Contents

Chapter one ................................................................................................................................................... 3

1.1. Background of the study ........................................................................................................................ 3
1.2. Statement of the problem .................................................................................................................. 4
1.3 Research question ................................................................................................................................... 4
1.4 Objective of the study ............................................................................................................................. 5
1.4.1 General objective: ............................................................................................................................ 5
1.4.2 Specific objective: ............................................................................................................................ 5
1.5 Significant of the study ........................................................................................................................... 5
1.6 Scope of the study ................................................................................................................................... 5
Chapter two ................................................................................................................................................... 7
Literature review ........................................................................................................................................... 7
2.1. Introduction ............................................................................................................................................ 7
2.2. Definition of working capital ................................................................................................................. 7
2.3. Advantage and dis advantage of current liabilities ................................................................................ 9
2.3.1. Advantage of current liabilities (short-term credited) ..................................................................... 9
2.3.2. Disadvantage of current liabilities ................................................................................................. 9
2.4. Objective and Goal of WCM ................................................................................................................. 9
2.5 Managing various components of working capital ............................................................................... 10
2.5.1 Liquidity.............................................................................................................................................. 10
2.5.1.1 Liquidity ratios: ........................................................................................................................... 10
2.5.2 Solvency ............................................................................................................................................. 12
2.5.2.1 Solvency ratio .............................................................................................................................. 12
2.5.3 Inventory management ..................................................................................................................... 12
2.5.3.1 Inventory turnover ratio ................................................................................................................. 14
2.5.4 Receivable management.................................................................................................................... 14
2.5.4.1 Receivable Ratio ............................................................................................................................. 15
Chapter Three.............................................................................................................................................. 16
Research Methodology ............................................................................................................................... 16
3.1. Introduction:......................................................................................................................................... 16
3.2. Research design ................................................................................................................................... 16

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3.3. Target group ......................................................................................................................................... 16
3.4. Sample size .......................................................................................................................................... 16
3.5. Sampling technique .............................................................................................................................. 16
3.5.1. Purposive Sampling .......................................................................................................................... 16
3.6. Data collecting technique ..................................................................................................................... 16
3.6.1. Interview ....................................................................................................................................... 17
3.6.2. Documentation .............................................................................................................................. 17
3.7. Source of data: ..................................................................................................................................... 17
3.8. Data analysis and Interpretation ........................................................................................................... 17
Chapter four ................................................................................................................................................ 18
Cost and Time Budget ................................................................................................................................ 18
4.1. Cost Budget.......................................................................................................................................... 18
4.2. Time Budget......................................................................................................................................... 18
Reference: ................................................................................................................................................... 19

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 Chapter one
1.1. Background of the study
The growth and survival of any company depends on the number of factors aside from the
conllection of talent resource (people), working with the latest technology and mechanical assets,
and performance of a leader, the appropriate management of financial factor that can help even if
there is an economic crisis.

In the current perspective of the competitive market short term asset and liabilities are important
component of total asset and need to be analyzed carefully at the side of total asset and liabilities.
Management of this short-term asset and liabilities are subjected to investigate warily from the
time because working capital management plays a vital function for the firm’s profitability and
risk as well as its value.

The relative importance of working capital management depends on among other the size,
industry, and external factors such as inflation and political legal environment. Working capital
management is thus of great importance to many organizations. The ability of the company to
remain in business for a very long time depends greatly on the efficient management of the
component of working capital. Thus, working capital is important to the financial health of all
company of all sizes. Working capital management is the process of managing the flow of money
with in a specific entity like an organization. This involve managing the relationship between a
firm’s short-term asset and short-term liabilities. The goal of working capital management is to

3
ensure that the firms able to continue its operation and that is it has sufficient cash flow to satisfy
both measuring short term debt and upcoming operation expense (peel & Wilson, 1996)

Generally working capital management is important for achieving both financial performance and
liquidity of business.

1.2. Statement of the problem

Working capital management includes a number of aspects that make it especially important for
the financial health of the firm surveys indicate that the largest portion of the financial management
time is devoted to the day to day operations of the firm, which fall under the heading of working
capital management. Current asset represents the largest proportion. More over current asset
fluctuates with sales and sales vary over time. Thus, managing current asset is the dynamic process
and it require the financial management to closely monitor sales to ensure that assets in hand are
at the right level for actual sales production level.

Working capital refers to a firm’s investment in short-term asset cash, Short-term securities,
account receivable and inventories (Western and Bingham). Working capital is descriptive of that
capital which is not fixed. But, the more common use of working capital to consider it as the
difference between the book value of the current asset and the current liabilities (Hoag Land).

Proper management of working capital management gives a firm the assurance that it is able to
continue its operation and that it has sufficient cash flow to satisfy both maturing short-term debt
and upcoming expense. If a company current asset do not exceed its current liabilities, then it may
run in to trouble paying back creditor in the short-term. A declining working capital ratio over a
long time period could also be a red flag that merits further analysis. For example, it could be that
the company`s sales volumes are decreasing and as a result, its account receivables are
diminishing.

Thus, the researcher conducts this study on working capital management practice of 2 brothers
food complex. Therefore, this research mainly focused on investigating the practice of working
capital management related with liquidity, solvency, account receivable collection period &
inventory turnover.

1.3 Research question

1.What is the role of working capital management to evaluate the liquidity position of the
company?
2.To what extent the company manage its working capital properly in order to increase the
solvency of the company?
3.Does the account receivable collection period of the company affect the working capital
management of the company?
4.Does the inventory produced and sold out with in a given period?

4
1.4 Objective of the study
1.4.1 General objective:
The overall objective of the study is to assess the working capital management
practice of 2 brothers food complex.

1.4.2 Specific objective:

 To evaluate the liquidity position of the company in working capital
management.
 To determine the solvency of the company in working capital management.
 To assess the effect of account receivable collection period of the company in
working capital management.
 To assess the inventory turnover in the company.

1.5 Significant of the study

It is significant to the actual practice of working capital management in 2 brothers food complex
for an industrial who wants to further study in this topic and organization. It will also give an
overview idea about the issue to all users.

It will be useful for the organization to evaluate the existing situation and take the necessary
measure based on the finding and conclusion of the study.

1.6 Scope of the study

This study will try to investigate to what extent the management of working capital is applied in
organization and it focus on the practice of working capital management which as to assess the
efficiency in 2 brothers food complex related with liquidity, solvency, account receivable
collection period and inventory turnover. This research will be accessible from 2008-2010 EC.

5
6
 Chapter two
Literature review

2.1. Introduction
This will help to invoice a critical review of existing work on the variables under the study and
this will also help to answer the research question and the membership between variable.

2.2. Definition of working capital

According to Eugene Brigham-university of Florida and Michael Ehrhart-university of Tennessee
(Financial management the theory and practice 10th edition … page 835-871)

 Working capital some times called grass working capital. Simply refers to current asset
used in the operations.
 Networking capital is defined as current asset minus current liability.
 Net operating working capital (NOWC) is defined as operating current asset minus
operating current liability. Generally, NOWC is equal to cash, account receivable, and
inventory less account payable and accruals.
 The current ratio is calculated by diving current asset by current liability, and it is intended
to measure liquidity. However, a high current ratio does not ensure that a firms` will have
the cash require to meet its needs. If inventories cannot be sold or if receivable can not be
collected in timely manner, then the apparent safety reflect in a high current ratio could be
illusory.
 The quick or acid test also attempt to measure liquidity, and it is found by subtracting
inventories from current asset and then dividing by current liabilities. The QR remove
inventories from current asset because they are the least liquid current asset. Therefore, QR
is an acid test of a company ability to measure its current obligation.
 Working capital policies refers to the firms’ policies regarding
1) Target level for each categories of current asset
2) How current asset will be financed

Working capital management involve both setting working capital policy and carrying that policy
in today operation.

 Working capital management is concerned with the problems that arises in attempting to
manage the current assets, the current liabilities and the interrelationship that exist between
them. The term current asset refers to these assets which in the ordinary courage of business
can be or will be, converted into cash with in one year without undergoing a reduction in
value and with out disrupting the operation of the firm. Current liabilities are those

7
 liabilities which are intended at their inception, to be paid in the ordinary courage of
business with in a year, out of the current asset or earning of the concern.
Current Asset
 Cash marketable securities
 Account receivables
 Inventories
o Raw material and components
o Work in progress
o Finished goods and others

Current liabilities
 Short term borrowing
 Account payables
 Tax provisions

In the management of working capital two characteristics of current asset must be borne in
mind.

i. Short life span

ii. Swift transformation into another asset form.

Current asset has a short life span.cash balance may be held idle for a week of two account
receivable may be held idle for a week of two account receivable may have a life span of 30 to 60
days, and inventories may be held for 30 to 100 days. The life span of current asset depends up on
the time required in the activities of procurement, production, sales and collection, and degree of
concide (synchronization) among them.

Each current asset is swiftly transformed into another asset forms; cash is used for acquiring raw
material; raw material is transformed into finished good (this transformation may involve several
stages of work in progress); finished goods generally sold on credit are converted into account
receivable; and finally account receivables, on realization generate cash.

The current asset should be large enough to cover its current liabilities in order to ensure a
reasonable margin of safety. The interaction between current asset and current liabilities is,
therefore, the main theme of the working capital management.

Short-term credit (current liabilities)- is defined as any liability originally scheduled far payment
with in one year. The four major component of current liabilities are

1) Accrual- which are continually recurring short term liabilities, represent free spontaneous
credit.

8
 2) Account payable- or trade credit is the largest category of short-term liabilities. Trade credit
arise spontaneously as a result of credit purchases.
3) Loan from commercial banks and financed companies: - are an important source of short-
term credit. Interest on bank loans may be quoted as simple interest, discount interest, or add-
on interest.
4) Commercial paper- is unsecured short-term debt issued by large financially strong
cooperation. Although the cost of commercial paper is lower than the cost of bank loan, it can
be used only by large firms with exceptionally strong credit rating.

2.3. Advantage and dis advantage of current liabilities

2.3.1. Advantage of current liabilities (short-term credited)
 The speed with which short-term loan can be arranged
 Increased flexibility
 Short-term interest rates are generally lower than long term.

2.3.2. Disadvantage of current liabilities

 The lender can demand payment on short notice
 The cost of loan will increase if interest rate rise.

2.4. Objective and Goal of WCM

 Liquidity and profitability

Which is more important

The basic objective of working capital management is to provide adequate support for the smooth
functioning of the normal business operations of a company. The objective of profitability supports
the primary financial management objective, which is shareholder wealth maximization ensures
that companies are able to meet their liabilities as they fall due, and thus remain in business.

The goal of working capital management is to manage the firms` current assets and liabilities in
such away that a satisfactory level of working capital is maintained. This is so because if the firm
can not maintain a satisfactory level of working capital it is likely to become insolvent and may
even force into bankruptcy.

9
2.5 Managing various components of working capital
An efficient management policy is needed for different components of working capital. This is
because managing each components of working capital enables the firm for maintaining liquidity
and maximizing the profit. Therefor it is very important to study the detail features of each
component of working capital separately. These components of working capital are:

 Liquidity management
 Solvency management
 Inventory management
 Account receivable

2.5.1 Liquidity
A market is liquid when it has a level of trading activity allowing buying and selling with minimum price
disturbance. It is also a market characterized by the ability to buy and sell with relative ease.

The ratios, which indicate liquidity of a firm, are:

2.5.1.1 Liquidity ratios:

These ratios measure the firm’s ability to meet its current obligations as and when they become
due. Liquidity is a prerequisite for the survival of a firm. A firm should ensure that it does not
suffer from lack of liquidity. The failure of the company to use its obligations put in a dangerous
situation on the other named idle assets earns nothing. Therefor a proper balance between the two
contradictory requirements i.e., liquidity and profitability is required for efficient financial
management. The liquidity ratios measure the ability of a firm to meet its short-term obligations
and reflect the short-term financial strength/solvency of a firm.

A ratio greater than one means that the firm has more current claims against them. Its conventional
rule that a current ratio of 2 to 1 or more to be considered as satisfactory. However current ratio is
a crude and quick measure of firm’s liquidity.
𝑐𝑎𝑠ℎ + 𝑚𝑎𝑟𝑘𝑎𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
𝑙𝑖𝑞𝑢𝑖𝑑𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

10
a) Current ratio:
and quick measure of firm’s liquidity.
Current ratio is calculated by dividing total current assets to total liabilities. This ratio is also
known as “working capital ratio”.

Current assets
Current ratio =
Current Liabilities

Current assets include cash and those assets in marketable securities, debtors, stock, prepaid
expenses, which can be converted in to cash within a year. Current liabilities defined as liabilities,
which are short term maturing obligation to be met, current liabilities include creditors, Bills
payable, Bank credit, and provision for taxation, dividend payable, outstanding expenses.
b) Quick Ratio:

Quick ratio or acid test ratio is more refined measure of firm’s liquidity. This ratio establishes a
relationship between quick or liquid assets and current liabilities. Stock and prepaid expenses are
considered to be less liquid.

Current assets – Inventory

Quick Ratio =
Current Liabilities

Generally, a quick ratio of 1:1 is considered, representing a satisfactory current financial

condition. This ratio is of great important for banks and financial institutions.
c) Cash Ratio:
It is the ratio of absolute liquid assets to quick liabilities. However for calculation purposes it is
taken as ratio of absolute liquid assets to current liabilities. Absolute liquid assets include cash in
hand and short-term investments.
Cash in hand and bank
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =
Current Liabilities

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2.5.2 Solvency
Steady and healthy circulation of cash in the entire business operation is the basis of business
running on a continuous basis. It is also the ultimate output expected to be realized by selling the
service or product manufactured by the firm. Ultimately, every transaction in a business in either
an inflow or an outflow of cash.

Therefore, effective management of cash is the key determinant of efficient working capital
management. There should be sufficient cash with a firm all the time to meet need of the business.
Both excess and inadequate cash situations are undesirable from the point of view of profitability
and liquidity.
Inadequate cash may degenerate a firm into a state of technical insolvency and even lead to its
liquidation. It will eventually disrupt the firm’s manufacturing operation. On the other hand, excess
cash remains idle without contributing anything towards the firm’s profitability. This is so because
if the firm cannot maintain a satisfactory level of working capital it is likely to become insolvent and may
even force into bankruptcy.

2.5.2.1 Solvency ratio

The solvency ratio of an organization gives an insight in to the ability of an organization to meet its financial
obligation. Solvency also indicate how much the organization depends on its creditors and the banks can
use this when the organization applies for a credit facility. Solvency ratio is a calculation formula and
solvency indicator that demonstrate the relationship between the varies equity components. There are two
ways to calculate solvency ratio.
𝑒𝑞𝑢𝑖𝑡𝑦
a) 𝑠𝑜𝑙𝑣𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑥100%
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡
b) 𝑠𝑜𝑙𝑣𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝑥100%

2.5.3 Inventory management

In developing inventory management technique, we have to evaluate costs associated with
inventory, the caring cost and ordering cost. Carrying cost includes interest on funds tied up in
inventory and cost of ware house space, insurance premium and materials handing expenses. There
is also implicit costs associated with the danger of obsolesces or profitability and paid price
changed the large the order, we placed the greater average inventory we will have on hand the
higher carrying cost.

12
ordering cost, if we maintain low average inventory stock, we must order many times and total
ordering cost will be higher as the order size increases carrying cost up because of having more
inventory on hand. (pandy, Financial management 2007)

EOQ: economic order quantity (EOQ) model is a famous model for managing the inventories of
the firm. It helps manage inventories and know right amount of quantity that should be ordered by
considering other factors like cost of ordering, carrying costs, purchase price and annual sales. D=
carrying cost

Just in time: it is another important technique which brought about paving shift in the management
of inventories. It did not reduce cost of inventory but it abolishes it completely. Just in time means
acquiring raw materials or manufacturing produce at the time when it is require by the customer.
This strategy is very difficult to implement but if implemented can bring down inventory cost to
minimum levels.

In manufacturing company inventory is usually divided in to three categories: raw materials, work
in process (partially finished goods) and fully finished goods which is ready for sale.

a) Raw Materials: Raw materials are those basic inputs that are converted into finished
products through the manufacturing process. Raw material inventories are those units, which
have been purchased and stored for future productions.
b) Work-in-progress: The work-in-progress is that stage of stock, which is in between raw
materials and finished goods. They are semi-finished products that need more work before
they become finished products for sale. The quantum of WIP depends on the time taken in
the manufacturing process. The greater the time taken in manufacturing, the more will be the
amount of work-in-progress.
c) Finished goods: Finished goods inventories are those completely manufactured products,
which are ready for sale. Stocks of raw material and work-in-process facilitate production
while stock of finished goods is required for smooth marketing operations.
All these forms of inventory need to be managed and financed, and their efficient management can
increase the firm’s profitability by minimizing the cost.

13
2.5.3.1 Inventory turnover ratio
Inventory turnover ratio indicates the efficiency of the firm in producing and selling its product. It
is calculated by dividing the cost of goods sold by the average inventory. The average inventory
is the average of operating and closing balances of inventory. In a manufacturing company
inventory of finished goods is used to calculate inventory turnover.

Sales
Inventory Turnover Ratio =
Average Inventory

Opening inventory + Closing inventory

Average Inventory =
2

2.5.4 Receivable management

Accounts receivable or trade credit is the most prominent force of the modern business. It is considered as
an essential marketable tool, acting as a bridge for the movement of goods through production and
distribution stages to customers finally. A firm grants credit to protect its sales from the competitor and to
attract potential customers. Trade credit, thus credit receivable or book debts, which the firm is expected
to, collect in future. It also involved an element of risk as the cash payment has get to be received, hence
they has to be carefully analyzed.

Account receivable represents the extension of credit by which the firm gives to its customer. The
extension of credit to customer by most manufacturers is costs of doing business. By keeping its
money tied up in account receivable, the firm loses time value of money and runs the risk of non-
payment by its customers. (Gitman 1997)

The firm’s financial manager directly controls account receivable through involvement in the
establishment on management of

Credit policy
Collection policy
Credit standard
Discount given for early payment

14
Credit policy: a set of decision that includes the firm’s credit period, credit standard, collection
procedures, and discounts offered.

Credit period; the length of time buyers are given to pay for their purchases.

Credit standard; refers to the required financial strength of acceptable credit customers.

Collection policy: measured by its toughness or laxity in attempting to collect on slow paying
account.

Discount offered: the percentage given for buyers to motivate the payment with in the short period
(bringham, Houston, 1997).

2.5.4.1 Receivable Ratio

Account receivable turn over let the business measure how quickly the customers are paying out the
money receivable. And also used to measure how effectively a firm is managing its receivable.

𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

15
 Chapter Three
Research Methodology

3.1. Introduction:
This will help to out line the methods that will be followed in the study it describes the research
design, sample design (sample size) target group, sampling technique, data collecting
technique, source of data and data analysis and interpretation.

3.2. Research design

In this study, descriptive research design will be used in the study. This will used to explain
the phenomena by understanding statement and fact on the ground as they were aimed at
explaining the phenomena as they exist. This gives a high degree of honesty and integrity in
reporting the finding. Both qualitative and quantitative approach will be used and this study
will conduct at 2 brothers food complex.

3.3. Target group

The target group will be 2 brothers food complex which is located at Adama.

3.4. Sample size

This sudy will use non-probability sampling method to collect efficient information from people who
have information about the study area from managers and employees

3.5. Sampling technique

In this technique we will use non probability sampling method. In this context, a non-probability
judgment sampling or purposive sampling technique will be used.

3.5.1. Purposive Sampling

In purposive sampling we sample with a purpose in mind. Purposive sampling can be very useful
for situation where we need to reach a targeted sample quickly and where sampling for
proportionality is not the primary concern with a purposive sample. We are likely target the opinion
of our target population.

3.6. Data collecting technique

The major data collection will be varying from primary and secondary data. How ever the major
technique of primary data will be interview (unstructured interview). And the secondary data will
be from external and internal source (documentation)

16
 3.6.1. Interview
This will involve conversation or face to face interaction between interviewer and respondent.
This technique provides a greater information or in-depth information from information from
the respondent and will be more flexible.

3.6.2. Documentation
This will be used in depth study on relevant documents like sales and marketing report,
accounting and financial report and miscellaneous report (sales order, purchase order...) will
be used.

3.7. Source of data:

This source of data collection method will be primary and secondary data. This will enable to
produce the final report.

3.8. Data analysis and Interpretation

This will help ordering of data in to consistent pattern in order to obtain answer the problem
under the study. We will systematically collect data, edit, code, classifies and tabulation
according which will provide with easy analysis, interpretation and presentation of the finding
in consistent manner.

17
 Chapter four
Cost and Time Budget

4.1. Cost Budget

It`s necessary for the research proposal to know the exact value of the cost to be incurred.

No Item Quality Unit cost per birr Total cost per birr
1 Pen 4 7 28
2 White paper 1 pack 1 200
3 Transportation fee - - 300
4 Mobile phone card 30 5 150
5 Print 45 4 180
6 Monetization (binding) 2 10 20
7 Compact disc 1 20 20
8 Flash disc 1 160 160
9 Paper writing 40 10 400
10 Miscellaneous expense - - 400
11 Copy 40 1 40
Total 1,898
Contingency 10% 189.8
Grand total 2,087.8

4.2. Time Budget

No Name 2019 GC
April May June
1 Research 5-13
proposal
2 Research 9-20
Design
3 Data collection 22-30 1-5
4 Data process 7-16
and analysis
5 Data 19-26
interpretation
6 Print 1-10
7 Summation and 20
presentation

18
Reference:
 Eugene F.Brighan – university of florida
 Michael cehrhadt- university of Tennessee (financial management theory and practice
10th edition, page 835-895)
 Galinger George W and P.Basil Healy, liquidity analysis and management (MA:
Addison Wesley, 1991)
 Hill Nedc, William L.sartoris, short term financial management: (NY: prentice-Hall
1995)
 Lambrix R.J and S.S Sanghvi. “managing the working capital cycle” financial
executive, June 1979, 32-41
 other internet searched documents.

19