effect of working capital on business profitability
TRANSCRIPT
EFFECT OF
WORKING
CAPITAL ON
BUSINESS
PROFITABILITY
(A CASE STUDY OF HOZOPAC NIG. LIMITED. LAGOS. NIGERIA)
BY
……………………………………….
AKP/WRR/BMG/BUS/HND2007/…………
BEING A PROJECT WORK SUBMITED TO THE
DEPARTMENT OF BUSINESS ADMINISTRATION, SCHOOL
OF BUSINESS STUDIES, COLLEGE OF ACCOUNTANCY AND
COMPUTER TECHNOLOGY, IN PARTIAL FULFILMENT FOR
THE AWARD OF HIGHER NATIONAL DIPLOMA (HND) IN
BUSINESS ADMINISTRATION.
NOVEMBER 2009
CERTIFICATION
2
We hereby certify that this research project was carried
out .......................................................AKP/WRR/BMG/BUS/
HND2007/0029) for the award of HIGHER NATIONAL DIPLOMA
CERTIFICATE. Department of Business Administration.
_______________ ________________
DATE
Project supervisor
__________________ ________________
DATE
Centre co-ordinator
DEDICATION
3
This research project is dedicated to the Almighty God for His
ever enduring love, kindness, mercy and grace all through the
course of this programme. Father, I thank and worship you and
give You all the Glory and Honour.
ACKNOWLEDGEMENT
4
I hereby which to Acknowledged the following people that
has made my dream and purpose in life to come through.
First of all, thanks to Almighty God who gave me power
and wisdom, and the grace to be educated and to my
dear One and Only love that gives me Joy, Mrs Ejaita
Otarigho and my dear mother Mrs Roseline S.
Awharevughen who is an encouragement to my life and
my brothers and Sisters Mr Ovoke Awharevughen, Favour
Awharevughen and Miss Faith Awharevughen for their
love towards me in prayer, also my supervisor Mr
Modeme N. who has been a great help to me. My lovely
Register of warri center Mrs Stella Oyabugbe and my late
father Mr Stephen. H. Awharevughen whose Vision for my
life was to be great and useful in life and those many love
ones too numerous to name. My prayer to God Almighty is
that HE should bless you richly in JESUS NAME.
ABSTRACT
This research work analyzes the effect of working capital
management on firm profitability. In accordance with this
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aim, to consider statistically significant relationships
between firm profitability and the components of cash
conversion cycle at length, a sample consisting of the
company working capital analysis has been included.
Empirical findings showed that accounts receivables
period, inventory period and leverage affect firm
profitability negatively; while growth (in sales) affects firm
profitability positively.
Decisions relating to working capital and short term
financing are referred to as working capital management.
These involve managing the relationship between a firm's
short-term assets and its short-term liabilities. The goal of working
capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to
satisfy both maturing short-term debt and upcoming
operational expenses.
In this research work, the researcher will consider in
chapter one….the introduction of the study which will in
turn considers the following topics. The background of the
study, the statement of research problem, the objective
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of the study, significance of the study, the hypothesis and
the structure of the work.
Chapter two focuses on the literature review, this chapter
is where the researcher extract materials from various
books, magazines, news papers and internet resources. In
chapter three, the researcher deals on research methods
while chapter four is data analysis and presentation. The
findings, summary, and conclusion is in chapter five.
CHAPTER ONE
INTRODUCION
1.1 BACKGROUND OF THE STUDY
The concept of Working Capital includes Current Assets and Current
Liabilities. There are two concepts of Working Capital which are Gross and
Net Working Capital.
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1. Gross Working Capital: Gross Working Capital refers to the firm's
investment in Current Assets. Current Assets are the assets, which can be
converted into cash within an accounting year or operating cycle. It
includes cash, short-term securities, debtors (account receivables or book
debts), bills receivables and stock (inventory).
2. Net Working Capital: Net Working Capital refers to the difference
between Current Assets and Current Liabilities are those claims of
outsiders, which are expected to mature for payment within an
accounting year. It includes creditors or accounts payables, bills payables
and outstanding expenses. Net Working Capital can be positive or
negative.
The concept of Gross Working Capital focuses attention on two aspects of
Current Assets' management. They are:
a) Way of optimizing investment in Current Assets.
b) Way of financing current assets.
a. Optimizing investment in Current Assets: Investment in Current
Assets should be just adequate i.e., neither in excess nor deficit because
excess investment increases liquidity but reduces profitability as idle
investment earns nothing and inadequate amount of working capital can
threaten the solvency of the firm because of its inability to meet its
obligation. It is taken into consideration that the Working Capital needs of
the firm may be fluctuating with changing business activities which may
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cause excess or shortage of Working Capital frequently and prompt
management can control the imbalances.
b. Way of financing Current Assets: This aspect points to the need of
arranging funds to finance Company Assets. It says whenever a need for
working Capital arises; financing arrangement should be made quickly.
The financial manager should have the knowledge of sources of the
working Capital funds as wheel as investment avenues where idle funds
can be temporarily invested.
1.2 STATEMENT OF THE PROBLEM
In looking at the effect of working capital on business profitability,
some of the questions easily come to mind are:
1. what are root causes of working capital on business?
2. what are the major effects on accounts receivable ?
3. what is the nature of relationship between working capital and
capital employed/
4. what steps should be taken to ensure that it effect on the profit of
the firm will not be negative?
5. how can working capital be managed/
6. what make up the working capital cycle?
7. how can debtors be controlled?
1.3 OBJECTIVE OF THE STUDY
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The main objective of the study is to determine the effect of working capital
on business profitability which has to do with…...................................
Maintenance of working capital at appropriate level, and
Availability of ample funds as and when they are needed
To accomplishment of these two objectives, the management has to
consider the composition of current assets pool. The working capital
position sets the various policies in the business with respect to
general operations like purchasing, financing, expansion and dividend
etc,
The subsidiary Objective of Working Capital Management is to provide
adequate support for the smooth functioning of the normal business
operations of a company. This Objective can be sub-divided into 2 parts:-
1. Liquidity
2. Profitability
1) Liquidity
The quantum of Investment in Current Assets has to be made in a
manner that it not only meets the needs of the forecasted sales but also
provides a built in cushion in the form of safety stocks to meet
unforeseen contingencies arising out of factors such as delays in arrival of
Raw Material, sudden spurts in demand etc. Consequently, the
investment in current assets for a given level of forecasted sales will be 10
higher if the management follows a conservative attitude than when it
follows an aggressive attitude. Thus, a company following a conservative
approach is subject to a lower degree of risk than the one following an
aggressive approach. Further, in the former situation the high amount of
Investment in Current Assets imparts greater liquidity to the company
than under the latter situation wherein the quantum of investment in
Current Asset is less. This aspect exclusively covers the liquidity
dimension of Working Capital.
2) Profitability
Once we recognize the fact that the total amount of financial resources
at the disposal of a company is limited and these can be put to
alternative uses, the larger the amount of investment in current assets,
the smaller will be the amount available for investment in other profitable
avenues at hand with the company. A conservative approach in respect
of Investment in Current Assets leaves fewer amounts for other
Investments than an aggressive approach does. Further, since the
Current Assets will be more for a given level of Sales forecast under the
conservative approach, the turnover of Current Assets (calculated as ratio
of Net Sales to Current Assets) will be less than what they would be under
the aggressive approach. Even if we assume the same level of Sales
Revenue, operating Profit before Interest and Tax and Net (Operating)
fixed assets, the company following a conservative policy will have a low
percentage of operating profitability as compared to its counter part
following an aggressive approach.
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1.4 SIGNIFICANCE OF THE STUDY
This study is significant because it will produce data on the working
capital management on firm’s profitability useful to:
1. managers and top executives in organized private sector
2. students carry a research work in this same issue.
3. Bankers that deals with such firms
4. Auditors
5. Accountants
6. Financial analyst
7. Stock exchange dealers
8. The staff of the organization
9. Prospective customers of the firm
10. Creditors of such organization
11. Legal practitioners
12. The stakeholders and management staff
1.5 LIMITATIONS OF THE STUDY
There was the limitation of the reluctance of the respondents to
give answers to survey probes.
The Questionnaire method of primary data collection was limited to
the verbal responses of subjects to pre-arrange questions. It also
had limitation that its usefulness depended on the level of
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education of the subjects. There was the limitation of the problem
of memory in remembering past facts. The structured nature of the
questionnaire may compel the respondents to give answers that
they do not fully endorse, There was the limitation of the rigidity of
the research instrument, which diminishes the amount of
information that could be gathered.
There was the limitation that the cost of administering the
questionnaire was very high due to high administrative, personnel
and traveling costs especially when some of the respondents were
initially not on their seats. There was the limitation that the
researcher and the field data collectors were not policemen and so
they could not force some of the respondents if they refuse to give
answers. There was also the limitation of the scarcity of time and
money resources. Let categories the limited as follows:..
Material Procurement
There was a lot constraints as to getting information and materials
for the job. The researcher made series of consultations and visit to
most renowned institutions to acquire the needed information. Most
materials used were very difficult to come by, as there is no library
within the town.
Time Constraints
Combining academic work with job is no doubt a thought provoking
issue, as it has to do with time. Actually, a lot of time was wasted
as the researcher visited the organizations and individuals together
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with government agencies to obtain valuable information for the
project.
Financial Constraints
The researcher would have obtained more information than what is
obtainable here but due to lack of money to visit some of the firms
and government agencies located a bit farther from the researcher
place of resident.
1.6 HYPOTHESES
It is a conjectural statement of the relationships between two or
more variables. It is testable, tentative problem explanation of the
relationship between two or more variables that create a state of
affairs or phenomenon.
E,C, Osuola (1986 page 48) said hypothesis should always be in
declarative sentence form, and they should relate to them
generally or specially variable to variables.
HYPOTHESIS THUS:
1. Explain observed events in a systematic manner
2. Predict the outcome of events and relationships
3. Systematically summarized existing knowledge.
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In essence, there exist NULL HYPOTHESIS set up only to nullify the
research hypothesis and the ALTERNATIVE HYPOTHESIS for the
purpose of the study. For the efficiency of the study, the hypothesis
is as follows:
NULL HYPOTHESIS (HO)
1. Working capital does not help the business concern in
maintaining the goodwill
2 Working capital does not create an environment of security,
confidence, and overall efficiency in a business
ALTERNATIVE HYPOTHESIS
1. Working capital helps the business concern in maintaining the
goodwill.
2. Working capital creates an environment of security, confidence,
and overall efficiency in a business.
1.7 STRUCTURE OF WORK
This research work is to be organized in five chapters as follows:
1. Introduction
2. Review of Related Literature
3. Research Methods and Procedures
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4. Data presentation and Analysis and
5. Summary, Findings and Conclusion
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 THE SPECTRUM OF WORKING CAPITAL
Cash is most important factor in financial management. Every
activity in an enterprise revolves round the cash.
As because cash is limited in every enterprise and it cannot be
raised as and when one likes it, it is, therefore, desirable that
available cash must be managed properly.
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Every undertaking is desirous of utilizing the available cash most
effectively so as to accomplish the goals of the undertaking, i.e.,
maximization of profits with the minimum of efforts. But
management of cash is not as simple as it might appear. In case,
the undertaking does not keep sufficient cash in hand, it shall not
be in a position to meet the unexpected challenges, which
challenges and cash remains unutilized in the business, it will result
in losses. If heavy amounts are blocked for unforeseen
contingencies the company will not be in a position to carry on its
day to day working efficiently. It is where the real problem of cash
management comes, i.e., how much cash should be set aside for
unexpected challenges and how much for the regular day-to-day
working.
It is really not an easy problem to solve. In fact, no hard and fast
rules can be suggested for the problem. All the financial
management can do in this regard, is to study the past records an
take the necessary decision bearing in mind the present economic
circumstances and the behaviour and practice of the sister concern.
In Hozopac Nigeria Limited, there are two types of assets in each
concern i.e., fixed assets and current assets. Both types of assets
are to be managed efficiently so as to earn maximum profit with
minimum possible investments because maximization of profits is
the prime object of every business.
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Decisions regarding investment in fixed assets are taken through
the capital budgeting process but decision making regarding
management of working capital is a continuous process which
involves control of everyday and flow of financial resources
circulating in the enterprise in one form or the other. The
accomplishment of the prime object-maximization of profits in most
businesses depends largely how their working capital is managed.
Working capital management is considered to involve the
management of current assets, i.e., cash, accounts receivables and
inventory. Unlike the management of fixed assets which may be
arranged in special cases on long-lease basis, the working capital
has no alternative except to arrange them and us them efficiently.
There are certain special problems peculiar to the management of
working capital requiring operational and financial skills of a high
order.
(1) There is a positive correlation between the sale of the product
of the firm and the current assets. An increase in the sale of the
project requires a corresponding increase in current assets. It is,
therefore, indispensable to manage the current assets properly and
efficiently.
(2) More than half of the total capital of the firm is generally
invested in current assets. It means less than half of the capital is
blocked in fixed assets. We pay due attention to the management
of fixed assets in details through the capital budgeting process.
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Management of working capital too, therefore, attracts the
attention of the management.
(3) In emergency (Non availability of funds etc.) fixed assets can be
acquired on lease but there is no alternative for current assets.
Investment in current assets, i.e., inventory or receivable, can in no
way be avoided without sustaining loss.
(4) Working capital needs are more often financed through outside
sources, so it is necessary to utilise them in the best way possible.
In nutshell, Working capital management involves the relationship
between a firm's short-term assets and its short-term liabilities. The
goal of working capital management is to ensure that a firm is able
to continue its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational expenses.
The management of working capital involves managing inventories,
accounts receivable and payable, and cash.
2.1 WORKING CAPITAL DEFINED
Working capital means the funds (i.e.; capital) available and used
for day to day operations (i.e.; working) of an enterprise. It consists
broadly of that portion of assets of a business which are used in or
related to its current operations. It refers to funds which are used
during an accounting period to generate a current income of a type
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which is consistent with major purpose of a firm existence.
2.2 MANAGEMENT OF WORKING CAPITAL
Management adopt a combination of policies and techniques for the
management of working capital. These policies aim at managing
the current assets (generally cash and cash equivalents, inventories
and debtors) and the short term financing, such that cash flows and
returns are acceptable.
Cash management. Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows
for uninterrupted production but reduces the investment in raw
materials - and minimizes reordering costs - and hence increases cash
flow; see Supply chain management; Just In Time (JIT); Economic order
quantity (EOQ); Economic production quantity
Debtors management. Identify the appropriate credit policy, i.e.
credit terms which will attract customers, such that any impact on
cash flows and the cash conversion cycle will be offset by increased
revenue and hence Return on Capital.
Short term financing. Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize
a bank loan (or overdraft), or to "convert debtors to cash" through
"factoring".
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Working capital is directly affecting by other management issues, such
as product mix, supply chain design and business model (for example
agent vs. distributor)
2.3 DECISION CRITERIA
By definition, working capital management entails short term
decisions - generally, relating to the next one year period - which
are "reversible". These decisions are therefore not taken on the
same basis as Capital Investment Decisions (NPV or related, as
above) rather they will be based on cash flows and / or profitability.
One measure of cash flow is provided by the cash conversion cycle -
the net number of days from the outlay of cash for raw material to
receiving payment from the customer. As a management tool, this
metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this
number effectively corresponds to the time that the firm's cash is tied
up in operations and unavailable for other activities, management
generally aims at a low net count.
In this context, the most useful measure of profitability is Return on
capital (ROC). The result is shown as a percentage, determined by
dividing relevant income for the 12 months by capital employed;
Return on equity (ROE) shows this result for the firm's shareholders.
Firm value is enhanced when, and if, the return on capital, which
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results from working capital management, exceeds the cost of capital,
which results from capital investment decisions as above. ROC
measures are therefore useful as a management tool, in that they link
short-term policy with long-term decision making.
2.4 MANAGING WORKING CAPITAL
1. Working Capital Cycle
Cash flows in a cycle into, around and out of a business. It is the
business's life blood and every manager's primary task is to help
keep it flowing and to use the cashflow to generate profits. If a
business is operating profitably, then it should, in theory, generate
cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire. Click here for more
information about the vital distinction between profits and
cashflow.
The faster a business expands, the more cash it will need for
working capital and investment. The cheapest and best sources of
cash exist as working capital right within business. Good
management of working capital will generate cash will help improve
profits and reduce risks. Bear in mind that the cost of providing
credit to customers and holding stocks can represent a substantial
proportion of a firm's total profits.
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There are two elements in the business cycle that absorb cash -
Inventory (stocks and work-in-progress) and Receivables
(debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables
and payables) has two dimensions ........TIME ......... and MONEY.
When it comes to managing working capital - TIME IS MONEY. If
you can get money to move faster around the cycle (e.g. collect
monies due from debtors more quickly) or reduce the amount of
money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less
money to fund working capital. As a consequence, you could reduce
the cost of bank interest or you'll have additional free money
available to support additional sales growth or investment.
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Similarly, if you can negotiate improved terms with suppliers e.g.
get longer credit or an increased credit limit, you effectively create
free finance to help fund future sales.
2. Sources of Additional Working Capital
Sources of additional working capital include the following:
← Existing cash reserves
← Profits (when you secure it as cash !)
← Payables (credit from suppliers)
← New equity or loans from shareholders
← Bank overdrafts or lines of credit
← Long-term loans
If you have insufficient working capital and try to increase sales, you
can easily over-stretch the financial resources of the business. This is
called overtrading. Early warning signs include:
← Pressure on existing cash
← Exceptional cash generating activities e.g. offering high discounts
for early cash payment
← Bank overdraft exceeds authorized limit
← Seeking greater overdrafts or lines of credit
← Part-paying suppliers or other creditors
← Paying bills in cash to secure additional supplies
← Management pre-occupation with surviving rather than managing
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← Frequent short-term emergency requests to the bank (to help pay
wages, pending receipt of a cheque).
3. Handling Receivables (Debtors)
Cashflow can be significantly enhanced if the amounts owing to a business are
collected faster. Every business needs to know.... who owes them money.... how
much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to
bad debts.
Slow payment has a crippling effect on business, in particular on
small businesses who can least afford it. If you don't manage
debtors, they will begin to manage your business as you will
gradually lose control due to reduced cashflow and, of course, you
could experience an increased incidence of bad debt. The following
measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make
sure that it gets the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff,
suppliers and customers.
4. Be professional when accepting new accounts, and especially larger
ones.
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5. Check out each customer thoroughly before you offer credit. Use
credit agencies, bank references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and
don't let any debts get too large or too old.
Recognize that the longer someone owes you, the greater the chance
you will never get paid. If the average age of your debtors is getting
longer, or is already very long, you may need to look for the following
possible defects:
← -weak credit judgement
← -poor collection procedures
← -lax enforcement of credit terms
← -slow issue of invoices or statements
← -errors in invoices or statements
← -customer dissatisfaction.
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Debtors due over 90 days (unless within agreed credit terms) should
generally demand immediate attention. Look for the warning signs of a
future bad debt. For example.........
← longer credit terms taken with approval, particularly for smaller orders
← use of post-dated checks by debtors who normally settle within agreed
terms evidence of customers switching to additional suppliers for the
same goods. New customers who are reluctant to give credit references
← receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one which most people dislike for
many reasons and therefore put on the long finger because they
convince themselves there is something more urgent or important that
demand their attention now. There is nothing more important
than getting paid for your product or service. A customer who
does not pay is not a customer. Here are a few ideas that may
help you in collecting money from debtors:
← Develop appropriate procedures for handling late payments.
← Track and pursue late payers.
← Get external help if your own efforts fail.
← Don't feel guilty asking for money.... its yours and you are entitled to
it.
← Make that call now. And keep asking until you get some
satisfaction.
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← In difficult circumstances, take what you can now and agree terms
for the remainder. It lessens the problem.
← When asking for your money, be hard on the issue - but soft on the
person. Don't give the debtor any excuses for not paying.
← Make it your objective is to get the money - not to score points or
get even.
4. Managing Payables (Creditors)
Creditors are a vital part of effective cash management and should
be managed carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing
function can create liquidity problems. Consider the following:
Who authorizes purchasing in your company - is it tightly managed
or spread among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities which take account of stock-holding
and purchasing costs?
Do you know the cost to the company of carrying stock ?
Do you have alternative sources of supply ? If not, get quotes from
major suppliers and shop around for the best discounts, credit
terms, and reduce dependence on a single supplier.
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How many of your suppliers have a returns policy ?
Are you in a position to pass on cost increases quickly through price
increases to your customers ?
If a supplier of goods or services lets you down can you charge
back the cost of the delay ?
Can you arrange (with confidence !) to have delivery of supplies
staggered or on a just-in-time basis ?
5. Inventory Management
Managing inventory is a juggling act. Excessive stocks can place a
heavy burden on the cash resources of a business. Insufficient
stocks can result in lost sales, delays for customers etc.
The key is to know how quickly your overall stock is moving or, put
another way, how long each item of stock sit on shelves before
being sold. Obviously, average stock-holding periods will be
influenced by the nature of the business. For example, a fresh
vegetable shop might turn over its entire stock every few days
while a motor factor would be much slower as it may carry a wide
range of rarely-used spare parts in case somebody needs them.
Nowadays, many large manufacturers operate on a just-in-time (JIT)
basis whereby all the components to be assembled on a particular
today, arrive at the factory early that morning, no earlier - no later.
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This helps to minimize manufacturing costs as JIT stocks take up
little space, minimize stock-holding and virtually eliminate the risks
of obsolete or damaged stock. Because JIT manufacturers hold
stock for a very short time, they are able to conserve substantial
cash. JIT is a good model to strive for as it embraces all the
principles of prudent stock management.
The key issue for a business is to identify the fast and slow stock
movers with the objectives of establishing optimum stock levels for
each category and, thereby, minimize the cash tied up in stocks.
Factors to be considered when determining optimum stock levels
include:
← What are the projected sales of each product?
← How widely available are raw materials, components etc.?
← How long does it take for delivery by suppliers?
← Can you remove slow movers from your product range without
compromising best sellers?
Remember that stock sitting on shelves for long periods of time ties
up money which is not working for you. For better stock control, try
the following:
←Review the effectiveness of existing purchasing and inventory
systems.
←Know the stock turn for all major items of inventory.
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←Apply tight controls to the significant few items and simplify
controls for the trivial many.
←Sell off outdated or slow moving merchandise - it gets more
difficult to sell the longer you keep it.
←Consider having part of your product outsourced to another
manufacturer rather than make it yourself.
←Review your security procedures to ensure that no stock "is going
out the back door "
6. Key Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital
utilization.
Ratio Formulae Result Interpretation
Stock
Turnover
(in days)
Average
Stock * 365/
Cost of
Goods Sold
= x
days On average, you turn
over the value of your
entire stock every x
days. You may need to
break this down into
product groups for
effective stock
management.
Obsolete stock, slow
moving lines will extend
overall stock turnover
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days. Faster production,
fewer product lines, just
in time ordering will
reduce average days.
Receivables
Ratio
(in days)
Debtors *
365/
Sales
= x
days
It take you on average x
days to collect monies
due to you. If your
official credit terms are
45 day and it takes you
65 days... why ?
One or more large or
slow debts can drag out
the average days.
Effective debtor
management will
minimize the days.
Payables
Ratio
(in days)
Creditors *
365/
Cost of Sales
(or
Purchases)
= x
days On average, you pay
your suppliers every x
days. If you negotiate
better credit terms this
will increase. If you pay
earlier, say, to get a
discount this will
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decline. If you simply
defer paying your
suppliers (without
agreement) this will also
increase - but your
reputation, the quality
of service and any
flexibility provided by
your suppliers may
suffer.
Current
Ratio
Total Current
Assets/
Total Current
Liabilities
= x
times Current Assets are
assets that you can
readily turn in to cash or
will do so within 12
months in the course of
business. Current
Liabilities are amount
you are due to pay
within the coming 12
months. For example,
1.5 times means that
you should be able to
lay your hands on $1.50
for every $1.00 you owe.
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Less than 1 times e.g.
0.75 means that you
could have liquidity
problems and be under
pressure to generate
sufficient cash to meet
oncoming demands.
Quick Ratio
(Total
Current
Assets -
Inventory)/
Total Current
Liabilities
= x
times
Similar to the Current
Ratio but takes account
of the fact that it may
take time to convert
inventory into cash.
Working
Capital
Ratio
(Inventory +
Receivables -
Payables)/
Sales
As %
Sales
A high percentage
means that working
capital needs are high
relative to your sales.
Other working capital measures include the following:
-Bad debts expressed as a percentage of sales.
-Cost of bank loans, lines of credit, invoice discounting etc.
-Debtor concentration - degree of dependency on a limited number of
customers.
34
Once ratios have been established for your business, it is important to
track them over time and to compare them with ratios for other
comparable businesses or industry sectors.
2.5 HOW TO CALCULATE CAPITAL NEEDS
If you have traditionally based your cash projections on gut instinct
and seat-of-the-pants estimates, chances are that you have come up
short when your company could least afford it. To prevent this crisis-
to-crisis method of financial management, Schechter says, try
bringing some science to the critical task of projecting your
company's capital requirements. The approach outlined here uses
information from your company's financial statements:
* Determine your collection period. For simplicity's sake, assume that
your annual sales are N365,000. Dividing this figure by the number of
days in the year gives average daily sales of N1,000. If your accounts
receivable balance is N60,000, you have a collection period of 60
days.
* Perform a similar calculation for inventory. Suppose your cost of
goods sold is N220,000. Dividing this by 365 gives daily costs of
about N600. If your inventory is N27,000, then you have 45 days of
inventory on hand.
Now proceed to accounts payable. Assume you have annual
purchases of inventory and raw materials of N182,000 per year.
Divide this by 365 days, and you have purchases of approximately
35
$500 per day. If your accounts payable are $16,000, you have an
accounts payable period (N16,000 divided by N500) of 32 days.
This means it takes about a month to pay your bills.
* The next step is to take the total of accounts receivable and
inventory days (in this case, 105 days) and subtract from this the
accounts payable period (32 days), leaving a net of 73 days.
"With this process, you've calculated the company's trade cycle,"
Schechter says. "The purpose is to figure how much working capital
the company requires, and that's what it does.
"Assume your annual cash needs (sales minus profits minus such
non-cash charges as depreciation) are N340,000 a year. Because
the company's 73-day business cycle is about 20 percent of a year,
you need about 20 percent of N340,000, or N68,000 in working
capital credit. While this can be reduced by existing lines of credit
or by profits plowed back into the business, it's a good estimate of
the company's cash requirements."
This simplified calculation can be fine-tuned for your company by
developing more detailed information on cash flow. This is usually
done on a monthly basis, since most businesses collect from
customers and pay suppliers monthly.
The cash-flow forecast should be comprehensive, and it should
encompass cash sources and outlays, including revenues, proceeds
36
from the sales of surplus fixed assets, disbursements for new
equipment, income-tax payments, loan payments, dividends or
withdrawals, and deposits on merchandise for future delivery.
Cash receipts and disbursements do not always balance out. Large
cash inflows come shortly after customers are billed. Large cash
payments must be made to build inventory, buy equipment, or pay
taxes.
Capital-planning calculations, says accountant Schechter, "bring
into sharper focus the company's cash needs, taking some of the
guesswork out of the borrowing process. And they help convince
bankers that you not only need loans but will be in position to repay
them."
CHAPTER THREE
RESEARCH METHODS AND PROCEDURES
3.1 RESEARCH DESIGN
The research method selected for the study is a combination of a
survey and an industrial study. The survey research method is
described hereunder that:
37
(i) It is a design in which primary data is gathered from members of
the sample that represents a specific population;
(ii) It is a design in which a structure and systematic research
instrument like a questionnaire or an interview schedule is utilized
together with the primary data;
(ii) It is a method in which the researcher manipulates no explanatory
variables because they have already occurred and so they cannot
be manipulated;
(iii) Data are got directly from the subjects;
The subjects give the data the natural settings of their workplaces;
(iv) The answers of the respondents are assumed to be largely
unaffected of the content in which they are brought;
(v) The impacts of the confounding factors are “controlled”
statistically; and
(vi) The aim of the research may span from the exploration phenomena
to hypotheses testing (stone 1995).
The survey research method has some merit, which are to be
articulated hereunder: In the survey research method, the sample
of the respondents are selected in such a way as to make it low
due to the utilization of big sample sizes, which results in generally
low sample errors.
The survey research method also has the merit that data collection
takes place in the “natural” settings of the workplace rather than
38
an activated laboratory. Data are got directly from the respondents.
The advantage that the survey yields data that suggests new
hypothesis is very illuminating. There is also the merit that a set of
systematic data collection instruments such as questionnaire
interview schedules and observation gadgets can either be used
alone or in conjunction with other instruments (stone, 1995).
3.2 SAMPLING
Spiegel (1992) observes that sampling theory is a study of the
relationship existing between a population or universe and the
samples drawn from it. The population in this study is from the
senior junior staff of the firms. In order to make conclusions of
sample theory and statistical references to be valid, a sample must
be selected as to be representative of the population
(Spiegel,1992). One way in which a representative sample may be
got, is by the process of stratified random sampling. In this
research work, the technique of simple random sampling is used to
select the sample of 100 respondents from each group of the
personnel, making a total sample size of 200.
The list of all senior and junior staff of the firm is from the personnel
department of the company. The numbers were written on a piece
of paper, put in a basket and the papers were folded to cover the
numbers and one of the pieces of paper was selected at a time
without replacing it and any name corresponding to the number
39
becomes a number of the sample. This method of sampling without
replacement was done until the sample of 100 respondents per
group of personnel was arrived at.
3.3 POPULATION
The population, in this study is the totality of the senior and junior
staff of HOZOPAC NIGERIA LIMITED. LAGOS.
The sample size is 200 and this number of respondents was chosen
from the population. The rationale for studying a sample rather
than the population includes that:
1. Most empirical research work in the social science involves
studying a sample in place of the population.
2. Statistical Laws reveal that statistics composed from the
sample data are usually reasonably accurate.
3. Luckily, it is usually possible to estimate the level of
confidence that can be placed on the results.
We should note that above is only possible if the probability sample
size is large enough.
3.4 DATA COLLECTION
Questionnaire
As earlier stated, the primary data collection instrument in this
study is the questionnaire. In the questionnaire method of primary
data collection, heavy dependence is placed on verbal reports from
40
the subjects to get information on the earnings per share and
standard set.
The questionnaire has a lot of merits. It needs less skill to
administer. Questionnaire can be administered to a big number of
individuals at the same time. Also with a specific research budget,
it is usually possible to cover a broader area. The impersonal nature
of a questionnaire, its structure and standardized wording, its order
of question, its standardized instructions for recording answers
might make one to conclude that it offers some uniformity from one
measurement occasion to another (Selltiz et al, 1976).
Another merit of questionnaire is that subjects may have a bigger
confidence in their anonymity, and thus feel freer to express views
they feel might be disapproved.
Another attribute of the questionnaire that is sometimes, though
not always desirable is that it might place less pressure on the
subjects for immediate response (Selltiz et al, 1976).
The questionnaire also has some demerits. It has noted that for
purpose of giving dependable responses to a questionnaire,
respondents must be considerably educated. Thus one of the
demerits of the usual questionnaire is that it is appropriate only for
with a considerable amount of education. There is also demerit that
subject may be reluctant and unable.
To report on the particular subject matter. Also, if a subject
misinterprets a question or give his or her answer in a batting
manner, there is often a little that can be done to ameliorate the
41
situation. In a questionnaire, the information the researcher gets is
limited to the fixed alternative answer format, when a specific
answer is not available, it can lead to error (Selltiz, 1976).
There is also limitation of memory in reporting on past facts. The
researcher is not a policeman that can compel answers. That is, the
information may not be readily accessible to subject and thus the
subject may be reluctant to put forth enough alternative
information that he or she is only barely conscious of (Selltiz et al,
1996).
In this research project, a structured and undisguised questionnaire
is utilized which is made up of two parts namely, the personal data
section and the section on the data on the actual subject matter of
the work. The questionnaire was undisguised in the sense that the
purpose of the data collection which was to collect primary data for
writing up the researcher’s HND project was made know to the 200
respondents. The questionnaire was structured in the sense the
questions are logically sequenced and are to be asked to the
respondents in the same manner and no follow up questions are to
be allowed. Some of the questions are of the fixed alternative
answer format type.
Ten (10) of the questions have yes or no answers,
Ten (10) of the questions have alternative answer for the
respondents to tick.
42
The structured questionnaire has the merit that it yields data that is
easier to analysis than data produced by an unstructured
questionnaire. Also the structured nature diminishes both
researcher’s and research instrument biases. It however has the
demerit that the rigidity of the research instrument diminishes the
amount of information that could be got.
Interview
The method of communication of the research instrument is by
means of the personal interview. The method has the merit that it
produces a better sample of the population than either mail or the
telephone methods. It also has the merit that it gives a very high
completion and response rates. It has the merit that the interview
has a bigger sensitively misunderstandings by the respondents and
gives a chance for clarification of misunderstood questions. It has
the merit that it is a very feasible method (Selltiz et al, 1976). The
personal interview method has the demerit that it is more costly
than the mail or the telephone methods of communication of a
questionnaire.
Observations
In addition to questionnaire and face-to face interviews,
observation was also carried out. This was to enable the researcher
43
to witness by herself the officers of this firm and to interact with
these people.
3.5 FIELD WORK
The researcher and three other field data collectors did the
fieldwork. The field data collectors were other classmates also
offering the Part-time HND program, who have also offered
research methodology. They had no problem gaining entrance into
the office under consideration since one of them has a friend
working there. They were to be trained by the researcher on how to
greet the respondents and how to tick the questionnaire correctly
and honestly.
3.6 DESCRIPTION OF DATA PRESENTATION AND ANALYSIS
TOOLS
The data presentation tools are simple bar charts, histograms, and
pictorial tables. The most important parts of a table include;
(a) Table numbers
(b) Title of the table
(c) Caption
(d) Stub or the designation of the rows and columns
(e) The body of the table.
(f) The head note or prefatory note or explanatory just before
the title.
44
(g) Source note, which refers to the literally or scientific source of
the table (Mills and Walter 1995)
Anyiwe (1994) has observed that a table has the following merits
over a prose information that;
(f) A table ensure an easy location of the required figure;
(g) Comparisons are easily made utilizing a table than a prose
information;
(h) Patterns or trends within the figures which cannot be
visualized in the prose information can be revealed and better
depicted by a table; and
A table is more concise and takes up a less space than a prose
formation:
The data is to be analysed by means of percentage, cross
tabulation and the chi-square test of population proportions for
testing the two hypothesis. Percentages express the ratio of two
sets of data to a common base of 100. The researcher made us of
the computer program called SPSS (statistical package for social
science) to carry out the computation of the hypothesis testing.
3.7 Limitation of The Study
Research work is subject to one form of limitation or the other,
mine is not an exemption.
It was the initial thought of the researcher that the exercise was
easy but the contrary was the case. As a student, several academic
demands compete with the limited but precious time available.
45
This implies that none of the competing exercise could be
effectively handled without the others being worse off.
This was my situation. Although the time expended was too small
to do justice to the study. The opportunity cost in terms of other
equally important activities forgone or cursorily attended to, was
made.
The researcher faces some embarrassment arising from low-level
educated staff who could not understand the essence of the
research work as this.
46
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION
In the previous chapter, the research methods and
procedures have been handled. In this chapter the data
presentation and analysis are to be done. The data is to
be presented by means of tables, two simple bar charts,
one histogram and one pie chart to make it amenable for
further analysis. By analysis is meant the act of noting
relationship and aggregating the set of variables with
similar attributes and also breaking the unit of their
components (Mills and Walters 1995).
In this research work, the research accepts the contention
of Podsakoff and Dalton (1995) that the factual
47
information from the data can be used as a basis for
reasoning, calculation and discussion.
Apart from the heading above, the other headings in this
chapter includes:
Data Presentation,
Percentage analysis
Cross-tabulated analysis
Hypothesis testing
4.2 DATA PRESENTATION
TABLE1THE SUMMARY OF THE PERSONAL DATA
OF THE RESPONDENTS
48
1
2
3
4
SEXMale
FemaleTotal
Marital StatusMarriedSingleTotal
AGE21-30 years31-40 years41-50 years51-60 years
Total
HIGHEREDUCATIONAL
QUALIFICATIONDIPLOMA
ONDHND
FIRST DEGREESECOND DEGREE
NIMTOTAL
FREQUENCY15050200
13070200
90901010200
103080204020200
Anglessuspendedin degree
1854144363236360
The marital statuses of the 200 respondents it is found that
130 of them are married while 70 of them are single. For
the ages of the 200 respondents they are 21-30 years, 31-
40 years, 51-60 years with frequency of 90 and 10
respectively. For the highest educational qualification of the
200 respondents they are diploma, OND, HND, First Degree,
Second Degree, NIM. and they have frequencies of 10, 30,
80, 20, 40 and 20 respectively.
49
Figure 4.1 below shows the simple bar chart of the data on
the sex of the respondents.
FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS
GENDER OF THE RESPONDENTS
TABLE 2. GENDER OF THE RESPONDENTS
Source: from data in table 1 (generated from SPSS)
From figure 4.1 above, it is shown that male respondents
have the modal frequency of 150 of the 200 respondents
while the female respondents have the frequency of 50 of
them.
50
Frequency
percentage
Valid Percent
Cumulative Percent
MAIL 150 75.0 75.0 75.0FEMAL
E50 25.0 25.0 100.0
Total 200 100.0 100.0
160
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-
-
MAIL FEMALE
Figure 4.2 below shows the simple bar chart of the data
on the marital statuses of the respondents.
FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITAL STATUSES OF THE RESPONDENTS
TABLE 3. MARITAL STATUS OF THE RESPONDENTS
From figure 4.2 above, it is shown that the married
respondents have the modal frequency of 130 out of the
200 respondents while the single respondents have the
frequency of 70 of them.
51
Status frequency
Percentage
Valid Percent
Cumulative Percent
MARRIED 130 65.0 65.0 65.0SINGLE 70 35.0 35.0 100.0Total 200 100.0 100.0
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-MARRIED SINGLE
FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THE RESPONDENTS.
AGES OF THE RESPONDENTS
TABLE 4. AGES OF THE RESPONDENTS
SOURCE: From the data in Table 1.
From figure 4.3 above, it is shown that the age classes
limit are 20.5-30.5 years, 30.5-40.5 years, 40.5-50.5 years
52
020
4060
8010
0
1.0 2.0 3.0 4.0
Std. Dev = 78 Mean = 1.7 N = 200.00
Categories
Frequency
Percentage
ValidPercentag
e
Cumulative Percent
21 TO 30YEARS
90 45.0 45.0 45.0
31 TO 40YEARS
90 45.0 45.0 90.0
41 TO 50YEARS
10 5.0 5.0 95.0
51 TO 60YEARS
10 5.0 5.0 100.0
Total 200 100.0 100.0
TABLE 5. EDUCATIONAL QUALIFICATION OF THE RESPONDENTS
and 50.5-60.5 years with frequencies of 90, 90, 10, and
10 out of 200 respectively. This shows that this is bi-
modal distribution as the age classes of 20.5-30.5 years
and 30. 5-40.5 years have a frequency of 10.
Figure 4.4 below shows the pie chart of the data on the
highest educational qualifications of the 200 respondents.
FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS
Educational Frequency Percentage Valid Cumulative
53
30%
10%
20%
80%
20%
40%
SECOND DEGREE
OND DIPLOMA
FIRST DEGREE
OND
SECOND DEGREE
HND
level Percentage PercentageDIPLOMA 10 5.0 5.0 5.0
OND 30 15.0 15.0 20.0
HND 80 40.0 40.0 60.0
FIRST DEGREE 20 10.0 10.0 70.0
SECOND DEGREE
40 20.0 20.0 90.0
NIM 20 10.0 10.0 100.0
Total 200 100.0 100.0
SOURCE: from the data in table 1.
From figure 4.4 above, the Highest Educational
Qualifications are Diploma, O.N.D, First Degree, Second
Degree and NIM and the sustained angles in degree is
equal to 180, 540, 1440, 360, 720 and 360 and respectively
at the center of the circle.
54
4.3 CROSS-TABULATED ANALYSIS
Table bellows show the analysis of the statuses of the 200
respondents
TABLE 6. CROSS- TABULATION 1
The above table shows that the total of 100 respondents
(out of 200 said YES. this proved that working capital
helps business organization in maintaining its goodwill.
TABLE 7. Cross-tabulation 2
55
DIPLOMA OND HND
FIRST DEGREE SECOND DEGREE NIM
Total
WORKING CAPITAL HELPS THE BIZ. CONCERN IN MAINTAINING THE GOODWILL
YES NO DON’T KNOW
NOANSWER
Total
61914
-4021100
2
3110
43
2
39
39
22
79
18
39
101991
19
4021200
39
DIPLOMA 10 10 OND 19 19 HND 14 30 47 91
FIRST DEGREE 10 9 19 SECOND DEGREE 40 40 NIM 21 21
Total 104 40 47 9 200
WORKING CAPITAL CREATES AN ENVIRONMENT OF SECURITY, CONFIDENCE AND OVERALL EFFICIENCY IN A BUSINESS,
YES NODON’TKNOW
NOANSWER Total
The above table indicates that working capital creates an
environment of security, confidence and overall efficiency in a
business. 104 respondents out of 200 said yes. While 40
did not agree with the fact.
4.4 HYPOTHESIS TESTING
In attempting to arrive at decisions about the population,
on the basis of sample information it is necessary to make
assumptions or guesses about the population parameter
involved. Such an assumption is called statistical
hypothesis, which may or may not be true. The
procedure, which enables the researcher to design on the
basis, is sample regards whether a hypothesis is true or
not is called test of hypothesis or test of significance.
The null hypothesis asserts that there is no significant
difference between the statistics and the population
parameters and what ever is observed difference is there,
is merely due to fluctuations in sampling from the same
population. Null hypothesis is thereby denoted by the
symbol H0. Any hypothesis, which contradicts the H0, is
called an alternate hypothesis and is denoted by the
symbol H1.
56
The researcher used chi-square analysis.
CHI-SQUARE TEST
The c is one of the simplest and most widely used non-
parametric test in statistical work. It makes no
assumptions about the population being sampled. The
quantity c describes the magnitude of discrepancy
between theory and observation i.e. with the help of c
test we can know whether a given discrepancy between
theory and observation can be attributed to chance or
whether it results from the inadequacy of the theory to fit
the observed facts. If c is zero, it means that the observed
and expected frequencies completely coincide. The
greater the value of c the greater will be the discrepancy
between observed and expected frequencies.
The formula for computing chi-square is –
c =(O-E)2/E
Where,O=Observed frequency
E=Expected or theoretical frequency
4.5 SOFTWARE USED FOR DATA ANALYSIS:
57
For the data analysis and the interpretation, the
researcher has adopted advanced version of SPSS
(statistical package for social science). This application
software has facilitated the researcher to construct the
frequency table, various types of charts and to find out
the valid percentage responses from the sample. By this
automated data analysis it has minimized the
researcher’s time constraints and reduced human error
and give also accurate outlay of information.
Chi-Square Test (1)
WORKING CAPITAL HELPS THE BUSINESS CONCERN IN
MAINTAINING THE GOODWILLObserved
F
ExpectedF
Residual Decision
YESNO DON’TKNOW NOANSWERTotal
10043
39
18 200
50.050.0
50.050.0
50.0 -7.0
-11.0
-32.0
AcceptReject
Reject
Reject
58
Chi-Square Test (2)
WORKING CAPITAL CREATE AN ENVIRONMENT OF SECURITY,CONFIDENCE AND OVERALL EFFICIENCY IN A
BUSINESS.
Residuals
The observed value of the dependent variable minus the
value predicated by the regression equation, for each
case. Large absolute values for the residuals indicate that
the observed values are very different from the predicted
values.
SOURCE: From the questionnaires administered.
The formulated hypothesis that is subject to statistical
test is at 5% level of significance in testing hypothesis,
the calculated value of the test statistics is usually
compared with tables of value. The critical values of the
test statistics serve as criterion value. It afforded the
59
Observed
F
ExpectedF
Residual Decision
YESNO DON’TKNOW NOANSWERTotal
10440
47 9 200
50.050.0
50.0
50.0
54.0 -10.0
-3.0
-41.0
AcceptRejected
Rejected
Rejected
basis for rejecting the null hypothesis is a function of the
value of the tested statistic.
Reject the null hypothesis if the calculated value of the
test statistic is greater than the critical value.
Accept the null hypothesis if the calculated value of the
test statistic is less than the critical value.
TEST STATISTICS
note: df = degree of freedom
4.6 SUMMARY OF RESULT
Level of significance……….0.05
Critical value………………………43.0
Calculated value……………………73.880
From the above analysis, it could be seen that in the first
test, working capital helps the business concern in
60
WORKING CAPITAL HELPS
THE BUSINESS CONCERN IN
MAINTAINING THE
GOODWILL
WORKING CAPITAL CREATE
AN ENVIRONMENT
OF SECURITY,CONFI
DENCE AND OVERALL
EFFICIENCY IN A BUSINESS
Chi-Squaredf
73.880 3
94.120 3
maintaining the goodwill, the calculated value is greater
than the critical value so we reject the hypothesis.
In the second test which state that working capital create
an environment of security, confidence and overall
efficiency in a business , the level of significance is 0.05,
the critical value is 44 while the calculated value from the
test statistics table is 94.120. Looking the data above, it
shows very clear that the calculated value is more greater
than the critical value so we reject the hypothesis.
CHAPTER FIVE
61
FINDINGS, SUMMARY AND CONCLUSION
5.0 INTRODUCTION
In this chapter, the researcher deals with the findings as
effect of working capital on business profitability. The
work is summarized with the conclusion drawn.
5.1 FINDINGS
During the cause of the research, the researcher,
discovered that Working capital management involves the
relationship between a firm's short-term assets and its
short-term liabilities. The goal of working capital
management is to ensure that a firm is able to continue
its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational
expenses. The management of working capital involves
managing inventories, accounts receivable and payable,
and cash.
62
In management of working capital, There are two types of
assets in each concern i.e., fixed assets and current
assets. Both types of assets are to be managed efficiently
so as to earn maximum profit with minimum possible
investments because maximization of profits is the prime
object of every business.
5.2 SUMMARY
The concept of Working Capital includes Current Assets
and Current Liabilities. There are two concepts of Working
Capital which are Gross and Net Working Capital.
1. Gross Working Capital: Gross Working Capital refers
to the firm's investment in Current Assets. Current Assets
are the assets, which can be converted into cash within
an accounting year or operating cycle. It includes cash,
short-term securities, debtors (account receivables or
book debts), bills receivables and stock (inventory).
2. Net Working Capital: Net Working Capital refers to
the difference between Current Assets and Current
Liabilities are those claims of outsiders, which are
63
expected to mature for payment within an accounting
year. It includes creditors or accounts payables, bills
payables and outstanding expenses. Net Working Capital
can be positive or negative.
5.3 CONCLUSION
A firm must have adequate working capital, i.e.; as much
as needed the firm. It should be neither excessive nor
inadequate. Both situations are dangerous. Excessive
working capital means the firm has idle funds which earn
no profits for the firm. Inadequate working capital means
the firm does not have sufficient funds for running its
operations. It will be interesting to understand the
relationship between working capital, risk and return. The
basic objective of working capital management is to
manage firms current assets and current liabilities in such
a way that the satisfactory level of working capital is
maintained, i.e.; neither inadequate nor excessive.
Working capital some times is referred to as “circulating
capital”. Operating cycle can be said to be t the heart of
the need for working capital. The flow begins with
conversion of cash into raw materials which are, in turn
64
transformed into work-in-progress and then to finished
goods. With the sale finished goods turn into accounts
receivable, presuming goods are sold as credit. Collection
of receivables brings back the cycle to cash.
It is in this respect that this study finds it worthwhile to address the following questions using time series data for a 31-year period, 1970-2000: (a) what is the nature of relationship between poverty, unemployment and growth in Nigeria? (b) what steps should be taken to ensure that growth is such that brings about decrease in unemployment and poverty in Nigeria?
65
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