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Saturday, 25 January 2020


1.1 Background of the Study Working Capital Management refers to a company’s managerial accounting strategy designed to monitor and utilize working capital components (current assets and current liabilities) to ensure the most financially efficient operation of the firm (Investopedia. 2018). Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet short term obligations when due and to avoid excessive investment on current assets which leads to idle cash (Eljelly, 2004). Working capital management involves decisions on the amount which constituted the composition of net current assets and the financing of these assets (Samson, et al, 2012). Working Capital Management can also be defined as the controlled process of current assets less current liabilities (Lukarris & Eero, 2011). Weston & Bringham (2015), defined working capital management as investment in short term assets. We have observed that most researchers see working capital management through the prism of working capital and they try to define working capital as follows: Cheng, Frank and Wu (2009) and Guthman & Dougall (1948) defined working Capital as receivables plus inventory minus payables. Working Capital are short term balance sheet items which are attributable to current assets on the assets side and current liabilities on the liabilities side of the balance sheet (Brealey, Meyers & Allen, 2011, p.856). The main elements of working capital should include cash, marketable securities, receivables and inventories which are important for the management of the company (Ali & Ali, 2012). Working Capital Management is important as it has direct impact on the profitability of firms (Ray, 2012). To maintain liquidity and profitability of an organization, its working capital should be managed efficiently (Nazir & Afza, 2009). This entails planning and controlling current assets and current liabilities of firms with the view to reduce the risk of inadequate and non-availability of cash (Adeniji, 2008). Deloof (2003) posited that working capital management directly affects the liquidity and profitability of firms, the study argues that firms in a given large sample must vary in terms of size, age and Technology among others; that liquidity settings will also vary greatly depending on the risk appetite of the firm. Also, that firms will have different credit ratings that determines the way in which these firms make their purchases. According to Raheman and Nasr (2007) “Excessive level of current assets account can easily result in a firm realizing a substandard return on investment”, hence the need to manage working capital. The working capital management variables considered by this study are; account receivables, inventories turnover, account payable and cash conversion cycle (Lukkaris & Eero, 2011). Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet short term obligations when due and to avoid excessive investment on current assets which leads to idle cash (Eljelly, 2004) and looking at the nature of working capital and its components which are short lived, there is the need to manage working capital in order to attain profitability. “Current assets are short-lived investments that are continually being converted into other asset types” (Rao, 1989). When a firm maintain excessive current asset, it ends up tying down firm resources and that can affect 3 profitability (Rahem & Nasir, 2011). Also, large inventory and a generous trade credit policy may lead to high sales, but that does not translate in to profitability (Rahem & Nasir, 2011). Efficient working capital management is necessary for achieving both liquidity and profitability of a company (Nazir & Afza, 2009). A poor and inefficient working capital management leads to tying up funds in idle assets and reduces the liquidity and profitability of a company (Reddy & Kameswari, 2004). Working capital management became important and necessary during the financial crisis up to 2008 because the cost of long term debt increases and the new cost levels become difficult to attain, hence the need to manage working capital, especially when it can influence firm profitability and risk (Smith, 2018). Keeping larger inventory by a firm reduces the likely risk of a stock-out (Rahem & Nasr, 2007), even at that, inventories are not to be kept at an arbitrary level, there is the need for deliberate planning and continuous check on the inventory. Given that Inventories can save the firm from the risk of losing an important customer by meeting up with their unexpected demand; however, keeping too much idle stock may create unnecessary liquidity shock to a firm thereby affecting firm profitability, hence the need for tradeoff between liquidity and profitability which is ultimately working capital management (Shin & Soenen, 1998). Firms sometimes bought goods on credit from its suppliers meant to be payable in the near future, delaying payment to suppliers allows a firm to assess the quality of products bought, and can be an inexpensive and flexible source of working capital for the firm (Perri, 2008). This in essence allows firms to utilize the available cash that ought to be used for paying for supplies to another profitable investment opportunity. However, late payment of invoices can be very costly 4 if the firm is offered a discount for early payment (Rahem & Nasr, 2007).This decision process need to be taken by top management and is considered as payables management and as a component of working capital, it can be seen as working capital management (Cannon, 2008). Cash conversion circle is a fundamental tool applied in the assessment of the efficiency of working capital management (Richard & Laughlin, 1980). The common measure of working capital management (WCM) is the cash conversion cycle (CCC), this is the time between making payment for the raw materials purchased and the receipts of proceeds of sales of finished goods (Deloof, 2003). The more days a company‟s money is tied up in inventory, the longer the cash conversion cycle and the longer the number of days creditors must wait for their money (Jason & Kasozi, 2017). It is usually recommended that firms should have shorter cash conversion cycle for them to be profitable and remain credit worthy (Bibi & Ajmad, 2017). A longer CCC may translate into poor profit as inventories are either not converted into goods on time or they are converted, sold and yet the debtors have delayed payment or we have delayed paying our creditors (Billie, 2014). Hence, when CCC is shortened, it is expected to improve firm‟s profitability. Longer CCC results to a greater need for expensive external financing as cash are tied down on inventories or because we have lost our credit worthiness as such we have to look elsewhere to finance that which ordinarily would have been made available to us by our creditors (Nordmeyer, 2015). Longer CCC ultimately suggest that the firm is less likely to obtain credit when needed and less likely to continue in business as it is cash trapped (Jason & Kasozi, 2017). When there is a reduction in the time cash are tied up in working capital, it tends to improve on the efficient operations of the firm. The CCC is a useful way of assessing the firm‟s 5 cash flow as it is the measure of time that the funds were invested in working capital (Pratap, Kumar & Colombage, 2017). CCC is often regarded as the powerful and more comprehensive measure of WCM than using the current ratio and the quick ratio which focus on statistical balance sheet values (Quang, 2017). The CCC includes the time dimension of liquidity which measures the overall ability of firms to manage cash (Pratap, Kumar & Colombage, 2017). There are two major measurement of firm‟s performance commonly put to use, these are return on asset (ROA) and return on equity (ROE) (Meena & Reddy, 2016). The impact of working capital management on the financial performance of industrial goods firms is often measured using the return on asset (ROA) and not return on equity (ROE) because of timing and value issues against ROE (Falope & Ajilore, 2010). Often, net operating income and gross operating income are also used as the measure of financial performance. Also, the use of operating income to sales and operating cash flow to sales is beginning to gaining currency as a measure of firm‟s performance (Enow & Brijlal, 2014). The operating income is often used as a measure of firm‟s earnings power from ongoing operation and it is regarded as the difference between revenues and operating expenses. However, for the purpose of this work, return on assets (ROA) will be adopted as the proxy of firm profitability because in manufacturing companies, the firm is being financed mostly by the proceeds from the assets of the company (Falope & Ajilore, 2010).

1.2 Statement of the Problem
Empirical study on the relationship between Working Capital Management and profitability dwelling on Industrial Goods Firms in Nigeria must be ubiquitous to enable industrialist have information at the snap of their finger. These should be the material that will drive their firms forward by sustaining firm’s operation so that Nigeria will be positioned in the community of industrialized nations. Nigeria has in its Vision of becoming one of the 20th Industrialized Economy in the World by year 2020 and a leading Economy in Africa; Nigerian Industrialist need to know the importance of managing their Working Capital and the relationship that exist thereto with profitability for Nigeria to sustain the tide. Adequate knowledge on Working Capital Management in the Industrial Goods Firms will help in solving the Country‟s developmental challenges such as unemployment, poverty and other related problems; as its industries will flourish as they become profitable. Many Industries earlier established have either folded or are performing very low due to their improper management of working capital which results in lack of appropriate financing and access to trade credit (Masocha & Dzamonda, 2016, Enow & Brijlal, 2014). It has been found that there are a lot of research work on working capital management and profitability but there is none that dwell on the Industrial Goods Firms in Nigeria. This has created a gab in the body of knowledge in the Industrial Goods Firms in Nigeria. With this research, material will be made available that dwells on the Industrial Goods Firms in Nigeria.
The research shall make materials available which inevitably bridge the gap that exits from the paucity of materials dwelling on Working Capital Management and Profitability in the Industrial 8 Goods Firms in Nigeria. With this material, there is no need for extrapolation of information that will suffice for knowledge in the Industrial Goods Firms in Nigeria. This gab in knowledge is to be filled by conducting a study on the Impact of Working Capital Management on the Profitability of Industrial Goods Firms in Nigeria. The Variables to be deployed for the study consist of Account Receivable Days, Inventory Turnover Days, Accounts Payable Days and Cash Conversion Circle as Proxies for the Independent Variable and Return on Assets as Proxy for the Dependent Variable. This work will look at the impact of managing Account receivable days (ARD), Inventory turnover days (ITO), Account payable days (APD) and cash conversion cycle (CCC) on profitability of industrial goods firms in Nigeria. Failure to investigate this relationship will be an issue for concern because there is no specific study that cover the Industrial Goods Firms in Nigeria as far as the Impact of Working Capital Management on Profitability is. This work will serve as material that will cover the knowledge gab that exist as a result of deficit of research materials on the Industrial Goods Firms in Nigeria.

Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References
Delivery: Email
No. of Pages: 100

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN
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Masters Project Topics in Accounting and Finance

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