CHAPTER ONE

INTRODUCTION 1.1 BACKGROUND OF THE STUDY The competitiveness of global manufacturing industries has evolved to the point where attractive returns are no longer guaranteed from their operations. In fact, the staff reduction and technical advancement reduction can easily be traceable to unattractive returns. A way out of this phenomenon is the improvement of returns on capital employed (ROCE) and cash flows by focusing on component of capital employed that is tied up in working capital; inventory, receivables and payables. Organizations now pay more attention to the effect of returns and risks on the assets: Current and Fixed assets. As well known, that the decision to finance any of these assets rest on the management of the organisation and in making decision on finance, the management must balance the requirement for higher returns by using short-term debt to finance current asset against risks of illiquidity that can result in insolvency. According to Olare (1997), it is essential that the investment in working capital is effectively and efficiently managed to maintain control of business cash flows, an investment in working capital must consider the trade off between liquidity (risk) and profitability. Business Capital is broadly divided into two groups: Fixed Capital and Working Capital. Fixed Capital refers to the funds invested in fixed assets of a firm in the form of land, building, machinery etc. Working Capital refers to the funds invested in the current assets of a firm such
1

as raw materials, work-in-progress, finished goods, receivables, cash etc. From the viewpoint of manufacturing process, working capital means that part of capital, which is required to keep the flow of production smooth and continuous. . Working Capital, being the lifeblood of any enterprise, its management becomes a crucial exercise for the Financial Managers of firms. The need of working capital is directly linked to the growth of the firm. In the past, only the problems of the management of fixed capital were given importance in the exercise of financial management. But in the present scenario, looking to the increasing importance of the working capital in any business unit, the exercise of management of working capital has become as much important for a financial manager as the management of fixed capital. Some authors go the extent of saying that financial management means working capital management. Even if this extreme view is regarded as unacceptable, there is no doubt that a large part of a financial managers time and energy is used up in attending to the problems of working capital management. The exercise of working capital management covers the following points to be considered: 1.Estimating the working capital requirements. 2.Financing of working capital. 3.Optimum untilisation of working capital The aim of this research work is to determine the importance of the management of working management to business. And also the adverse effect which neglecting of working capital management could have on the profitability and continual existence of businesses.
2

1.2

STATEMENT OF THE PROBLEM Every organisation whose working capital is effectively managed is likely to meet its financial obligation as they fall due. On the other hand, organisation whose working capital is poorly managed is proves to financial crises when faced with unforeseen situations i.e. unforeseen expenditure. Therefore, the problems identified with the management of working capital which the study is giving solutions to are:
i. The problem associated with how a company should optimize

its working capital

ii. The problem associated with how to determine the adequate

level of investment in working capital iii. The problem of to balancing of liquidity with profitability 1.3 SIGNIFICANCE OF THE STUDY The survival and growth of the manufacturing companies had been of great concern to various people. Several methodologies had been used to analyse the soundness of the working capital management in the manufacturing industries. 1. This study is expected to be of great importance to determine the rate at which the management of working capital in the manufacturing industries affect the efficiency and performance in organisation 2. Determine best possible strategies required to effectively manage working capital
3. The result of this study will be used to create a balance between

liquidity and profitability in businesses.

1.4

OBJECTIVE OF THE STUDY The objective of the study is to examine the effect of efficient working
i.

capital

management

system

on

the

growth

of

manufacturing industries. More specifically, other objectives are: To find out the effect of working capital on the short and long To assess the level of effective control of working capital To evaluate the impact of efficient working capital term survival of a company. ii. iii.
iv.

management management on the growth of manufacturing industries. To provide plausible recommendations and on how working capital could be effectively managed for improved organisational performance. v. Plc To find out methods of managing working capital in Lever Brothers

1.5

THE SCOPE OF STUDY

The research work examined the factors which influenced the efficiency of working capital management using the UNILEVER NIGERIA PLC as a case study. The work covered the relating working capital in the period of study. 1.6 RESEARCH HYPOTHESIS In the process of this research, the researcher intends to examine the hypothesis stated below:

HYPOTHESIS 1
4

1. NULL HYPOTHESIS (HI)

The profitability of a company does not depend on its liquidity ALTERNATIVE HYPOTHESIS (HO) The profitability of a company depends on its liquidity 2. HYPOTHESIS 2 NULL HYPOTHESIS (HI) The company does not have working capital as at needs to manage the available resources

ALTERNATIVE HYPOTHESIS (HO) The company has working capital as at needs to manage the available resources 3.

1.7

DEFINITION OF THE TERMS

5

Fixed Assets: These are the assets acquired that are used for more Current Assets: These are assets which are expected to be Current Liability: These are liabilities that a firm must satisfy Cash: This is the basic input needed to keep the business Capital: Money invested to carrying on a business for the Capital Employed: Total money tied up in a business to allow it Investment: Act of putting money on a business to make profit Inventory: This is a general terminology referring to stocks of Batch: A number of things dealt with at a time as a group.

than one year which produce economic benefit converted to cash in one year to meet current obligation (pay) within one year running on a continuous basis purpose of getting profit operate

different articles

CHAPTER TWO
LITERATURE REVIEW

2.1

THE CONCEPT OF WORKING CAPITAL Working Capital, in the simple words, means the capital invested in the current assets of a business However it has been variously defined as : The current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash. So, Working Capital is descriptive of that capital which is not fixed. But the more common use of working capital is to consider it as the difference between the book value of the current assets and current liabilities. Thus, there are two different opinions about the meaning of the term Working Capital (1) According to first school of thought, working capital represents all current assets of the Company. They believe that working capital represents those assets, which change their form during the process of production. Working Capital = Total Current Assets (2) According to the second school of thought, working capital is the excess of current assets over current liabilities. Working Capital = Current Assets Current Liabilities

Current assets include cash, accounts receivable, notes receivable, advances on contracts, inventories etc. Current liabilities include accounts payable, notes payable, accrued expenses, temporary loans etc. Under this concept an attempt is made to measure net working capital of the Company. To avoid the confusion involved in the interpretation of working capital, the total current assets are described as gross working capital, while the excess of total current assets over total current liabilities are described as net working capital.

2.2

FEATURES OF WORKING CAPITAL : The features of the working capital distinguishing it from the fixed capital are as follows:

i)

Short Term needs Working capital is used to acquire current assets, which get converted into cash in a short period. The duration of working capital depends on the length of production process, the time that elapses in the sale and the waiting period of the cash receipt.

ii)

Circular Movement Working capital is constantly converted into cash, which again turns into working capital. This process of conversion goes on continuously. It moves in a circular way. That is why working capital is also described as circulating capital

iii)

An element of permanency Though working capital is a short-term capital, it is required always and forever. It is required to run the production activity of the firm smoothly and uninterruptedly. So long as the production continues, the firm will constantly remain in need of working capital.

iv)

Fluctuating

Though the requirement of working capital is felt permanently, its requirement fluctuates more widely than the fixed capital. The requirement working capital varies directly with the level of production. The portion of working capital that changes with production, sale, price etc. is called variable working capital v) Liquidity Working capital is more liquid than fixed capital. It can be converted into cash within a short period and without much loss. A firm in need of cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its products. It is due to this trait of working capital that the firms with a larger amount of working capital feel more secure. vi) Less Risk Investment in the working capital is less risky as it is a short-term investment. Working capital involves more of physical risk only and that also is limited. It involves financial or economic risk to a much less extent because variations of the product prices are less severe generally. It is also free from technological changes as it gets converted into cash again and again.

2.3

WORKING CAPITAL OR CASH OPERATING CYCLE A working capital or cash operating cycle is the total length of time required to complete the following sequence of events. - Conversion of cash into raw materials - Conversion of raw materials into works in progress - Conversion of working in progress into finished goods - Conversion of finished goods into debtor through sales
9

- Conversion of debtor into cash through debt collection This working capital cycle is the total length of time between investment on raw materials at the start of the production process (cash outflow) and time of recovery at the end with the collection of cash from debtors (cash inflow). As an introduction to the working capital cycle, here is a quick reminder of the main types of cash inflow and outflow in a typical business: Inflows Cash sales to customers Receipts from customers who were allowed to buy on credit (trade debtors) Interest on bank and other balances Proceeds from sale of fixed assets Investment by shareholders Outflows Purchasing finished goods for re-sale Purchasing raw materials and other components needed for the manufacturing of the final product Paying salaries and wages and other operating expenses Purchasing fixed assets Paying the interest on, or repayment of loans Paying taxes Cash flow can be described as a cycle: The business uses cash to acquire resources (assets such as stocks).The resources are put to work and goods and services produced. These are then sold to customers. Some customers pay in cash (great), but others ask for time to pay. Eventually they pay and these funds are used to settle any liabilities of the business (e.g. pay suppliers).And so the cycle repeats Hopefully, each time through the cash flow cycle, a little more money is put back into the business than flows out. But not necessarily, and if management dont carefully monitor cash flow and take corrective action when necessary, a business may find itself sinking into trouble.
10

In other words, working capital is needed by the business to: - Pay suppliers and other creditors - Pay employees - Pay for stocks - Allow for customers who are allowed to buy now, but pay later (socalled trade debtors) What is crucially important, therefore, is that a business actively manages working capital. It is the timing of cash flows which can be vital to the success, or otherwise, of the business. Just because a business is making a profit does not necessarily mean that there is cash coming into and out of the business. The cash needed to make the cycle above work effectively is known as working capital.

2.3.1

How to determine the length of the Working Capital cycle?

The length of the operating cycle can be determined by addition of the Inventory conversion period and the debtors conversion period. The inventory conversion period is the total time needed for producing and selling the product. The debtors conversion period is the time required to collect the outstanding amount from the customers. The total of inventory conversion period and debtors conversion period is referred to as gross operating cycle. There are certain expenses, the payment of which can be temporarily postponed. Such types of expenses are the spontaneous sources of working capital for a firm to finance its investment in current assets. The period during which the firm can temporarily defer the payment of such expenses is called as payables deferral period and the difference between the gross operating cycle and the payables deferral period is referred to as net operating cycle. Based on the forecast of the operating cycle of a firm, its requirement for working capital can be estimated.
11

2.4

DETERMINANTS OF WORKING CAPITAL There are no set rules or formulate to determine the working capital requirements of a firm. There are n numbers of factors influencing the working capital requirements of a firm, some of which are;

i)

Nature of business Working capital requirement of a firm is basically influenced by the nature of its business. Trading and financial firms require large amount of working capital. In contrast, the manufacturing firms require less amount of working capital and large amount of fixed assets.

ii)

Sales and Demand Conditions The sales and demand conditions of a firm also affect its working capital position. It is difficult to precisely determine the relationship between volume of sales and working capital needs. Sales depend on the demand conditions. Most of the firms experience seasonal and cyclical fluctuations in the demand of their products and services. These business variations affect the working capital requirement, particularly the temporary working capital requirement of the firm. When there is an upward swing in the economy, the sales will increase and untimely the firms investment in inventories and debtors will also increase. On the other hand, when there is a decline in the economy, the sales will fall and ultimately, the level of inventories and debtors will also fall. Under recessionary conditions firms try to reduce their short-term borrowings.

iii)

Technology and Manufacturing Policy The manufacturing cycle of the firm also affects the requirement of the working capital. The manufacturing cycle comprises the purchase and use of raw material and production of finished goods. Longer the manufacturing cycle, larger will be the firms working capital
12

requirements and vice versa. An extended manufacturing time/span means a larger tie-up of funds in inventories. Thus, if there are alternative technologies for manufacturing a product, the technological process with the shortest manufacturing cycle may be chosen. Further, the requirement of working capital also depends on whether the firm has adopted steady production policy or variable production policy. iv) Credit Policy In the present day circumstances, almost all units have to sell goods on credit. The nature of credit policy is an important consideration in deciding the amount of working capital requirement. The larger the volume of credit sales, the greater will be the requirement of working capital. Also the longer the period of collection of payment, the greater will be the requirement of working capital. Generally, the credit policy of an individual firm depends on the norms of the industry to which the firm belongs. v) Availability of Credit The availability of credit from banks and financial institutions also influences the working capital requirement of a firm. The availability of credit to a firm depends upon the creditworthiness of the firm in the money market. If a firm has good credit standing in the market, it can get credit easily on favorable terms and hence it will require less working capital. vi) Operating Efficiency The operating efficiency of the firm relates to the optimum utilisation of resources at minimum costs. If the firm is efficient in controlling its operating costs and utilizing its current assets, than it helps in keeping the working capital at a lower level. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. vii) Price Level Changes
13

The price level changes also affect the level of working capital. Generally, rising price levels will require a firm to maintain higher amount of working capital. However, the effect of rising prices may be different for different companies, as though the general price level increases, the individual prices may move differently. Therefor some firms may require more working capital, while other may require less working capital in case of price rise. viii) Growth and Expansion Plans : The growth and expansion plans to be undertaken by a firm also affect its requirements of working capital. Hence the planning of the working capital requirements and its procurements must go hand in hand with the planning of the growth and expansion of the firm. Even the expansion of the sales also increases the requirements of working capital.

2.5

FORECASTING WORKING CAPITAL REQUIREMENT Occasionally, a company requires forecasting the amount of working capital needed to finance an increase in output or introduction of new products. The anticipated production level and production costs, length of production cycle, planned stock level and credit term are all factors to be considered in preparing a working capital forecast. A firm has to maintain an adequate level of working capital to run its operations smoothly and effectively. It should be adequate in the sense that it shall not be more than the requirements nor it shall be less than the requirements. Both the excessive as well as inadequate working capital positions are dangerous from the firms point view. We know that the current liabilities are met out of the current assets. So the level of current assets shall be sufficient enough to meet the current liabilities. Excessive working capital refers to the position where when the level of current assets is much higher to meet current
14

liabilities. The excessive capital has opportunity cost for the firm, as this excessive capital remains idle in the firm, which earns no profit for the firm. If these funds shall be invested in some profitable project, it adds the profitability of the Company. On the other hand, inadequate working capital refers to the position where the current assets are not sufficient enough to meet the current liabilities. Such type of position may be harmful to the firm as it may interrupt the production and sales of the Company, which ultimately affects the profitability of the Company. Moreover if the liquidity position of the firm is not adequate enough to meet its current liabilities, it may affect its credibility in the market. Therefore an enlightened management should maintain the right amount of working capital on a continuous basis. Only then the proper functioning of business operations can be ensured. The amount of the working capital shall be maintained at such level, which is adequate for it to run its business operations, neither excessive nor inadequate. This level of working capital is called as the Optimum Working Capital. 2.6 Risk Return Trade-off :Liquidity v/s Profitabilit The level of working capital affects the degree of risk and profitability both. Hence the level of working capital should be so fixed that, on the one hand, its financial soundness is maintained and on the other hand, its profitability is optimised. At this point it is necessary to be clear about the meaning of solvency or insolvency of the firm. Solvency means a situation in which a firm can easily repay its debts as and when they mature. On the other hand, insolvency is a situation in which a firm is not able to repay its debts as and when they become due for payment.
15

The term risk implies the profitability that a firm will become technically insolvent, so that it will not be able to meet its obligations as and when they become due for payment.

2.6.1

Nature of trade-off: If profitability is to be increased, the firm must increase its risk. If the firm wants to decrease risk, its profitability will also decrease. If a firm wants to maintain insolvency, it must maintain a higher level of liquidity. That is, it must hold a larger amount of current assets such as cash, receivables, stock of goods etc., so that there would be no problem in repaying the debts as and when they due for payment. However, if a firm holds more amount of current assets, the prospects of profit decline due to the fact that most of its funds are locked up in idle current assets, which earn no profit. On the other hand, if a firm wants s to increase its profitability, it must be prepared to increase its risk of insolvency, as it would have to reduce its investment in current assets. However a smaller amount of liquidity increases risk of insolvency and, at the same time, it increases profitability also. The firm should maintain the its current assets at such level that on one hand its profitability increases and on the other hand its risk of insolvency decreases. There should be a balance between profitability and risk. The level, at which there is a trade-off between the risk and return, is the optimum level of working capital for a firm

2.7

MANAGEMENT OF WORKING CAPITAL

16

Working Capital management refers to the administration of all aspects of current assets namely cash, marketable securities, debtors and stock(inventories) and current liabilities. The financial manager should determine levels and composition of current assets. He must see that right sources are tapped to finance current assets and that current liabilities are paid in time. Working capital management is critical for all firms, but particularly for small firms. A small firm may not have much investment in fixed assets, but it has to invest in current assets. Further, the role of current liabilities in financing the current assets is far more significant in case of small firms, as, unlike large firms they, face difficulties in raising long-term finances. The main problems of the management of working capital are as stated below: a. to determine a proper amount of working capital to be held in the Business i.e. estimating the working capital needs b. to take decision on the sources of working capital i.e. procurement of Working capital c. to ensure that the working capital is efficiently utilised i.e. optimum of utilisation of working capital Before we consider these problems lets first understand some of the Principles of working capital management:

2.7.1

Principles of Working Capital Management : The financial manager must keep in mind the following principles of Working capital management:

i)

Principle of Optimisation
17

The level of working capital must be so kept that the rate of return on investment is optimised. In other words, the working capital should be maintained at an optimum level. This is the point at which the increase in cost due to decline in working capital is equal to the increase in the gain associated with it. According to the principle of optimisation, the magnitude of working capital should be such that each Naira invested adds to its net value. In other words Capital should be invested in each component of working capital as long as the equity position of firm increases ii) Principle of Risk Variation This principle is based on the assumption that the rate of return on investment is linked with degree of risk in the business. The greater on investment is linked with the degree of risk in the business assumes, the greater is the opportunity for gain or loss. iii) Principle of Cost of Capital Each source of working capital has different cost of capital. The degree of risk also differs from one source to another. The type of capital used to finance working capital directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of capital. A firm should raise capital in such a manner thata balance is maintained between risk and profit. iv) Principle of Maturity of Payment : This principle states that the working capital should be so raised from different sources that the firm is able to repay them on maturity out of its inflows of funds. Otherwise the firm would fail to repay on maturity and ultimately, it would find itself into liquidation though it is earning huge profits. This implies that the firms ability to repay its short-term debts depends not on its earnings but on the flow ofcash into it.

18

These are some of the principles of working capital, which a financial manager should keep in mind while managing working capital. Nowlets discuss how to manage working capital. v) Estimating Working Capital needs : The first step in managing working capital is to estimate about the working capital needs. The most appropriate method for calculating working capital needs of a firm is the concept of operating cycle. In estimating working capital needs, different people adopt different approaches. Some authors suggest that the working capital should be greater than the minimum requirements of the firm. The management should feel safety. It would be able to meet its obligations even in adverse circumstances. However, the excessive capital may lead to waste and inefficiency. On the other hand, many authors suggest that the working capital should be lower than the requirement so that no idle funds shall be invested in the current assets and it ultimately leads to increase unprofitability of the Company. However, in such case the firm always have risk of technical insolvency as it may not meet its obligations as and when they falls due for payment. So the question is what the proper amount of working capital is. It is not an absolute amount. It depends upon the needs and circumstances available in the firm. 2.8 MANAGEMENT OF COMPENENTS OF WORKING CAPITAL The financial manager of a firm shall, while thinking about the management of working capital, consider the management of the following components of working capital individually:

1. Cash Management

19

2.InventoryManagement 3. Receivable Management The exercise of management of each component of Working Capital leads to effective management of Working Capital of a firm. Lets have a brief idea about the management of each component of working capital. 2.9 CASH MANAGEMENT Cash is the medium of exchange which allows management to carry on the various activities of the business on day to day basis. It includes coins, currency, cheques held by the firm and the balance in its bank accounts. In a broader sense, it also includes Near Cash Assets such as marketable securities and time deposits with the bank. A firm should have a sufficient balance of cash neither more nor less than the requirements. A firm holds cash for the following motives: a) Transaction Motive, This is the need of holding cash to satisfy normal disbursement and collation activities associated with firms operations. This motive of holding cash is to meet day to day obligations of a company. b) Precautionary Motive, The purpose of holding cash in this case to meet unforeseen contingencies like fire, accident, sudden breakdown of equipment or vehicles. If expected cash is not received as planned for, cash held on precautionary basis could be used to satisfy any obligation that comes up which ought to have been satisfied by expected cash. c) Speculative Motive and This motive of holding cash is to create the ability for a firm to take advantage of special opportunities that if acted
20

upon quickly will favour the firm. Examples of this would be purchasing of stock of a greater discount or investing in profit making opportunities.

2.9.1

CASH MANAGEMENT STRATEGIES Cash balance is significantly influenced by the firms production and sales techniques and by procedure for collection of sales and paying for purchases.The cash management strategy of a firm involves the consideration of the following four factors -Ascertainment of the minimum cash balance and controlling the Levels of cash - Controlling Cash Inflows - Controlling Cash outflows - Optimum investment of surplus cash

i)

Controlling the levels of cash The financial manager of a firm shall have the following tools available with him for controlling the levels of cash. Cash Budget: Cash budget is a statement showing the estimated cash inflows and cash outflows over the next planning period. The surplus or shortfall of cash is highlighted by the cash budget. Providing for contingencies: In addition to the level of cash determined by the cash budget, a suitable minimum amount of cash must be kept for meeting the unforeseen contingencies such as strikes, floods, fire etc. Consideration of cost of shortage of cash: The cost arises in terms of loss of firms reputation or additional cost of borrowing at higher rate of interest shall be considered. Availability of other sources of funds:

21

In case of shortage of cash, which are the sources that can be trapped for meeting the urgent cash requirements. ii) Controlling of cash inflows After having prepared the cash budget, a finance manager must ensure that there is no significant deviation between the projected cash inflows and the actual cash inflows. Effective cash collection shall be made by adopting the following techniques. Concentration Banking : The Concentration Banking is a system of decentralised collection of accounts receivable in case of large firms having their business spread over a large area, by opening a number of collection centers at selected strategically located areas and making collections from that centers from the customers residing in that area. Local Box System In this system, the firm hires a post-office box and asks its customers to send the cheques to the box. The firms local bank is given authority to open the box and credit the payment in the firms bank account. iii) Controlling of cash outflows The operating cash requirement can be reduced by controlling the cash outflows. The financial manager can use the following techniques for the purpose. Centralised Disbursements: All the payment can be made from only one account at the Head Office. This will result in delay in presentation of cheques for payment by parties who are working from distant places.

Playing Float
22

Float means the amount tied up in cheques that have been drawn but have not yet been presented for payment. There is always a time lag between the issue of a cheque by the firm and its actual presentment for payment. As a result the firms actual balance at bank may be more than the balance as shown by its books. This different is called Payment in Float. Optimum Investment of Surplus Cash The financial manager shall use its the cash efficiently and for that purpose, the following points shall be kept in mind. Determining Surplus Cash Surplus cash is the cash in excess of the firms normal cash requirements. This requirement can be computed by the multiplication of desired days of cash and average daily outflows. If the cash balance is more than this normal requirement, then the surplus cash can be invested somewhere to earn returns. Determining Channels of Investment : Surplus funds can be invested in marketable securities or somewhere else. While exercising such discretion, a finance manager must take care of security, liquidity, yield and maturity associated with marketable securities

2.10

INVENTORY MANAGEMENT Inventory constitutes the most significant part of current assets of manufacturing companies. Because of large size of company a considerable amount of fund is required on inventory. It is this absolutely and effectively in order to avoid unnecessary investment.

The inventories are stock of the product a company is manufacturing for sale i.e the components that make up the product. The various
23

forms in which inventories exist in a manufacturing company are raw materials, work in progress and finished goods. Raw materials these are basic input that are available to meet production requirement. Work in progress these are semi manufactured product Finished goods these are completely manufactured products which are ready for sales. The stock of raw materials facilitates production while the stock of finished goods is required for smooth marketing operation. A firm holds inventory mainly for the following motives: a. Transaction Motive; to meet demand of stock items where the size of the demand is known certainty b. Precautionary Motive;This motive of holding inventories is to guard against the risk of unpredictable changes in future demand and supply c. Speculative Motive; This is to take advantages of special opportunities that if acted upon quickly will favour the company. It also helps to get discount on bulk purchasing. As the inventory involves the investment of the funds, it should be managed properly or rather controlled properly. Inventory management is a planned method to determine which items is to be purchased and how much to be kept in stock, so that the costs of purchase and storage both are minimised without adversely affecting either production or sales. It involves the decision of the firm as to the extent to which inventories can be economically stored.
24

The inventory hold by the firm involves the following cost to the firm: a. Ordering Costs: Every time an order is placed for stock replenishment; certain costs are incurred called as ordering cost. It includes paper work costs, follow up costs, staff costs etc. b. Carrying Costs: Carrying costs are the costs of holding inventory for a given period of time. It includes storage cost, handling cost, insurance cost, obsolesce cost etc. It is possible to reduce its inventory without affecting the production and sales. Though the use of simple inventory and planning control techniques, excessive stock (inventory) can be reduced thus enhancing the profitability of a firm. 2.10.1 Objectives of Inventory Management: A fundamental objective of a good system of inventory management is to be able to place an order at the right time from the right source to acquire the right quantity at a right price and of right quantity. Mainly there are the following objectives of the Inventory Management: 1. to ensure adequate stock 2. to minimise inventories on hand 3. to maintain continuity in production 4. to minimise the cost of purchasing and storage 5. to minimise the wastage and loss 6. to reduce the risk of deterioration 7. o use the available capital effectively
25

8. to be helpful in efficient purchasing 9. to give maximum satisfaction to customers 10. to minimise loss due to price decline 11. maximum use of storage capacity 12. proper storage of materials

2.10.2 Techniques for Inventory Management:

Usually the following techniques are being used by the financial manager for inventory control. a. Determining the Economic Order Quantity (EOQ) Economic Order Quantity is that quantity at which the total ordering costs and inventory carrying costs will be the minimum. A firm is required to consider a number of factors before fixing an economic ordering quantity. Of these factors, important ones are inventory carrying costs and ordering costs. When the inventory carrying cost and ordering cost are in balance, the total cost of ordered quantity is lowest and therefore it is called as economic order quantity. The firm should maintain its inventory at such a level so that its inventory carrying cost and ordering cost are at balance. There are three methods for determining the EOQ: 1. Graphic Method 2. Formula Method 3. Trial and Error Method The results of all three methods are more and less same.

b. Determining other inventory levels

26

In order that the inventory costs are reduced to the minimum and yet the process of production and sales goes on uninterrupted, it is necessary to determine the following inventory levels: 1. Re-order Point or Ordering Level It represents the quantity level at which an order for fresh supplies must be placed with the supplier to replenish the present stock. Generally the following formula is to be used for the purpose: Ordering Level = Maximum Consumption * Maximum Delivery Time 2. Minimum Level The minimum level indicates the lower level of stocks of inventory. Min. Level = Re-ordering level Average Consumption of Average Delivery Period 3. Maximum Level The maximum level of inventory indicates the upper limit of level of stocks. It represents the largest quantity of material to be kept in stock. Max. Level = Re-ordering level Minimum Consumption of Minimum Period + Re-ordering Quantity c. ABC System of Inventory Control A modern system of inventory control, which is economical, too is ABC System of inventory control. It is Always Better Control (ABC). Some items included in the inventory are of very low value and its detailed accounting is not economical. Hence, such items must be stored in sufficient quantity and its use is not restricted. On the other hand, there are certain items of inventory that represent a large proportion of the total value of inventory. In ABC Analysis all items are divided into three Categories A, B and C.

27

In category A, are included those items which are very important and of high value but forms only a small proportion of total quantity of inventory. Strict control over receipts, storage and issue should be exercised over such items. Its requirements must be estimated in advance and its purchases must be planned, so that it is available as and when needed. In category B, those items are included, which are not as important as those are in A group, but are important enough for its proper records to be maintained. Maximum and Minimum levels must be fixed for such items and they must be issued against proper material requisition only. The remaining items must be places in Category C. They are not important from the view point of maintaining control over their receipts and consumption. Little control is to be put on such items. The ABC System of inventory control is very useful for the modern management as it helps in saving their time from the unnecessary work and leads to efficient inventory control. d. Perpetual Inventory System For efficient inventory control, it is necessary that the various items of inventory must be continuously checked and compared with records maintained. This is done by Perpetual Inventory System. Perpetual Inventory means a system of maintaining continuous stock records through bin cards and stores ledger. This implies continuous stock taking in which a certain number of inventory items are checked and verified everyday or at frequent intervals.

28

2.11

Receivables Management When the goods are sold on credit in business, the price of the goods becomes receivable. In the present economic system, credit sales are essentials, unless the goods sold are in short supply. The money involved in inventories are blocked till future and therefore there is an opportunity cost of receivables. However, the credit sales are also essential in order to meet the sever competition. Thus, the management of receivable requires great care. It must be so managed that the benefit available from additional sales and the cost of funds raised to finance the additional credit coincide. The management of receivables is important in the sense that in most business it forms about one-third of current assets. The management of receivable is needed as; a firm has to incur the following cost associated with receivables. 1. Collection Cost i.e. the costs incurred in collecting the payments 2. Default Cost i.e. the bad debt losses arise when a firm is unable to collect some receivable 3. Opportunity Cost 4. Administrative Cost

2.12

Optimum Credit Policy If a firm sells goods on credit, it has to decide the optimum credit policy. It has neither to be too rigid nor too liberal. The sales must go on rising and yet the bad debts and collection costs are kept to the minimum. Thus two types of credit policies are to be considered: 1. Liberal or Lenient Credit Policy 2. Strict or stringent credit policy In Liberal Credit Policy, the customers are allowed liberal terms for credit sales and credit is granted for a longer period even to those
29

customers whose financial position is doubtful. A liberal policy results into increase of sales and increase of profits. However, the risk of bad debts and the opportunity cost of receivables are also increased. The collection costs are also increased. On the other hand, a strict or stringent policy implies that the firm sells in credit on a highly selective basis and only to those customers whose financial position is sound. It results into reduction in sales and reduction in profit also. However, the cost involved with the high volume of receivables and risk of bad debts are also reduced. The firm should determine its credit policy in such a manner that on one hand its profitability is to be increased and on the other hand its liquidity position is not hampered. That means the point at which the profitability and liquidity is balanced is the optimum credit policy for the firm. 2.12.1 Credit Policy Variables While framing optimum credit policy, the financial manager shall consider carefully the following variables of the credit policy: a. Credit Standards Credit Standards means the criteria on the basis of which, credit is granted to a particular customer or particular group of customers. If the standards are very strict in would reduce the volume of receivables and vice versa. Credit Standards of most of the firms include the creditworthiness of the customer. That means the credit should be granted to a customer after accessing his credit worthiness. For accessing the creditworthiness of a customer two factors are important

30

i. Average collection period of a particular customer ii. His default rate While determining the creditworthiness of a customer five Cs are taken into account: i. Character ii. Capacity iii. Collateral iv. Condition and v. Capital b. Credit Terms Credit terms means both the credit period and the cash discount offered, the credit period is the length of time for which credit is extended to customers. It is stated by such terms as 3/15 Net45 meaning that if payment is made within 15 days, 3% cash discount will be given. Even without discount, payments will be made within 45 days. Generally, the customers of the industry determine the credit terms. c. Collection Policy The collection policy must be such as would help in collecting bookdebts in time and reduce the bad debts. A collection policy should ensure prompt and regular collection. This would reduce the need for more working capital and loss of bad debts. The firm must frame a procedure to expedite collection from the customers. e.g. First, a letter must be written to the customer to pay his dues. If he does not respond, then a strong letter must be written. As a last step, a letter must be sent informing the customer that legal action would be taken is dues are not paid within certain days. Thus, a financial manager of a firm shall, while managing its working capital, consider carefully the management of the components of the working capital, in the manner as stated above.
31

2.13

Types of working capital Working capital can be divided in two categories:

i) Fixed or permanent working capital The volume of investment in current assets an change over a period of time. But always there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operating cycle. It is the investment incurrent assets. This is permanently locked up in the business and therefore known as permanent working capital. ii) Variable/temporary working capital It is the volume of working capital that is needed over and above the fixed working capital in order to meet the unforced market changes and contingencies. In other words any amount over and above the permanent level of working capital is variable or fluctuating working capital. This type of working capital is generally financed from shorter source of finance such as bank credit because this amount is not permanently required and is usually paid back during off season or after the contingency. 2.14 Sources of working capital The company can choose to finance its current assets by Long term sources Short term sources A combination of both i) Long term sources of permanent working capital include equity and preference shares, retained earnings, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of
32

financing. Financing through long term means provides stability, reduces risk or payment. And increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow a) Issue of shares It is the primary and most important sources of regular or permanent working capital. Issuingequity shares as it does not create and burden on the income of the concern. Nor the concern isobliged to refund capital should preferably raise permanent working capital. b) Retained earnings Retained earnings accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises. c) Issue of debentures It creates a fixed charge on future earnings of the company. Company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures. e) Long term debt Company can raise fund from accepting public deposits, debts from financial institutions like banks, corporations etc. the cost is higher than the other financial tools. Other sources sale of idle fixed assets, securities received from employees and customers are examples of other sources of finance. ii) Short term sources Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short
33

term sources of funds. And only the period needed. it has the benefits of ,low cost and establishes closer relationships with banker. Some sources of temporary working capital are given below; a) Commercial bank A commercial bank constitutes a significant sources for short term or temporary working capital this will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchanges. b) Public deposits Most of the companies in recent years depends on this sources to meet their short term working capital requirements ranging fro six month to three years. c) Various credits Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, promissory notes, etc helps to raise temporary working capital d) Reserves and other funds Various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital. The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from shortterm sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required.

34

2.15 History of Unilever

Unilever Nigeria Plc, was incorporated as Lever Brothers (West Africa) Ltd on 11th April, 1923 by Lord Leverhulme, but the companys antecedents have to be traced back to his existing trading interests in Nigeria and West Africa generally, and to the fact that he had since the 19th century been greatly involved with the soap business in Britain. Unilever Nigeria Plc started as a soap manufacturing company, and is today one of the oldest surviving manufacturing organizations in Nigeria. After series of mergers/acquisitions, the company diversified into manufacturing and marketing of foods, non-soapy detergents and personal care products. These mergers/acquisitions brought in Lipton Nigeria Ltd in 1985, Cheesebrough Ponds Industries Ltd in 1988. The company changed its name to Unilever Nigeria Plc in 2001. Unilever Nigeria Plc is a public liability company quoted on the Nigerian Stock Exchange since 1973 with Nigerians currently having 49% of equity holdings. The long-term success of this business stems from the strong relationship with the consumers based on the deep roots in the local cultures and markets, creating products that help them to feel good, look good and get more out of life and the total commitment to exceptional standards of performance and productivity. In order to sustain this success, we endeavor to maintain the highest standards of corporate behavior towards our employees, consumers, customers, communities and operating environment.

35

The companys brands are household favorites and this is because it is deeply committed to meet the everyday needs of people everywhere in Nigeria. What is more, deep roots in Nigeria combined with international experience and support; enable Unilever to consistently develop brands, which raise the quality of life. It is therefore no surprise that one would find that all over Nigeria, people are at home with the companys brands. 2.16 Unilever Today Unilever as a company has embarked on a program of restructuring in a bid to re-energize itself. Code-named the Journey to Greatness, the vision is re-inventing the company so that it can deliver fully on promises to its consumers, customers and investors. In addition, the company has sharpened its focus by introducing the Vitality mission, which stands to ensure that in all it does, it is adding vitality to life for everyone. Corporately responsible Over the years, Unilever Nigeria Plc has been a socially responsible and responsive organization that takes strategic actions for the improvement of the communities and environments in which it operates. The company has made provision for assistance in fields of health, education/children welfare and potable water/hygiene as part of its social responsibility programme in the Nigerian communities. Environment & society Every day, people all over the country choose Unilever products to care for their families. This illustrates a key way in which it makes a positive contribution to society.160 million times a day, someone somewhere chooses a Unilever product. From feeding your family to keeping your home clean and fresh, our brands are part of everyday life.

36

CHAPTER THREE
RESEARCH METHODOLOGY

3.1

RESEARCH METHODOLOGY This section is centered on the research methodology adopted in the analysis of the study. The research questions were used to aid the explanatory nature of the study.

3.2

POPULATION OF STUDY The populations studied were most of personnel, accountancy, purchasing, sales and raw materials departments of Unilever Nigeria Plc. The selected staffs have direct relationship with the working capital management system of the organisation. There are total of 140 staffs in those departments. The researcher envisaged that a consideration of 50% of that population was representative.

3.3

SAMPLES AND SAMPLING PROCEDURES As briefed above, sample was drawn from the personnel, accountancy, purchasing, sales and raw materials department, being the unit of analysis. The staffs of those departments were randomly selected to provide the needed data for the study. Being a finites population a sample of 50% of the concerned staff was considered. The number was to members of the staff (population) of Unilever Nigeria Plc.

37

3.4

TYPES AND SOURCES OF DATA Primary data were used in the study. The source of the dark was the staff of the concerned departments. The data was collected through the administration of questionnaire.

3.5

INSTRUMENT OF DATA COLLECTION The instrument used stated above was questionnaires. The questions were simply set is such a manner that the respondents will understand easily. The questionnaires were in two sections. The sections A focused on bio-data information while section B was based on questions pertaining to the research work.

3.6

METHODS OF DATA ANALYSIS Data was analysed by inferential statistics and descriptive means. The results of the research were presented with the use of tables and percentage to facilitate simple representation classification and interpretation of the data collected. Inferential statistics, Chi- square method was used to test whether the data collected would lead to the acceptance or rejection of either the Null hypothesis (Ho) or the alternate hypotheses (Hi). The Chi- square method was given as X 2 = (fo fe) 2 fe

38

Where X2 = Chi- Squre fo = frequency expected fe = frequency observed The significance level chosen for the purpose of testing this hypothesis was 0.05, since this seems to be more acceptable and realistic. Therefore, the criteria values were read on the table at the point corresponding to the intersection of the significance level and degree of freedom. Degree of freedom (df) = (r-1) Where r = row 1 = constant Decision Rule Reject Ho if X2 calculated is greater than the tabulated value, accept if otherwise .

39

CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION

4.0

INTRODUCTION This chapter contains analysis of data collected in the course of this study. This analysis was based on the field research through questionnaires administered to the staff of Unilever Nigeria. A tabular format is used to present the data and chi-square method is used to test and integrate the relevant findings of the research work. The data processing and analysis were manually done for each of the research question contained in the questionnaire. The responses are sorted out, categorized and later table to enhance easy analysis and interpretation. Two hypotheses were posed by the researcher. In this chapter each of the hypotheses was tested vis--vis primary data. The tables were used to summaries the responses of the respondents collected based on their answers to them.

4.1

DATA ORGNISATION AND PRESENTATION The questionnaires that were distributed to respondents were seventy (70) copies out of which sixty there copies were well answered and collected back by the researcher showing a response rate of 90% which is considered adequate enough for an accurate or very near accurate conclusion to be based on

40

DISTRIBUTION PERSONAL DATA

OF

RESPONDENTS

ACCORDING

TO

Table 1: GENDER DISTRIBUTION OF RESPONDENTS Gender Male Female Total Frequency 38 25 63 Percentage (%) 60 40 100

Table 1 shows that 38 of the respondents represented by 60% are male while 25 of the respondents represented by 40% are female. Therefore male are more in the industry than female. Table 2: AGE DISTRIBUTION OF RESPONDENTS Gender 21 30yrs 31 40yr Above 41yrs Total Frequency 25 20 18 63 Percentage (%) 40 32 28 100

It can be deduced from table 2 that 25 of the respondents represented by 40% are between the ages of 21-30years, 32% of them are between the ages of 31-40years while 28% of the respondents are above 41 years.

41

Table 3: MARITAL DISTRIBUTION OF RESPONDENTS Status Single Married Total Frequency 33 30 63 Percentage (%) 52 32 100

Table 3 shows that 52% of the respondents are single while 48% are married. It shows that singles are more in the industry than married. Table 4: EDUCATIONAL QUALIFICATION OF RESPONDENTS Qualification WASSCE/SSCE OND/NCE B.Sc/HND MBA/MSc PROFESSIONAL/OTHERS Total Frequency 7 32 16 8 63 Percentage (%) 11 51 25 13 100

It is affirmed from table 4 that 11% of the respondents owns qualification of OND/NCE, 51% of them owns BSc/HND, 25% of them owns MBA/MSc while 13% of them owns PROFESSIONAL/OTHERS, qualification. Non of the respondents has WASSSC/SSCE as the peak. Table 5: DEPARTMENT DISTRIBUTION Department Admin/Personnel Purchasing Purchasing Sales Raw Material Total Field Study: 2008 Frequency 6 17 9 20 11 63 Percentage (%) 10 27 14 32 17 100

Table 5 shows that 10% of the respondents are in the Admin/Personnel Dept, 27% are in accounting Dept, 14% are in
42

purchasing Dept, 32% are in Sales Dept while 17% are in Raw material Dept. It shows that majority of the respondents are from Sales Dept. Table 6: DISTRIBUTION BY LENGTH OF SERVICE Length 1 5yrs 5 10yrs 11 15yr Above 15yrs Total Frequency 8 12 25 18 63 Percentage (%) 13 19 40 28 100

Table 6 shows that 13% of the respondents have worked between 1-5years, 19% have worked between 5-10years, 40% have worked between 11-15years, 28% have worked above 15 years.

SECTION B PRESENTATION AND ANALYSIS OF DATA ACCORDING TO THE QUESTION ITEMS Table 7: Question 7 DOES YOU COMPANY HAVE ENOUGH WORKING CAPITAL? Responses Yes No
43

Frequency 42 8

Percentage (%) 67 13

Total Field Study: 2008

63

100

Table 7 shows that 67% of the respondents agreed to the question by saying yes, 13% of them said No to the question while 20% of them are not sure to the question. Table 8: Question 8 WHICH OF THESE FACTORS MOSTLY AFFECT THE MANAGEMENT OF WORKING CAPITAL? Responses Nature of business Length of production, etc All of the above Total Field Study: 2008 Frequency 23 32 8 63 Percentage (%) 36 51 13 100

Table 8 shows that 36% of the respondents agreed that nature of business affect the management of working capital, 51% of them agreed that length of production, size of business etc affect the management of working capital while 13% chose all of the above. Table 9: Question 9 WHAT THREAT DOES EXCESSIVE WORKING CAPITAL POSE TO YOUR ORGANISATION? Responses Unnecessary build up of inventory Higher incidence of bad debts Affect the profit of the business All of the above Total Frequency 18 15 10 20 63 Percentage (%) 29 24 16 31 100

Table 9 shows that 29% of the respondents agreed that excessive working capital will cause unnecessary build up of inventory, 24% believe that it will cause higher incidence of bad debts, 16% believe
44

that it will affect the profit of the business while 31% chose all of the above. Table 10: Question 10 WORKING CAPITAL SHOULD BE FINANCED BY? Responses Long term debt Short term debt A mixture of two debts None of the above Total Frequency 16 23 18 6 63 Percentage (%) 25 37 29 9 100

Table 10 affirmed that 25% of the respondents believe that working capital should be financed by long term debt, 37% believe that it should be financed by short term debt, 29% of them believe that it should be financed by mixture of two debts while 9% believe that none of them will be used to financed working capital. Table 11: Question 11
WHAT FACTORS GUIDE ORGANISATION INVENTORY BUILDS UP?

Responses Storage/holding costs Set up/ordering costs Stock out cost Availability of discount from suppliers All of the above Total

Frequency 13 22 10 10 8 63

Percentage (%) 21 35 16 16 12 100

Table 11 shows that 21% of the respondents believes that factors that will guide organisation inventory builds up is storage/holding cost, 35% believes that it is set up/ordering cost, 16% believe it is stock out cost, 16% believes it is availability of discount from suppliers while 12% believe all of the above.

45

Table 12: Question 12 DOES YOUR BUSINESS ORGANISATION UNDERTAKEN PHYSICAL STOCK TAKING IN ADDITION TO HAVING A GOOD INVENTORY DOCUMENTATION? Responses Yes No Total Field Study: 2008 Frequency 33 30 63 Percentage (%) 53 47 100

Table 12 shows that 53% of the respondents believes that the organisation undertakes physical stock taking in addition to having a good inventory documentation by saying Yes while 47% says No to the question. Table 13: Question 13 HOW IS AUTHORIZATION GIVEN FOR THE USAGE OF INVENTORY IN YOUR ORGANISATION? Responses Predetermined inventory document Verbal instruction All of the above Total Frequency 29 20 14 63 Percentage (%) 46 32 22 100

Table 13 affirmed that 46% of the respondent confirmed that predetermined inventory document gives authorization for inventory usage, 32% says that verbal instruction gives authorization for inventory usage and remaining 22% of the respondents believe that neither verbal instruction nor predetermined inventory document gives authorization for inventory usage.

46

Table 14: Question 14 Do you agree that the pace of growth of the company should not outstrip the ability of the business to finance additional assets that is needed to support any growth? Frequency Percentage (%) Yes 25 40 No 38 60 Total 63 100 Table 14 says that 40% of the respondents agreed that pace of the company should not outstrip the ability of the business to finance additional asset that is needed to support any growth. But, 60% of the respondent said No. Table 15: Question 15 CASH SHORTAGE CAN BE CORRECTED BY NEGOTIATING A REDUCTION IN CASH OUTFLOWS SO AS TO REDUCE PAYMENT. DO YOU AGREE? Responses Yes No Total Frequency 41 22 63 Percentage (%) 65 35 100 Responses

Table 15 affirmed that 65% of the respondent agreed that cash shortage can be corrected by negotiating reduction in cash outflows which will reduce payment. But 35% of the respondent disagreed that cash shortage can be corrected by negotiating reduction in cash outflows.

47

Table 16: Question 16 THE PROFITABILITY OF THE COMPANY DEPENDS ON THE LIQUIDITY LEVEL Responses Yes No Total Frequency 42 21 63 Percentage (%) 67 33 100

Table 16 said that 67% of the respondent believe that major objective of cash management is to balance corporate liquidity with the profitability while 33% of the respondents said No.

Table 17: Question 17

DO YOU THINK THAT A COMPANY SHOULD SELL ON CREDIT AT ALL?

Responses Yes No Total

Frequency 36 27 63

Percentage (%) 57 43 100

Table 17 showed that 57% of the respondent said that company should sell on credit. But 43% of them said company should not sell on credit.

48

Table 18: Question 18 A COMPANY CAN INCREASE IN SALES VOLUME BY RELATING ITS CREDIT POLICY. Responses Yes No Total Frequency 43 20 63 Percentage (%) 68 32 100

Table 18 shows that 68% of the respondent said that company can increase sales volume if credit policy is reduce. But 32% of them no this statement.

Table 19: Question 19 WHY IS IT NECESSARY FOR A BUSINESS TO HAVE A CREDIT POLICY? Responses Frequency To control its investment in 24 account receivable. To ensure that credit facilities are given to those that worth it. Total 39 63 Percentage (%) 38 62 100

In Table 19, 38% of the respondent said that it is necessary for a business to have a credit policy in order to control its investment in account receivable while 62% of them said it is necessary in order to ensure that credit facilities are given to those that worth it. Table 20: Question 20
WHAT DO YOU THINK IT DETERMINES CREDITORS PAYMENT PERIOD? 49

Responses Debtor collection period Availability of cash discount Availability of cash surplus Al of the above Total

Frequency 28 16 9 10 63

Percentage (%) 44 25 14 17 100

According to table 20, 44% of the respondent said that debtors collection period determines creditors payment period, 25% of them said availability of cash discount determines creditors payment period and 17% of them says that all the factors mentioned determine creditors payment period. Table 21: Question 21 DO YOU THINK ACCOUNTING RATIOS ARE GOOD MEANS OF INTERPRETING FINANCIAL STATEMENT? Responses Yes No Total Frequency 41 22 63 Percentage (%) 65 35 100

65% of the respondent in table 21 said that accounting ratios are good means of interpreting financial statement while 35% of the respondent said No.

4.4

HYPOTHESIS TESTING HYPOTHESIS 1 In testing null hypothesis 1 which states that the profitability of the company does not depends on its liquidity level. The variables are

50

derived from table 16 it is subjected to statistical analysis using chisquare test techniques, which is given by the formula X2 = (Fo Fe)2 Fe Where X2 = Chi-square Fo= Observed frequency Fe = Expected frequency The degree of freedom (df)= (n 1) DECISION RULE: At 0.05 significant level reject Ho if chi calculated (Xl) is greater than (Xt) chi tabulated. Accept if otherwise. Ho: The profitability of the company does not depends on its liquidity fo 42 21 Total 63 fe 21 21 21 fo fe 21 0 21 (fo fe)2 441 0 441 (fo fe)2 fe 21 0 f = 21

df = (n 1 ) = (3 1) = 2 Calculated chi-square = 21 Tabulated chi-square df 2 at 0.05 level of significant is 5.991 DECISION Since the calculated Xc is greater than the tabulated chi-square at 0.05 level of significance reject null hypothesis (Ho). Hence, accept
51

the alternative hypothesis which states that the success or otherwise of a company depends on effective management of working capital.

HYPOTHESIS 2 Ho: The company does not have working capital as it needs to manage the available resources variables are collected/ from table 7. fo 42 8 13 Total 63 fe 21 21 21 fo fe 21 13 8 0 (fo fe)2 441 169 64 (fo fe)2 fe 21 8.05 3.05 f = 32.1

The chi-square calculated is 32.1 from the table at 0.05 level at significance at df (n 1) = (3 1) = 2 Chi square tabulated is 5.991

DECISION Since the calculated chi-square is greater than the tabulated chisquare at 0.05 level of significant, reject null hypothesis (Ho). Therefore accept alternative hypothesis which states that the company have working capital as it needs to manage the available resources.

52

53

CHAPTER FIVE
SUMMARY, CONCLUSION, RECOMMENDATION 5.1 SUMMARY As it is explained from the beginning part of this discussion, the management of working capital is a very important concept in every organisation. This is why the study is channeled to how working capital should be optimized and having adequate investment in working capital in addressing this, the researcher examined the effect of efficient working capital management on the growth of manufacturing industry. In purchasing this objective, the researcher made use of both descriptive and inferential statistical to analyse the data got through the administration of questionnaires. The chi-square distribution model was used to test the hypothesized questions. The study revealed that management of the concerned

organisation reckons that effective and efficient management of working capital is very important to the survival and growth of any organisation. It is found that investment in working capital depends on factors other than the nature of the business. It is also discovered that the company invested adequately in their working capital. 5.2 CONCLUSION Based on the findings of the study over twenty percent (20%) of the capital employed is usually fixed up in working capital in Unilever Nigeria Plc. This Phenomenon makes the management of working capital important for the survival of firms and as such it shall be adequately provided for and properly managed.
54

Giving the attention paid to this study it is fund that returns and cash flows can be improved through aggressive working capital management.

5.3

RECOMMENDATION Recommendations were given on some factors in working capital management based on the findings of this study thus:

i. Cash

Management: The need to have effective cash

management. Organisation should avoid maintaining idle cash balances unless it is necessary to do so. If a company keeps too much cash it may be depriving itself of some other profitable opportunities which the cash kept could have been used for the improve returns. The idle cash may be invested in marketable securities, used in replenishing stocks or to pay off contain current assets or current liabilities or even used to purchase fixed assets. Efforts should be made for effective and efficient cash plan as this is the key to the survival of all business undertakings.

ii. Debtors Management: The need to have a good management

of debtors account. It is known that no organisation can improve its sales return unless it makes provision for credit facilities to customers. The organisation should have a credit control policy which must be strictly applied in order to minimize implicit cost and explicit cost of selling on credit. Furthermore, organisations are advised not to
55

relax their credit policy beyond a bearable level because more often not the cost associated with such decisions are much more than the gains.

iii. Management of Credits: The need for adequate management.

The brief of some organisations is that they should make short the debtors payment period. This resolution may not be advantageous to the company as the creditors too will interest in making short they payment period as much as possible. On this note, the company is advice to usually negotiate the payment period with the creditors and try to meet up with any agreement they resolved on as this may strengthen the relationship between the two parties.

iv. Stock Management: The need to have adequate stock

management.

Organisation

ensures

that

their

investment

inventories (stocks) are properly monitored and control. The in and out movement of stocks from stores should be controlled and checked through proper documentation. Physical stock taking can still be increased as this will forestall falsifications will respect to records keep and equally help in identifying obsolete stocks, damaged stocks as well as slows moving items. Pilfering can also be checked through this medium. Organisation should pay attention to the level of stock kept. They should make efforts to keep stock as how as possible as this will lead to the release of fund which would have been tried down if the stock level is not checked. The ability to reduce inventory successfully will depend on the reasons for holding inventories and the reasons why it builds up.
56

The research work has leads to focus effective management of inventories on two cores area, which the researcher feels will be of much benefit to organisations if considered.

v. Inventory Optimization: This area is assisted with the newly

developed sophisticated personal computer based inventory optimization model. The model takes into account the required safety and cycle stock levels while optimizing the cost trade off between holding inventory and incurring a shortage situation.

vi. Demand Management: This area focuses on more detailed

information integration with both suppliers and customers. The close links to customers demand forecast can have significant benefits in inventory minimization both for the producer and the suppliers.

vii. Working Capital Ratio: The need to have a close match on the

working capital ratio. Since it is known that accounting ratios are good means of interpreting a companys financial positions financed managers are implored to watch their working capital ratios and ensure that they do not fall beyond the accepted standards of below the industrial average of the manufacturing industry.

57

JOURNALS AND ARTICLES Igbinosun, F. E. (2002): In search of Excellent Cash Management and Control Strategies in Business endeavors. The Nigerian Accountant Vol. 35, No 4 pp. 20-28 Ken, H. (1998), Improving returns and cash flow in process industries through aggressive Working Capital Management Mercer Management Consulting. Michael, A. O. (1996): Inventory Model The National Association of Polytechnics Accountancy Students. Kwara State Polytechnics Chapter, Ilorin Vol 6. pp. 8

58

Department Science,

of

Management

Lagos State University, Ojo, Lagos State Dear Sir/Ma, RESEARCH QUESTIONNAIRE I am an MBA student of the Management Science Department of Lagos State University Ojo Lagos State. I am conducting a research study on The Management of Working Capital in the Manufacturing Industry (A Case Study of Unilever Nig. Plc.) This work is done in partial fulfillment of the requirement for the award of a Masters in Business Administration Please kindly answer the entire questions in the attached questionnaire, the responses of the concerned top management staff are highly needed on the questions. All information supplied by you shall be used for the intended purpose. Thanks. Yours faithfully Adeyinka Adeniji

59

QUESTIONNAIRE Instruction: Please answer the following questions by ticking appropriate boxes provided. SECTION A PERSONAL DATA 1. 2. 3. 4. Gender: Male Female

Age: (a) 21 30 ( ) (b) 31 40year ( ) (c) Above 41 years ( ) Marital Status: (a) Single ( ) (b) Married ( ) Educational Qualification (a) WASSCE/SSEC ( ) (b) OND/NCE ( ) (c) B.Sc/HND ( ) (d) MBA/MSC ( )

5.

Which department or section are you in? (a) Administrative/Personnel ( ) (b) Accounting ( ) (c) Purchasing ( ) (d) Sales ( ) (e) raw material ( )

6.

What is your working experience in the company? (a) 1-5 year ( ) (b) 5 -10years ( ) (c) 11 -15years ( ) (d) Above 15 years ( )

60

SECTION B OPERATIONAL DATA 7. Does your company have enough working capital? (a) Yes ( ) (b) No ( ) 8. Which of these factors affect the management of working capital mostly? (a) Nature of business ( ) (b) Operating efficiency

(c) Technology & Manufacturing Policy ( ) 9. What threat does excessive working capital pose to your organization? (a) It results in unnecessary build up of inventories ( ) (b) It could lead to higher incidence of bad debts ( ) (c) It could affect the overall profit of the 10. Working capital should be financed by? (a) Long term debt ( ) (b) short term debt ( ) (c) a mixture of two debts ( ) (d) None of the above ( ) 11. What factors guide organization in building up inventory? (a) storage/holding cost ( ) (b) set up/ordering costs ( ) (c) stock out cost ( ) (d) availability of discount from suppliers ( ) (e) all of the above 12. Does your business organisation undertake physical stock taking in addition to having good inventory documentation? (a) Yes ( ) (b) No ( )

61

13.

How is authorization given for the usage of inventory in your organisation? (a) By the use of predetermined inventory document ( ) (b) by verbal instruction ( ) (c) all of the above ( )

14.

Do you agree that the pace of growth of the company should not outstrip the ability of the business to finance additional assets that is needed to support any growth? (a) Yes ( ) (b) No ( )

15.

Cash shortage can be corrected by negotiating a reduction in cash outflows so as to reduce payment. Do you agree? (a) Yes ( ) (b) No ( )

16.

The profitability of the company depends on the liquidity level,Do you agree? (a) Yes ( ) (b) No ( )

17.

Do you think that a company should sell on credit at all? (a) Yes (b) no

18.

A company can increase in sales volume by relating its credit policy (a) Yes (b) No

19.

Why is it necessary for a business to have a credit policy? (a) To control its investment in account receivable ( ) (b) To ensure that credit facilities are given to those that worth it ( ) (c) All of the above ( )

20.

What do you think, determines the creditors payment period? (a) Debtor collection period ( ) (b) Availability of cash discount ( ) (c) Availability of cash surplus ( )
62

(d) All of the above ( ) 21. Do you think accounting ratios are good means of interpreting

financial statement? (a) Yes ( ) (b) No ( )

63

A good management should watch these signals to see whether the

CONCLUSION: Working Capital occupies a peculiar position in the Capital Structure of afirm. It is the lifeblood of all types of enterprises, manufacturing andtrading both. If the business has enough Working Capital, it can maintainits operating efficiency. Not only that, but adequate working capitalprovides psychological satisfaction and relief to the management. Onlythose enterprises, which have adequate working capital, can survive intimes of depression. It has been observed that number of businessenterprises have failed due to inefficient management of working capital. That is the reason why the management of working capital becomes atedious exercise for a financial manager of a firm. For any enterprise thequestion of adequacy of working capital and its efficient management is atest of efficiency of a financial manager. The experience shows that muchof the financial managers time is used in the management of workingcapital. Working Capital constitutes a large portion of total investment in assets. Itis estimated that about 60% of the total net assets of the public sectorcompanies in India is in the form of current assets. This underlines theimportance of the working capital management. Working Capital management is more important for small firms also.Generally, in the small units, investment in such current assets as cash,receivables and inventories tends to be larger than investment in fixedassets. Also it is more difficult for small units to raise enough long termcapital for the current assets. Therefore, the exercise of the management of working capital must betaken with great care and attention. The financial manager must beconstantly alert to ensure that there is no over investment in workingcapital. On the other hand, he also has to ensure that the firm does notface the problem of shortage of working capital. The financial manager hasto constantly make efforts to ensure that whatever working capital the firmpossess, is managed properly so as to increase the operating efficiency ofthe firm.

64