Impact Of Working Capital Management On Corporate Profitability Of Nigerian Manufacturing Firms

1.4 Research Questions

The following research questions will be considered in the study.

1. To what extent does accounts payable ratio influence profitability?

2. To what extent does accounts receivable ratio influence profitability?

3. How far has cash conversion circle ratio affected the profitability of the companies under study?

4. To what extent does stock turnover ratio influence firm profitability?

5. To what extent does liquidity ratio influence the profitability of Nigeria quoted manufacturing firms under study?

1.5 Research Hypotheses

In order to address the issue raised above, the following hypotheses shall be proved:

 1. Accounts payable ratio has no significant and positive impact on corporate profitability.

2. Accounts receivable ratio has no significant and positive impact on corporate profitability.

3. There is no significant and positive impact of cash conversion cycle ratio on profitability of the Nigeria quoted manufacturing firms.

4. There is no relationship between stock turnover ratio and firm profitability.

5. There is no relationship between liquidity ratio and profitability of the Nigeria quoted manufacturing firms.

1.6 Scope of the Study

The study is on the impact of working capital management as a measure for profitability following previous studies on this area, the study focuses on five independent variables, Accounts receivable, Accounts payable, inventory , cash conversion cycle and liquidity. The study also focuses on Dependent variable[Profitability],five independent variables[Accounts Payable,Accounts Receivable,Cash Conversion Cycle, Stocks,Liquidity, and other control variables that affect profitability such as sales growth and debt. The study is for the period: 2000-2011, and it will include all the publicly listed manufacturing firms in Nigeria.

1.7 Significance of the study.

It was mentioned earlier in this study that working capital is the life wire of organization. It is assumed that what blood is to human existence is what working capital is to business. Therefore a well designed and implemented working capital management is expected to contribute positively to a firm value (Padachi, 2006). It is expected that this study will:

a. Help to create awareness on the impact of working capital management and how it can enhance corporate profitability.

b. Help managers of the firms under study to have better insights on how to maximize their firms value.

c. Help investors to invest in the manufacturing companies under study that are managing their working capital well. These investors will have more confidence in the company they want to invest in. Their investing in Nigeria will influence the growth of the economy.

d. It will also assist policy makers to implement new set of policies regarding working capital management in Nigeria to ensure continuous economic growth.

e. Meet the need of management accountants, academia, and students who will be interested in this study. Other researchers on corporate governance will find useful information from this study, it will also add to the existing literature on the topic.

 1.8 Limitation of the study

The study was conducted on only manufacturing firms in Nigeria Accordingly the result could not be generalized for all the manufacturing firms operating in Nigeria due to unavailability of data for some of these firms.

1.9 Operational Definition of Terms

Working capital: working capital is the cash needed to pay for the day-to-day operation of the business. It is calculated as the difference between the current assets of a business and its current liabilities. Current assets are those assets that are held in cash form or that can easily be turned into cash. Examples are: receivable, inventory and cash. While current liabilities are money owned by a business which will need to be paid within one year.

Working capital management: it is the regular adjustment and control of the balance of current assets and current liabilities of an organization are made and the fixed assets are properly serviced. (Ross et al 1996) Accounts receivable are customers who have not yet made payment for goods or services, which the firm has provided. The objective of the debtor management is to minimize the time-lapsed between completion of sales and receipts of payment. In this respect account receivable is divided by sales. It represents the firms’ payment from its customers.

Inventories: Inventories are list of stocks raw materials, work-in- progress or finished goods waiting to be consumed in production or to be sold. Inventory is calculated as inventory/purchase. It reflects the stock held by the firm.

Accounts payable: accounts payable is suppliers whose invoices for goods or services have been processed but who have not yet been paid. Organization often regards the amount owing to the creditors as a source of free credit. Account payable is calculated as payables divided by purchases. The longer the value, the longer firms take to settle their payment commitment to their suppliers.

Cash conversion cycle (CCC): the cash conversion cycle (CCC) is a proxy for working capital management efficiency. Cash conversion cycle is the flow of cash from suppliers to inventories to accounts receivable and back into cash. It is therefore calculated as inventories and receivables less inventories and payables. It has been interpreted as a time interval between the cash outlays that arise during the production of output and the cash inflows that results from the sale of the output and collection of the account receivable. CCC is calculated by subtracting the payables the sum of the inventory conversion period and the receivable.

Sales growth: the sales growth is the increase or decrease of the annual sales measured as a percentage. In this study a positive effect from sales growth on the performance is assured.

Debt: This is measured by relationship of long-term debt to total assets and is proxy leverage. It is assumed that when external funds are borrowed e.g. from banks at the fixed rate, they can be interested in the company and gain a higher interest paid to the bank.

 Working capital cycle:- the period of time between the point at which the cash is first spent on the production of a product and the final collection of cash from a customer.

Overtrading:- Overtrading is the term applied to a company which increase its turnover without having sufficient capital backing. It is risky because short-term finance can be withdrawn relatively quickly if creditors lose confidence in the business or if there is a general tighten in the economy. The problem with overtrading is not that the company is unprofitable; it is that company has