WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF INSURANCE COMPANIES
Abstract
This study examined the relationship between working capital management efficiency (WCME) and firms EBIT using 26 quoted companies in the Nigeria insurance industry during 2005-2006 to 2013-2014.
To guide the study, a model for measuring working capital management efficiency was specified and a form of equation was formulated to measure net EBIT the study adopts utilized both descriptive and inferential statistics to analyze the working capital management efficiency in Nigeria.
The study reveals that Nigerian insurance industry has been inefficient in adopting a very sound working capital management policy and that insurance firms shown low efficiency in working capital management relevant to their operational activities. These make it imperative for policy effort to be geared towards the efficient working management in the Nigeria insurance industry. Several recommendations were given to help stimulate the efficient working capital management in insurance industry.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1     Background to the study    -    -
1.2     Statement of the research problem    -    -    -
1.3    Research questions -        -    -    -    -    -    -
1.4    Research objectives     -    -    -    -
1.5    Research hypothesis    -    -    -    -    -    
1.6     Scope of the study    -    -    -    -    -    -    
1.7     Significance of the study -        -    -    -    -    
1.8    Limitation of the study    -    -    -    -    -    
1.9    Definition of terms    -    -    -    -    
CHAPTER TWO: LITERATURE REVIEW.
 2.1     Introduction     -    -    -    -    -    -    
2.2     Conceptual framework    -    -    -    
2.2.1     The concept of working capital     
2.2.2     Gross versus net working capital     -    -    -
2.2.3    Permanent versus variable working capital     -    -    -
2.2.4    Role of working capital     -    -    -    -    
2.2.5    Why working capital is needed by the firm     -    -    -
2.3    Components of working capital     -    -    -    
2.3.1    Current assets     -    -    -    -    -    -    
2.3.2    Current liabilities     -    -    -
2.3.3    Determinants of working capital     -    -    -
2.3.4    Working capital policy     -    -    -    
2.3.5    Financing working capital     -    -    -
2.4    Working capital management     -    -    
2.4.1    The concept of working capital management     
2.4.2    Role of working capital management     -    -
2.4.3    Composition of working capital     -    -    -
2.4.4    Issues in working capital management     -    
2.5.1    The concept of profit     -    -    -    -    -    
2.5.2    The concept of profitability     -    -    -    -    -
2.6     Theoretical framework     -    -    -    
2.6.1     Baumol model     -    -    -    
2.6.2    The miller-orr model     -    -    -    -
2.7    The impact of working capital management on firm profitability
2.8.1    The concept of insurance     -    -    
2.8.2    History and development of insurance     -    -
2.8.3    Characteristics and operation of insurance business -    
2.8.4    A review of insurance industry in Nigeria     -
2.9    Empirical literature on working capital management     
CHAPTER THREE: METHODOLOGY
3.1    Introduction    -    -    -    -    -    -    -    
3.2    Research design    -    -    -    -    -    -    -
3.3    Method of data collection     -    -    -    -    -    -    -    
3.4    population and sample size    -    -    -    -    -    -    -
3.5    Model specification     -    -    -    -    
3.6    Method of data analysis    -    -    -    
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1     Introduction    -    -    -    -    -    -    -    
4.2    Industry analysis and findings    -    -    -    -    -    
4.3     Regression analysis and results    -    -    -    
4.4     Relationship between WCM efficiency and EBIT -        -    -
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.1     Introduction    -    -    -    -    -
5.2    Summary of finding    -    -    -    -    
5.3     Recommendation     -    -    -    -    -
5.4     Conclusion     -    -    -    -    -
Bibliography    -    -    -    -    -    -    
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
Working capital management is an important activity that requires the attention of a finance manager of any business firm at all time as neglecting this important activity may have adverse effect on the firm or jeopardize its operations as regards to the profitability and liquidity level of the insurance firm. Because, it directly affects the liquidity and profitability of a firm as it deals with the management of current assets and current liabilities that are essential for the smooth running of firm operation in a profitable manner. However, there is an inverse relationship between profitability and liquidity of a firm, this means that they work in opposite direction. That is, increase in profitability will reduce and vice-versa. So, it is important for the firm to strike a balance between profitability and the liquidity. Working capital management is the administration of a firm’s current account (current assets and liabilities) within its policy guidelines. Working capital is a financial metric which represents the operating liquidity available to the business. WCM being an important indicator of financial fitness and its availability is the first item that an existing or potential investors or lenders will look for and examine on a financial position of the firm. The proper management of the current account component of a firm’s total assets has a lot of influence/effect as the success of the business. A popular measure of working capital management is the cash conversion cycle (CCC), which tells us how cash is moving through the insurance company in terms of duration. Other components of WCM are average inventory period (AIP), Average payment period (APP) and Average collection period (ACP). However WCM affects profitability of the firm, its risk, thus its value (Smith, 1980). Hence working capital management should be given a proper and dully considerations which will in turn influence the firm profitability level. The whole idea of insurance revolves around the payment of premium by customers, payment of claims and investment of excess liquidity by the insurance company. However, if payments of premium are not properly supervised, the continuous survival of the company will be in jeopardy leading to unprofitability and eventually collapse. On the other hand, if premium collected are not effectively managed, payment of claims and other financial obligations will be impaired. From this, it is important to note that effective and efficient management of working capital (made up of cash, inventory, marketable securities, receivables and payables) in the insurance firms will be appreciated.
STATEMENT OF THE RESEARCH PROBLEM
Efficient management and the control of working capital seem to generate a considerable amount of internal financing as against the procurement of capital to finance the firms daily operations which is becoming difficult and also led some business organization to have fold up, WCM is of importance in managing firm financial aspect. Many financial managers are finding it difficult to identify the important drivers of WCM that can enhance their company level of profitability, so, without sufficient working capital, the company will either be able to produce goods and services needed by customers due to lack of money to buy materials for producing them. Therefore the firm’s profitability can be jeopardizing as a result. Despite the crucial the WCM is to the success of an enterprise, it is strange that so far it could not attract as much attention of the researchers in as it desires, previous researchers have indicated that ‘por’ or ‘careless’ financial management is a major cause business failure, (Matoha, 2007), some of the most internal problems business need to identify are inadequate capital, cash flows management and inventory control. A survey conducted in the UK indicated that above 20% of firm failures was due to irrecoverable debts or poor receivable management (Pandachi, 2006). In other developed countries such as US, Canada, England, Australia and others has been recognized that the efficient management of working capital is crucial for prosperity and survival of business (Deloof, 2003). Nevertheless, in the developing countries such as Nigeria, very little has been done concerning working capital management practices in insurance companies, hence the need for the study.
RESEARCH QUESTIONS
Are Insurance Companies in Nigeria efficient in their working capital management?
What is the relationship between working capital management efficiency and earnings before interest and tax in selected Insurance companies in the Insurance industry in Nigeria?
RESEARCH OBJECTIVES
The broad objective of the study is to examine the relationship between the working capital management efficiency and earnings before interest and tax of the Insurance industry in Nigeria.  The specific objectives are to;
Analyze the firm’s efficiency in working capital management in the Insurance industry in Nigeria.
Examine the relationship between working capital management efficiency and earnings before interest and tax in selected Insurance companies in the Insurance industry in Nigeria.
1.5   RESEARCH HYPOTHESIS
H01:      There is no significant efficiency in the use of various components of current assets for enhancing sales in the insurance industry
H02: The insurance industry as a whole does not have the ability to utilize the entire    current asset for the purpose of generating sales.
H03: The insurance industry, as a whole does not have efficiency in working capital management.
H04: There is no significant relationship between working capital management efficiency and earnings before interest and tax of the Insurance industry in Nigeria.
     SCOPE OF THE STUDY
For the purpose of this study, emphasis will be place on the insurance companies whose data are publicly available which will serve as the sample while the entire insurance companies in Nigeria is the population this study will cover the period of 2006-2014 and the data will also be based on the period under consideration.
1.7    SIGNIFICANCE OF THE STUDY
This study will be of immense benefit and useful to the shareholders by giving them an insight on how their funds have been utilized and managed. Also to an existing and potential investors to decide whether to withdraw their investment or continuing with the firm depending on the attractiveness of the firm in terms of its operation. In addition, management will also find the study benefited by giving them opportunity or open the eye on the best way to manage working capital management in order to achieve the objective of profit maximization of the firm. Above all, to other researchers which might be writing on similar study of this nature, will find it useful as a source of information and referencing as much work have not been done on this subject matter.
1.8    LIMITATION OF THE STUDY
A study of this nature cannot be carried out without one or two challenges. Unavailability of enough materials to put the write up together serves as a constraint. Also, not all insurance companies have their data publicly available this might lead to small sample size. In addition, considering the fact that the work has to be submitted within a stipulated period of time and the fact one will attend lectures and do other things as a student, time becomes other constraint.
1.9    DEFINITION OF TERMS
Working capital: Excess of current assets over current liabilities.
Working capital management: Administration of current assets and current liabilities.
Liquidity: Ability to meet short-term financial obligations.
Profitability: Accounting for profit relation to asset used in business       operation.
Current Asset: cash and other assets that are expected to turn into cash within one accounting period
Current liabilities: A debt or obligation that must be discharge within a year.