WORKING CAPITAL MANAGEMENT AND FIRMS PERFORMANCE: A STUDY OF MANUFACTURING COMPANIES IN NIGERIA

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Accountancy Department

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ABSTRACT

This study investigated the relationship between working capital management

measured by account receivable period (ACRP), inventory period (INVP), cash

conversion cycle (CCC) and sales Growth (SG) and profitability performance

measured by returns on assets (ROA). The study utilized secondary data obtained

from the annual financial statements of Nigerian Manufacturing companies listed

on the Nigerian Stock Exchange (NSE) for period 2008 - 2012. Multiple

regression model were adopted for testing all the hypotheses and the study result

reveals that there was a negative significant relationship between the account

receivable period and profitability of the Nigerian Manufacturing companies. It

also reveals that the profit is significantly influenced by the number of days

inventory were held (INVP) and that the profitability performance negatively and

significantly related to the cash conversion cycle (CCC). These results suggest that

effective policies must be formulated for the individual components of working

capital. Furthermore, efficient management and financing of working capital

(current assets and liabilities) can increase the operating profitability of

manufacturing firms

TABLE OF CONTENTS

Content Page

Title page - - - - - - - - - - i

Declaration - - - - - - - - - - ii

Approval - - - - - - - - - - iii

Dedication - - - - - - - - - - iv

Acknowledgements - - - - - - - - - v

Abstract - - - - - - - - - - vi

List of tables - - - - - - - - - xi

List of figure - - - - - - - - - xi

CHAPTER ONE : INTRODUCTION

1.1 Background to the Study - - - - - - 1

1.2 Statement of the Problem - - - - - - - 3

1.3. Objectives of the Study - - - - - - - 4

1.4 Research Questions - - - - - - - - 5

1.5 Research Hypotheses - - - - - - - 5

1.6 Scope of the Study - - - - - - - 6

1.7 Significance of the Study - - - - - - - 7

References - - - - - - - - - 8

CHAPTER TWO: REVIEW OF LITERATURE

2.0. Introduction - - - - - - - - 10

2.1. Conceptual Review - - - - - - - 10

2.1.0. Concepts of Working Capital Management - - - - 10

2.1.1. Working Capital - - - - - - - - 10

2.1.2. Working Capital Management - - - - - - 12

2.1.3 Working Capital Management Efficiency - - - - - 13

2.1.4. Policy of Working Capital - - - - - - - 13

2.1.5. Working Capital Cycle - - - - -- - - 16

2.1.6. Components of Working Capital Management (WCM) - - - 18

2.1.7. Cash Management - - - - - - - - 19

2.1.8 Cash Positioning - - - -- - - - - 22

2.1.9 Cash Flow Volatility, Earnings Volatility and Firm Value. - - 23

2.1.10 Cash Budget - - - - - - - - - 25

2.1.11. Management of Cash Receivables - - - - - 26

2.1.12. Credit Standards - - - - - - - - 26

2.1.13. Credit Extension Policy - - - - - - - 27

2.1.14. Credit Collection Policy - - - - - - - 28

2.1.15. Inventory (Inv) Management - - - - - - 29

2.1.16. Need to Hold Inventory - - - - - - - 30

2.1.17 Inventory Control - - - - - - - - 31

2.1.18. The Economic Order Quantity (EOQ) - - - - - 31

2.1.19. Re-Order Point - - - - - - - - 32

2.1.20. Relation to Financial Management - - - - - 32

2.1.20.1. Payables Management - - - - - - - 33

2.1.21. Receivables Management - - - - - - - 33

2.1.22. Cash Conversion Cycle (CCC) Management - - - - 34

2.1.23. Measures of Profitability - - - - - - - 34

2.1.24. Liquidity - - - - - - - - - 36

2.1.25. Nature of Working Capital - - - -- - - - 37

2.1.26. Trade-Off between Profitability and Risk - - - - 37

2.1.27. The Efficient Management of Firm’s Working Capital - - 38

2.1.29 . The Consequences of Inefficient Management of Working Capital 39

2.1.30. The Costs and Benefits of Firm’s Investments in Working Capital - 44

2.1.31. The Nigerian Economy and Working Capital Management of Quoted

Firms in Nigeria =- - - - - - - - 46

2.20. Theoretical Review - - - - - - - - 47

2.2.1. The Operating Cycle Theory - - - - - - 48

2.2.2. The Cash Conversion Cycle (CCC) Theory - - - - 48

2.2.3. The Pecking Order Theory - - - - - - - 49

2.2.4 Agency Theory - - -- - - - - - 50

2.2.5. The Risk –Return Trade-Off Theory - - - - - 51

2.3.0. Review of Empirical Studies - - - - - - 51

2.3.1. Summary of Literature Review - - - - - 57

References - - - - - - - - - - 58

CHAPTER THREE: METHODOLOGY

3.0 Introduction - - - - - - - - - 60

3.1 Research Design - - - - - - - - 60

3.2 Population of the Study - - - - - - - 61

3.3 Sampling Techniques and Sample Size - - - - - 61

3.4 Sources of Data Collection - - - - - - - 61

3.5 Variables Used for the Study - - - - - - 62

3.5.1 Dependent Variable - - - - - - - - 62

2.5.2 Independent Variables - - - - - - - 63

3.6 Data Analysis Techniques - - - - - - - 65

3.7 Model Specification - - - - - - - 66

3.8 Limitation of the Study - - - - - - - 66

References - - - - - - - - - 68

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND

INTERPRETATION

4.0 Introduction - - - - - - - - 69

4.1. Presentation and Analysis of Multiple Regression Results - - 70

4.2. Data Validity Test - - - - - - - - 71

4.3. Summary of Regression Results - - - - - 72

4.4. Testing of Research Hypotheses - - - - - 73

4.5. Interpretation of results and discussion of findings - - - 75

4.5.1. The Impact of ACRP on Profitability - - - - 75

4.5.2. The Impact of Inventory Period (INVP) on Profitability - - - 75

4.5.3. The Impact of Cash Conversion Cycle (CCC) on Profitability - 76

4.5.4. The Impact of Sales Growth (SG) on Profitability - - - 76

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1. Introduction - - - - - - - - 78

5.2. Summary - - - - - - - - - 78

5.3. Conclusions - - - - - - - - - 80

5.3.1 Policy Implication - - - - - - - - 81

5.4. Recommendations - - - - - - - - 81

5.5. Suggestions for Further Research - - - - - - 82

Bibliography - - - - - - - - - 83

Appendices - - - - - - - - 86

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📄 Pages: 112 🧠 Words: 9886 📚 Chapters: 5 🗂️️ For: PROJECT

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