The project research work on “The Impact of Effective Working Capital Management on Company Performance in a Depressed Economy" was embarked on to check the profitability and liquidity problems existing in some companies that lack the working capital management acumen.
It was because of this deficiency in some companies that brought about the above quoted topic. Taking Unilever Nig. Plc as a case study.
The need for working capital management cannot be overemphasized. The objective of financial decision-making is to maximize shareholder wealth. However, the objective of this study was to identify and discuss the basic determinants of working capital and to highlight areas of short-term investment of the company. It was also aimed at suggesting ways for improving insufficient cash balances to meet current obligations. Short-term survival and success of any firm is dependent on right financial management decision-making. This is because working capital is one the most important aspects of financial management.
The materials used in this research work were by means of review of related literature, personal interview and observations, issue of questionnaires. The data collected through these means were analyzed with analytical tools like percentages, descriptive tables, chi-square, and distribution tables.
All these were not achieved without hitches. The following were limitations to this research work. They include: Bureaucracy, delay in responding to questionnaires, errors in questionnaires returned, proximity, running cost, etc.
Conclusively, working capital management policies are practices that have significant influence on companies solvency and profitability. Maintaining a large size of current assets improved the liquidity position of the company.
The working capital management was aimed at striking a balance by ensuring that the right combination of current assets and liabilities were held at each point in time.
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW OF THE STUDY
“Working capital usually referred to as the life wire of a company is mad up to those resources which are capable of being converted into cash”. The efficient management of working capital is prerequisites for overall operational efficiency of a company. It has to be noted, “working capital is not current asset”. It is the difference between current assets and current liabilities. Any transaction that increases the amount of working capital is source of working capital.
The various components of working capital management cannot be separated from fundamental decision of investment and financing, the takes of the financing manager in managing working capital effectively, to ensure sufficient liquidity in the operations of the company.
A company’s liquidity is measured by its ability to satisfy short-term financial obligations as they arise. The net working capital is one of the measures of company’s liquidity. Other measures include the current rating and acid test ratio.
“The net working capital has been commonly defined as excess of current asset over current liabilities”. Effective working capital management requires that a company should operate with some net working capital, though the exact amount varies from one company to another.
Theoretical justification for the use of net working capital to measure a company’s liquidity is based on the assumption that the greater margin by which the current assets cover the short-term obligation when they fall due. The net working capital is quite useful in internal control, though not quite for company comparison of performances. The greater the net working capital, the more liquid the company is, and the less likely it is to become insolvent.
Most profitable companies have failed because of improper management of working capital, especially cash and accounts receivable. The management of these resources is a balancing problem and this problems stems from the fact that the relationship between cash flow and profitability is not fully understood. The privilege economic condition in Nigeria today calls for a more serious attention in the effective management of working capital in companies. The unprecedented oil boom of the early seventies in Nigerian economy has come and gone. The sudden downturn in the price of oil, the backbone of our natural woes, this is manifesting by the rapid rise in unemployment, prices and interest rates, coupled with fluctuations in the exchange value of our currency at the foreign exchange market.
Profitability and liquidity of companies has been affected by this development. Therefore, effective management of working capital has necessarily become a risk that should be given such importance, more ever than before, in any company. It should be noted that companies would do better by trying to tie down fewer funds in receivables. However, economic considerations and circumstance often make it difficult to keep these items down as far as most companies would wish. Frequent examination of the size, competition and significant change in net working capital would assist financial managers to achieve the much desired balance between profitability and liquidity.
1.2 STATEMENT OF THE PROBLEM
The management of inter-relationship existence between current assets and liabilities has been the primary problem of working capital management. Effective working capital management involves sourcing of funds for the management daily operations of companies. Every company needs to maintain a satisfactory level of working capital or it would go into banking and finally wound up. However, profitability, liquidity and other related risks have been a major problem facing companies in our depressed economy. This is an important characteristic of working capital management. Maintaining a large size positive side of the economy, but profitability would be adversely affected, as funds remain ideal.
Conversely, if a company’s holding asset are relatively small, the overall profitability will no doubt increase, but this will have an adverse effect on the company’s overall performance, including its liquidity position and thus making the company more risky. Working capital management should therefore aim at striking a balance between the liquidity and profitability o positions of the company by ensuring that right combinations of current assets and liabilities are held at cash point in time for a better company performance.
1.3 PURPOSE OF THE STUDY
As mentioned earlier, effective working capital management plays effective role on the financial decision making of any company, which is however, the basis for success in any viable company. As earlier observed, the objective of financial decision-making is to maximize shareholders wealth. This wealth or profit usually depends on the rate of turnover.
Primarily, the purpose of this study is to examine how Unilever PLC tries to
(i) Identify and discuss the basic determination of working capital, because the individual need of companies as influenced by many factors and fluctuate over time.
(ii) Identify and highlight areas of short-term investment of the company, with a view to making recommendation on how funds could be better utilized to generate higher earnings and to offer suggestions for improving insufficient cash balances to meet current obligations.
(iii) Discuss the place of receivables in the liquidity of a company with a view to providing solutions through lightening or reduction of collection policies where receivable appears excessive.
(iv) Highlight the importance of net working capital as a measure of liquidity as this serves as important consideration for any contemplating granting of credit to the company.
1.4 SIGNIFICANCE OF THE STUDY
Virtually, continuous growth and development of every business or company depends on its source and proper application of fund generated, which acts as its measure of profitability. This topic is therefore significance as it provides a panacea to the profitability problem of companies through product cash management.
Inadequacy of cash receivable, which are vital forms of working capital, impairs the growth of any business. However, the present degree of uncertainty prevailing in the economy makes it important to maintain better cash or its equivalent for contingency expenditure. This is the crux of the need for effective working capital management.
Nevertheless, determination of the current ratio of companies has been a determinant of credit grant to companies. The working capital ratio is particularly significant in this regard as it is indicative of the degree of shrinkage in current asset that will not discourage the interest of the current creditors. Therefore, working capital is significant and crucial in this context.
1.5 SCOPE OF THE STUDY
This research work will only cover the management of cash accounts receivable which is the foundation of working capital since working capital is naturally wide in scope, this is the management of current assets and liabilities.
1.6 LIMITATIONS OF THE STUDY
This work is exclusively limited to Unelever PLC. for precision and objectivity. Although, Unelever PLC classify some information as “highly confidential” to maintain certain secrecy like other viable companies do.
This is viewed as a limitation because it is assumed that the disclosure of such information would further contribute to academic excellence of the study.
Another limitation of this study is the cost involved in data collected and in writing, and processing of the research work. This was a further constraint. It more funds were made available at the disposal of the researcher, virtually all the five branches of Unelver PLC would have been sampled and this would have contributed to improve the quality of this work. Samples of other companies might have been collected for comparison. Bureaucracy was another set back to the project work. This is a result of delay in getting one to source information.
1.7 COMPANY PROFILE
The factory first came into Nigeria in 1923, when it was incorporated as a private company under the name of Lever Brothers (West Africa) Limited.
In 1924, the name was changed to West African Soap Company Limited and later Lever Brothers (Nigeria) Limited in 1955. When the company went public in 1973, it subsequently changed its name to Lever Brothers Nigeria Limited. In compliance with the company and Allied Matters Decree (CAMD) 1990, the company substituted the word “Limited” in its name with PLC to become Lever Brothers PLC.
The company operates four factories, which are located in Apapa, Agbara and Isolo. The company started with the production of bar soap using palm oil, in the Apapa factory, which was commissioned in 1924. Since expiration has taken place to include the prosecution of international toilet soap branch like Lux, Astral and Asepso. In addition to soap making, Vim, Scrubbing powder as well as Pepsodent and Close-Up Toothpaste are also manufactured.
Lever Brothers Nigeria Plc was renamed to Unilever Nigeria Plc.
Unilver Nigeria plc as been referred to now, Aba factory in Abia State, which was commissioned in 1958 was producing sunlight and key laundry soaps, Omo and Surf detergent while in 1986, another plant was installed for the production of Rin detergent bar.
Agbara factory in Ogun State is the company’s third factory. The ultra modern complex was commissioned in 1983 for the manufacturing of edible products. The factory produces Blue Band and Planta Margarine, industrial oil and fats (the master line range of production) as well as Oroyo and Coro cooking oil. In December 1989, the factory started producing a popular food seasoning “Royco”. The Lipton tea plant formerly at Burma Road, Apapa was fully relocated to Agbara in order to consolidate the production of their food production in one location.
The N100 million Plantation on the Mambiller Plateau State belonging to Unilver Nigeria PLC continues to make satisfactory progress. Current 92 hectares of tea were planted with full irrigation facilities and additional one million plants are in nursery.
However, an N18 million project commissioned at Aba aimed at improving the supply of vegetable oil as an essential raw material in soap and edible production. Unilever’s range of quality products are distributed throughout the country through an established end tested distribution network, using appointed distributors supervised their trained sale force. The company has staff strength of 3,750 employed spread over its four factories. The company also provided employed for over five thousand suppliers, transporters, distributors etc.
Unilever Nigeria PLC has been dedicated to the production of top quality products for Nigerians for over sixty years. Today, Unilever Nigeria PLC is a lending company in the manufacturing industry, manufacturing and marketing of detergents, soaps, skin creams, toothpates, squash drinks, edible oil and fats, tea and coffee, blue band margarine as well as ranges of petroleum jelly and other domestic products.
1.8 RESEARCH HYPOTHESES
Hypothesis 1:
H0: Effective working capital management does not have significant impact on profitability of companies
H1: Effective working capital management have significant impact on the working capital management.
Hypothesis II:
H0: Credit management policies of companies do not have significant impact on the working capital management.
H2: Credit management policies of companies have significant impact on the working capital management.
Hypothesis III
H0: Liquidity is not the best single measure of quality adopted by companies in working capital management.
H3: Liquidity index is the best single measure of quality adopted by companies in working capital management.
REFERENCES
Esho, P. B. “Constraints in Working Capital Management, Business Concord March1, 1988 p. 19.
Hbbs and Moore: Financial Accounting Concepts and Valuation Analysis 2nd ed. Cincinnati, Ohio South West Publishing C. 1984 p. 455.
Meiyer W. B. and Meiyer R. f. Accounting; The Basis for Business Decisions 6th ed.: New York: McGraw Hill Book Company 1977. p. 801.
Smithy Keith and Stephens: Accounting Principles, new York West Publishing Company, 1983 p. 673.
The New Webster’s Dictionary of The English Language Internation Edition.
