assets leaves fewer amounts for other Investments than an aggressive approach does. Further, since the Current Assets will be more for a given level of Sales forecast under the conservative approach, the turnover of Current Assets (calculated as ratio of Net Sales to Current Assets) will be less than what they would be under the aggressive approach. Even if we assume the same level of Sales Revenue, operating Profit before Interest and Tax and Net (Operating) fixed assets, the company following a conservative policy will have a low percentage of operating profitability as compared to its counterpart following an aggressive approach. 1.4 SIGNIFICANCE OF THE STUDY

This study is significant because it will produce data on the working capital management on firms profitability useful to: 1. 2. Managers and top executives in organized private sector Students carry a research work in this same issue.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Bankers that deals with such firms Auditors Accountants Financial analyst Stock exchange dealers The staff of the organization Prospective customers of the firm Creditors of such organization Legal practitioners The stakeholders and management staff

1.5

LIMITATIONS OF THE STUDY

There was the limitation of the reluctance of the respondents to give answers to survey probes. The Questionnaire method of primary data collection was limited to the verbal responses of subjects to pre-arrange questions. It also had limitation that its usefulness depended on the level of education of the subjects. There was the limitation of the problem of memory in remembering past facts. The

structured nature of the questionnaire may compel the respondents to give answers that they do not fully endorse, there was the limitation of the rigidity of the research instrument, which diminishes the amount of information that could be gathered. There was the limitation that the cost of administering the questionnaire was very high due to high administrative, personnel and traveling costs especially when some of the respondents were initially not on their seats. There was the limitation that the researcher and the field data collectors were not policemen and so they could not force some of the respondents if they refuse to give answers. There was also the limitation of the scarcity of time and money resources. Let categories the limited as follows:.. Material Procurement There was a lot constraint as to getting information and materials for the job. The researcher made series of consultations and visit to most renowned institutions to acquire the needed information. Most materials used were very difficult to come by, as there is no library within the town. Time Constraints Combining academic work with job is no doubt a thought provoking issue, as it has to do with time. Actually, a lot of time was wasted as the researcher

visited the organizations and individuals together with government agencies to obtain valuable information for the project. Financial Constraints The researcher would have obtained more information than what is obtainable here but due to lack of money to visit some of the firms and government agencies located a bit farther from the researcher place of resident.

1.6

HYPOTHESES

It is a conjectural statement of the relationships between two or more variables. It is testable, tentative problem explanation of the relationship between two or more variables that create a state of affairs or phenomenon. E,C, Osuola (1986 page 48) said hypothesis should always be in declarative sentence form, and they should relate to them generally or specially variable to variables. HYPOTHESIS THUS: 1. Explain observed events in a systematic manner

2. 3.

Predict the outcome of events and relationships Systematically summarized existing knowledge.

In essence, there exist NULL HYPOTHESIS set up only to nullify the research hypothesis and the ALTERNATIVE HYPOTHESIS for the purpose of the study. For the efficiency of the study, the hypothesis is as follows:

NULL HYPOTHESIS (HO) 1. Working capital does not help the business concern in maintaining the

goodwill 2 Working capital does not create an environment of security, confidence,

and overall efficiency in a business

ALTERNATIVE HYPOTHESIS 1. 2. Working capital helps the business concern in maintaining the goodwill. Working capital creates an environment of security, confidence, and

overall efficiency in a business.

1.7

STRUCTURE OF WORK

This research work is to be organized in five chapters as follows: 1. Introduction 2. Review of Related Literature 3. Research Methods and Procedures 4. Data presentation and Analysis and 5. Summary, Findings and Conclusion

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1

THE SPECTRUM OF WORKING CAPITAL

Cash is most important factor in financial management. Every activity in an enterprise revolves round the cash. As because cash is limited in every enterprise and it cannot be raised as and when one likes it, it is, therefore, desirable that available cash must be managed properly. Every undertaking is desirous of utilizing the available cash most effectively so as to accomplish the goals of the undertaking, i.e., maximization of profits with the minimum of efforts. But management of cash is not as simple as it might appear. In case, the undertaking does not keep sufficient cash in hand, it shall not be in a position to meet the unexpected challenges, which challenges and cash remains unutilized in the business, it will result in losses. If heavy amounts are blocked for unforeseen contingencies the company will not be in a position to carry on its day to day working efficiently. It is where the real problem of cash management comes, i.e., how much cash should be set aside for unexpected challenges and how much for the regular day-to-day working.

It is really not an easy problem to solve. In fact, no hard and fast rules can be suggested for the problem. All the financial management can do in this regard, is to study the past records an take the necessary decision bearing in mind the present economic circumstances and the behaviour and practice of the sister concern.
In Hozopac Nigeria Limited, there are two types of assets in each concern i.e., fixed assets and current assets. Both types of assets are to be managed efficiently so as to earn maximum profit with minimum possible investments because maximization of profits is the prime object of every business. Decisions regarding investment in fixed assets are taken through the capital budgeting process but decision making regarding management of working capital is a continuous process which involves control of everyday and flow of financial resources circulating in the enterprise in one form or the other. The accomplishment of the prime object-maximization of profits in most businesses depends largely how their working capital is managed. Working capital management is considered to involve the management of current assets, i.e., cash, accounts receivables and inventory. Unlike the

management of fixed assets which may be arranged in special cases on longlease basis, the working capital has no alternative except to arrange them and us them efficiently. There are certain special problems peculiar to the management of working capital requiring operational and financial skills of a high order.

(1) There is a positive correlation between the sale of the product of the firm and the current assets. An increase in the sale of the project requires a corresponding increase in current assets. It is, therefore, indispensable to manage the current assets properly and efficiently. (2) More than half of the total capital of the firm is generally invested in current assets. It means less than half of the capital is blocked in fixed assets. We pay due attention to the management of fixed assets in details through the capital budgeting process. Management of working capital too, therefore, attracts the attention of the management.

(3) In emergency (Non availability of funds etc.) fixed assets can be acquired on lease but there is no alternative for current assets. Investment in current assets, i.e., inventory or receivable, can in no way be avoided without sustaining loss.

(4) Working capital needs are more often financed through outside sources, so it is necessary to utilise them in the best way possible. In nutshell, Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and

upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.
2.1 WORKING CAPITAL DEFINED Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.

2.2

MANAGEMENT OF WORKING CAPITAL

Management adopt a combination of policies and techniques for the management of working capital. These policies aim at managing the current

assets (generally cash and cash equivalents, inventories and debtors) and
the short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the

business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw materials and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity

Debtors management. Identify the appropriate credit policy, i.e.

credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital.

Short term financing. Identify the appropriate source of financing,

given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Working capital is directly affecting by other management issues, such as product mix, supply chain design and business model (for example agent vs. distributor)

2.3

DECISION CRITERIA
By definition, working capital management entails short term decisions generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the

net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts

receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on

capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.

2.4 MANAGING WORKING CAPITAL 1. Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cashflow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. Click here

for more information about the vital distinction between profits and
cashflow. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.

2. Sources of Additional Working Capital

Sources of additional working capital include the following:

Existing cash reserves Profits (when you secure it as cash !)

Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include:

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment

Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).

3. Handling Receivables (Debtors)

Cashflow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business, in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cashflow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: 1. Have the right mental attitude to the control of credit and make sure

that it gets the priority it deserves.

2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers

and customers.
4. Be professional when accepting new accounts, and especially larger

ones.
5. Check out each customer thoroughly before you offer credit. Use credit

agencies, bank references, industry sources etc.

6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are

coming or if operating in a volatile sector.

8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option. 12. Monitor your debtor balances and ageing schedules, and don't let any

debts get too large or too old.

Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects:

-weak credit judgement -poor collection procedures -lax enforcement of credit terms -slow issue of invoices or statements -errors in invoices or statements -customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example.........

longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods. New customers who are reluctant to give credit references

receiving part payments from debtors. Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demand their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem.

When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying.

Make it your objective is to get the money - not to score points or get even.

4. Managing Payables (Creditors)

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following:

Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stock-holding and purchasing costs? Do you know the cost to the company of carrying stock ?

Do you have alternative sources of supply ? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy ? Are you in a position to pass on cost increases quickly through price increases to your customers ? If a supplier of goods or services lets you down can you charge back the cost of the delay ? Can you arrange (with confidence !) to have delivery of supplies staggered or on a just-in-time basis ? 5. Inventory Management
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize stock-holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management. The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best sellers?
Remember that stock sitting on shelves for long periods of time ties up money which is not working for you. For better stock control, try the following:

Review the effectiveness of existing purchasing and inventory systems.

Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many.

Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it.

Consider

having

part

of

your

product

outsourced

to

another

manufacturer rather than make it yourself.

Review your security procedures to ensure that no stock "is going out the back door "

6. Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital utilization.

Ratio

Formulae

Resu lt

Interpretation

Stock Turnover (in days)

Average Stock * 365/ Cost of Goods Sold

=x days

On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving

lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It take you on average x days to collect monies due to you. If your official credit

Receivable s Ratio (in days)

Debtors * =x 365/ days Sales

terms are 45 day and it takes you 65 days... why ? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.

Payables Ratio (in days)

Creditors * 365/ Cost of Sales (or Purchases)

=x days

On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also

increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities

Total Current =x Current Ratio Assets/ time Total s Current Liabilities

are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

Quick Ratio

(Total Current

=x time

Similar to the Current Ratio but takes account of

Assets Inventory)/ Total Current Liabilities (Inventory A high percentage means Working Capital Ratio + As % that working capital needs Receivables Sales are high relative to your - Payables)/ sales. Sales
Other working capital measures include the following:

the fact that it may take s time to convert inventory into cash.

-Bad debts expressed as a percentage of sales. -Cost of bank loans, lines of credit, invoice discounting etc. -Debtor concentration - degree of dependency on a limited number of customers.
Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.

2.5

HOW TO CALCULATE CAPITAL NEEDS

If you have traditionally based your cash projections on gut instinct and seatof-the-pants estimates, chances are that you have come up short when your company could least afford it. To prevent this crisis-to-crisis method of financial management, Schechter says, try bringing some science to the critical task of projecting your company's capital requirements. The approach outlined here uses information from your company's financial statements: * Determine your collection period. For simplicity's sake, assume that your annual sales are N365,000. Dividing this figure by the number of days in the year gives average daily sales of N1,000. If your accounts receivable balance is N60,000, you have a collection period of 60 days. * Perform a similar calculation for inventory. Suppose your cost of goods sold is N220,000. Dividing this by 365 gives daily costs of about N600. If your inventory is N27,000, then you have 45 days of inventory on hand.

Now proceed to accounts payable. Assume you have annual purchases of inventory and raw materials of N182,000 per year. Divide this by 365 days, and you have purchases of approximately $500 per day. If your accounts payable are $16,000, you have an accounts payable period (N16,000 divided by N500) of 32 days. This means it takes about a month to pay your bills. * The next step is to take the total of accounts receivable and inventory days (in this case, 105 days) and subtract from this the accounts payable period (32 days), leaving a net of 73 days.

"With this process, you've calculated the company's trade cycle," Schechter says. "The purpose is to figure how much working capital the company requires, and that's what it does. "Assume your annual cash needs (sales minus profits minus such noncash charges as depreciation) are N340,000 a year. Because the company's 73-day business cycle is about 20 percent of a year, you need about 20 percent of N340,000, or N68,000 in working capital credit. While this can be reduced by existing lines of credit or by profits plowed back into the business, it's a good estimate of the company's cash requirements." This simplified calculation can be fine-tuned for your company by developing more detailed information on cash flow. This is usually done on a monthly basis, since most businesses collect from customers and pay suppliers monthly. The cash-flow forecast should be comprehensive, and it should encompass cash sources and outlays, including revenues, proceeds from the sales of surplus fixed assets, disbursements for new equipment, income-tax payments, loan payments, dividends or withdrawals, and deposits on merchandise for future delivery. Cash receipts and disbursements do not always balance out. Large cash inflows come shortly after customers are billed. Large cash payments must be made to build inventory, buy equipment, or pay taxes.

Capital-planning calculations, says accountant Schechter, "bring into sharper focus the company's cash needs, taking some of the guesswork out of the borrowing process. And they help convince bankers that you not only need loans but will be in position to repay them."

CHAPTER THREE

RESEARCH METHODS AND PROCEDURES

1. RESEARCH DESIGN

The research method selected for the study is a combination of a survey and an industrial study. The survey research method is described hereunder that:
(i)

It is a design in which primary data is gathered from members of the sample that represents a specific population;

(ii)

It is a design in which a structure and systematic research instrument like a questionnaire or an interview schedule is utilized together with the primary data;

(ii)

It is a method in which the researcher manipulates no explanatory variables because they have already occurred and so they cannot be manipulated;

(iii)

Data are got directly from the subjects; The subjects give the data the natural settings of their workplaces;
(iv)

The answers of the respondents are assumed to be largely unaffected of the content in which they are brought;

(v) (vi)

The impacts of the confounding factors are controlled statistically; and The aim of the research may span from the exploration phenomena to hypotheses testing (stone 1995).

The survey research method has some merit, which are to be articulated hereunder: In the survey research method, the sample of the respondents are selected in such a way as to make it low due to the utilization of big sample sizes, which results in generally low sample errors.

The survey research method also has the merit that data collection takes place in the natural settings of the workplace rather than an activated laboratory. Data are got directly from the respondents. The advantage that the survey yields data that suggests new hypothesis is very illuminating. There is also the merit that a set of systematic data collection instruments such as questionnaire interview schedules and observation gadgets can either be used alone or in conjunction with other instruments (stone, 1995).

3.2

SAMPLING

Spiegel (1992) observes that sampling theory is a study of the relationship existing between a population or universe and the samples drawn from it. The population in this study is from the senior junior staff of the firms. In order to make conclusions of sample theory and statistical references to be valid, a sample must be selected as to be representative of the population (Spiegel,1992). One way in which a representative sample may be got, is by the process of stratified random sampling. In this research work, the technique of simple random sampling is used to select the sample of 100 respondents from each group of the personnel, making a total sample size of 200.

The list of all senior and junior staff of the firm is from the personnel department of the company. The numbers were written on a piece of paper, put in a basket and the papers were folded to cover the numbers and one of the pieces of paper was selected at a time without replacing it and any name corresponding to the number becomes a number of the sample. This method of sampling without replacement was done until the sample of 100 respondents per group of personnel was arrived at.

3.3

POPULATION

The population, in this study is the totality of the senior and junior staff of HOZOPAC NIGERIA LIMITED. LAGOS. The sample size is 200 and this number of respondents was chosen from the population. The rationale for studying a sample rather than the population includes that:
1.

Most empirical research work in the social science involves studying a sample in place of the population.

2.

Statistical Laws reveal that statistics composed from the sample data are usually reasonably accurate.

3.

Luckily, it is usually possible to estimate the level of confidence that can be placed on the results. We should note that above is only possible if the probability sample size is large enough.

3.4

DATA COLLECTION Questionnaire As earlier stated, the primary data collection instrument in this study is the questionnaire. In the questionnaire method of primary data collection, heavy dependence is placed on verbal reports from the subjects to get information on the earnings per share and standard set.

The questionnaire has a lot of merits. It needs less skill to administer. Questionnaire can be administered to a big number of individuals at the same time. Also with a specific research budget, it is usually possible to cover a broader area. The impersonal nature of a questionnaire, its structure and standardized wording, its order of question, its

standardized instructions for recording answers might make one to conclude that it offers some uniformity from one measurement occasion to another (Selltiz et al, 1976). Another merit of questionnaire is that subjects may have a bigger confidence in their anonymity, and thus feel freer to express views they feel might be disapproved. Another attribute of the questionnaire that is sometimes, though not always desirable is that it might place less pressure on the subjects for immediate response (Selltiz et al, 1976). The questionnaire also has some demerits. It has noted that for purpose of giving dependable responses to a questionnaire, respondents must be considerably educated. Thus one of the demerits of the usual questionnaire is that it is appropriate only for with a considerable amount of education. There is also demerit that subject may be reluctant and unable.

To

report

on

the

particular

subject

matter.

Also,

if

a subject

misinterprets a question or give his or her answer in a batting manner, there is often a little that can be done to ameliorate the situation. In a questionnaire, the information the researcher gets is limited to the fixed alternative answer format, when a specific answer is not available, it can lead to error (Selltiz, 1976). There is also limitation of memory in reporting on past facts. The researcher is not a policeman that can compel answers. That is, the information may not be readily accessible to subject and thus the subject may be reluctant to put forth enough alternative information that he or she is only barely conscious of (Selltiz et al, 1996).

In this research project, a structured and undisguised questionnaire is utilized which is made up of two parts namely, the personal data section and the section on the data on the actual subject matter of the work. The questionnaire was undisguised in the sense that the purpose of the data collection which was to collect primary data for writing up the researchers HND project was made know to the 200 respondents. The questionnaire was structured in the sense the questions are logically sequenced and are to be asked to the respondents in the same manner

and no follow up questions are to be allowed. Some of the questions are of the fixed alternative answer format type. Ten (10) of the questions have yes or no answers, Ten (10) of the questions have alternative answer for the respondents to tick. The structured questionnaire has the merit that it yields data that is easier to analysis than data produced by an unstructured questionnaire. Also the structured nature diminishes both researchers and research instrument biases. It however has the demerit that the rigidity of the research instrument diminishes the amount of information that could be got.

Interview The method of communication of the research instrument is by means of the personal interview. The method has the merit that it produces a better sample of the population than either mail or the telephone methods. It also has the merit that it gives a very high completion and response rates. It has the merit that the interview has a bigger sensitively misunderstandings by the respondents and gives a chance for clarification of misunderstood questions. It has the merit that it is a

very feasible method (Selltiz et al, 1976). The personal interview method has the demerit that it is more costly than the mail or the telephone methods of communication of a questionnaire.

Observations In addition to questionnaire and face-to face interviews, observation was also carried out. This was to enable the researcher to witness by herself the officers of this firm and to interact with these people.

3.5

FIELD WORK The researcher and three other field data collectors did the fieldwork. The field data collectors were other classmates also offering the Parttime HND program, who have also offered research methodology. They had no problem gaining entrance into the office under consideration since one of them has a friend working there. They were to be trained by the researcher on how to greet the respondents and how to tick the questionnaire correctly and honestly.

3.6

DESCRIPTION OF DATA PRESENTATION AND ANALYSIS TOOLS The data presentation tools are simple bar charts, histograms, and pictorial tables. The most important parts of a table include; (a) (b) (c) (d) (e) (f) title. (g) Source note, which refers to the literally or scientific source of the Table numbers Title of the table Caption Stub or the designation of the rows and columns The body of the table. The head note or prefatory note or explanatory just before the

table (Mills and Walter 1995) Anyiwe (1994) has observed that a table has the following merits over a prose information that; (f) (g) A table ensure an easy location of the required figure; Comparisons are easily made utilizing a table than a prose

information;

(h)

Patterns or trends within the figures which cannot be visualized in

the prose information can be revealed and better depicted by a table; and A table is more concise and takes up a less space than a prose formation: The data is to be analysed by means of percentage, cross tabulation and the chi-square test of population proportions for testing the two hypothesis. Percentages express the ratio of two sets of data to a common base of 100. The researcher made us of the computer program called SPSS (statistical package for social science) to carry out the computation of the hypothesis testing.

3.7

Limitation of The Study Research work is subject to one form of limitation or the other, mine is not an exemption. It was the initial thought of the researcher that the exercise was easy but the contrary was the case. As a student, several academic demands compete with the limited but precious time available.

This implies that none of the competing exercise could be effectively handled without the others being worse off. This was my situation. Although the time expended was too small to do justice to the study. The opportunity cost in terms of other equally important activities forgone or cursorily attended to, was made. The researcher faces some embarrassment arising from low-level educated staff who could not understand the essence of the research work as this.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

1. INTRODUCTION

In the previous chapter, the research methods and procedures have been handled. In this chapter the data presentation and analysis are to be done. The data is to be presented by means of tables, two simple bar charts, one histogram and one pie chart to make it amenable for further analysis. By analysis is meant the act of noting relationship and aggregating the set of variables with similar attributes and also breaking the unit of their components (Mills and Walters 1995). In this research work, the research accepts the contention of Podsakoff and Dalton (1995) that the factual information from the data can be used as a basis for reasoning, calculation and discussion. Apart from the heading above, the other headings in this chapter includes: Data Presentation, Percentage analysis Cross-tabulated analysis

Hypothesis testing

4.2

DATA PRESENTATION TABLE1 THE SUMMARY OF THE PERSONAL DATA OF THE RESPONDENTS 1 SEX Male Female Total FREQUENCY 150 50 200 Angles suspended 2 Marital Status Married Single Total 130 70 200 in degree

AGE 21-30 years 31-40 years 41-50 years 51-60 years Total 90 90 10 10 200

HIGHER EDUCATIONAL QUALIFICATION DIPLOMA OND HND FIRST DEGREE SECOND DEGREE NIM TOTAL 10 30 80 20 40 20 200 18 54 144 36 32 36 360

The marital statuses of the 200 respondents it is found that 130 of them are married while 70 of them are single. For the ages of the 200 respondents they are 21-30 years, 31-40 years, 51-60 years with frequency of 90 and 10 respectively. For the highest educational qualification of the 200 respondents they are diploma, OND, HND, First Degree, Second Degree, NIM. and they have frequencies of 10, 30, 80, 20, 40 and 20 respectively.

Figure 4.1 below shows the simple bar chart of the data on the sex of the respondents.

FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS

GENDER OF THE RESPONDENTS

TABLE 2. GENDER OF THE RESPONDENTS

Frequency MAIL FEMALE Total 150 50 200

percentage 75.0 25.0 100.0

Valid Cumulative Percent Percent 75.0 25.0 100.0 75.0 100.0

Source: from data in table 1 (generated from SPSS)

From figure 4.1 above, it is shown that male respondents have the modal frequency of 150 of the 200 respondents while the female respondents have the frequency of 50 of them. Figure 4.2 below shows the simple bar chart of the data on the marital statuses of the respondents. FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITAL STATUSES OF THE RESPONDENTS

TABLE 3.

MARITAL STATUS OF THE RESPONDENTS

Status

frequency

Percentage

Valid Cumulati Percent ve Percent 65.0 35.0 65.0 100.0

MARRIED SINGLE

130 70

65.0 35.0

Total

200

100.0

100.0

From figure 4.2 above, it is shown that the married respondents have the modal frequency of 130 out of the 200 respondents while the single respondents have the frequency of 70 of them.

FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THE RESPONDENTS.

AGES OF THE RESPONDENTS

TABLE 4. AGES OF THE RESPONDENTS SOURCE: From the data in Table 1.

From figure 4.3 above, it is shown that the age classes limit are 20.530.5 years, 30.5-40.5 years, 40.5-50.5 years and 50.5-60.5 years with frequencies of 90, 90, 10, and 10 out of 200 respectively. This shows that this is bi-modal distribution as the age classes of 20.5-30.5 years and 30. 5-40.5 years have a frequency of 10. Figure 4.4 below shows the pie chart of the data on the highest educational qualifications of the 200 respondents.

FIG.4.4

THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS

Educational level DIPLOMA OND HND

Frequency 10 30 80

Percentage 5.0 15.0 40.0

Valid Percentage 5.0 15.0 40.0

Cumulative Percentage 5.0 20.0 60.0

FIRST DEGREE SECOND DEGREE NIM Total

20 40 20 200

10.0 20.0 10.0 100.0

10.0 20.0 10.0 100.0

70.0 90.0 100.0

SOURCE: from the data in table 1.

From figure 4.4 above, the Highest Educational Qualifications are Diploma, O.N.D, First Degree, Second Degree and NIM and the sustained angles in degree is equal to 180, 540, 1440, 360, 720 and 360 and respectively at the center of the circle.

4.3

CROSS-TABULATED ANALYSIS Table bellows show the analysis of the statuses of the 200 respondents TABLE 6. CROSS- TABULATION 1

The above table shows that the total of 100 respondents (out of 200 said YES. this proved that working capital helps business organization in maintaining its goodwill.

TABLE 7. Cross-tabulation 2

The above table indicates that working capital creates an environment of security, confidence and overall efficiency in a business. 104 respondents out of 200 said yes. While 40 did not agree with the fact.

4.4

HYPOTHESIS TESTING In attempting to arrive at decisions about the population, on the basis of sample information it is necessary to make assumptions or guesses about the population parameter involved. Such an assumption is called statistical hypothesis, which may or may not be true. The procedure, which enables the researcher to design on the basis, is sample regards whether a hypothesis is true or not is called test of hypothesis or test of significance. The null hypothesis asserts that there is no significant difference between the statistics and the population parameters and what ever is observed difference is there, is merely due to fluctuations in sampling from the same population. Null hypothesis is thereby denoted by the symbol H0. Any hypothesis, which contradicts the H0, is called an alternate hypothesis and is denoted by the symbol H1. The researcher used chi-square analysis.

CHI-SQUARE TEST The c is one of the simplest and most widely used non-parametric test in statistical work. It makes no assumptions about the population being

sampled. The quantity c describes the magnitude of discrepancy between theory and observation i.e. with the help of c test we can know whether a given discrepancy between theory and observation can be attributed to chance or whether it results from the inadequacy of the theory to fit the observed facts. If c is zero, it means that the observed and expected frequencies completely coincide. The greater the value of c the greater will be the discrepancy between observed and expected frequencies. The formula for computing chi-square is c = (O-E)2/E Where,O=Observed frequency E=Expected or theoretical frequency

4.5

SOFTWARE USED FOR DATA ANALYSIS:

For the data analysis and the interpretation, the researcher has adopted advanced version of SPSS (statistical package for social science). This application software has facilitated the researcher to construct the frequency table, various types of charts and to find out the valid percentage responses from the sample. By this automated data analysis it has minimized the researchers time constraints and reduced human error and give also accurate outlay of information.

Chi-Square Test (1) WORKING CAPITAL HELPS THE BUSINESS CONCERN IN

MAINTAINING THE GOODWILL Observed F YES NO DONT KNOW NO ANSWER Total 18 200 39 50.0 50.0 -32.0 Reject -11.0 Reject 100 43 50.0 50.0 Expected F 50.0 -7.0 Accept Reject Residual Decision

Chi-Square Test (2)

WORKING CAPITAL CREATE AN ENVIRONMENT OF SECURITY,CONFIDENCE AND OVERALL EFFICIENCY IN A BUSINESS. Observed F YES NO DONT KNOW NO ANSWER Total 9 200 50.0 -41.0 Rejected 47 50.0 -3.0 Rejected 104 40 Expected F 50.0 50.0 54.0 -10.0 Accept Rejected Residual Decision

Residuals The observed value of the dependent variable minus the value predicated by the regression equation, for each case. Large absolute values for the residuals indicate that the observed values are very different from the predicted values. SOURCE: From the questionnaires administered.

The formulated hypothesis that is subject to statistical test is at 5% level of significance in testing hypothesis, the calculated value of the test statistics is usually compared with tables of value. The critical values of the test statistics serve as criterion value. It afforded the basis for rejecting the null hypothesis is a function of the value of the tested statistic. Reject the null hypothesis if the calculated value of the test statistic is greater than the critical value. Accept the null hypothesis if the calculated value of the test statistic is less than the critical value.

WORKING CAPITAL HELPS THE BUSINESS CONCERN IN MAINTAINING THE Chi-Square df 73.880 GOODWILL 3 TEST STATISTICS note: df = degree of freedom

WORKING CAPITAL CREATE AN ENVIRONMENT OF SECURITY,CON FIDENCE AND OVERALL 94.120 3

4.6

SUMMARY OF RESULT Level of significance.0.05 Critical value43.0 Calculated value73.880 From the above analysis, it could be seen that in the first test, working capital helps the business concern in maintaining the goodwill, the calculated value is greater than the critical value so we reject the hypothesis. In the second test which state that working capital create an environment of security, confidence and overall efficiency in a business ,

the level of significance is 0.05, the critical value is 44 while the calculated value from the test statistics table is 94.120. Looking the data above, it shows very clear that the calculated value is more greater than the critical value so we reject the hypothesis.

CHAPTER FIVE

FINDINGS, SUMMARY AND CONCLUSION

5.0

INTRODUCTION

In this chapter, the researcher deals with the findings as effect of working capital on business profitability. The work is summarized with the conclusion drawn 5.1 FINDINGS During the cause of the research, the researcher, discovered that Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

In management of working capital, There are two types of assets in each concern i.e., fixed assets and current assets. Both types of assets are to be managed efficiently so as to earn maximum profit with minimum possible investments because maximization of profits is the prime object of every business. 5.2 SUMMARY

The concept of Working Capital includes Current Assets and Current Liabilities. There are two concepts of Working Capital which are Gross and Net Working Capital. 1. Gross Working Capital: Gross Working Capital refers to the firm's investment in Current Assets. Current Assets are the assets, which can be converted into cash within an accounting year or operating cycle. It includes cash, short-term securities, debtors (account receivables or book debts), bills receivables and stock (inventory). 2. Net Working Capital: Net Working Capital refers to the difference between Current Assets and Current Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. It includes creditors or accounts payables, bills payables and outstanding expenses. Net Working Capital can be positive or negative. 5.3 CONCLUSION A firm must have adequate working capital, i.e.; as much as needed the firm. It should be neither excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations. It will be interesting to understand the relationship between working capital,

risk and return. The basic objective of working capital management is to manage firms current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e.; neither inadequate nor excessive. Working capital some times is referred to as circulating capital. Operating cycle can be said to be t the heart of the need for working capital. The flow begins with conversion of cash into raw materials which are, in turn transformed into work-in-progress and then to finished goods. With the sale finished goods turn into accounts receivable, presuming goods are sold as credit. Collection of receivables brings back the cycle to cash.

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American Institute of Certified Public Accountants (AICPA) (1981). Statement on Auditing Standards (SAS), no. 39: Audit Sampling New York: AICPA

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Ouchi, W.G. (1978). The Transmission of control through Organizational Hierarchy, Academy off Management of Management Journal, Volume 21, 173-192.

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