The Effect Of Inventory Management On Financial Performance Of Quoted Pharmaceutical Companies In Nigeria

Project and Seminar Material for Accountancy / Accounting

The Effect Of Inventory Management On Financial Performance Of Quoted Pharmaceutical Companies In Nigeria


Abstract


The study focuses on the appraisal of the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria. This is a qualitative research on the study of stock management and its effect on growth and profitability of an organization. The study used Regression, Qualitative and ANOVA analyses to analyze the data collected from the annual report from 2005 – 2013. The results show that there is significant relationship between value of stock carried and cost of goods sold in the firm under study. The findings have far reaching implications for the inventory policies of the cement manufacturing firms on profitability. This study therefore suggests some recommendations to remedy certain defects in the company inventory policy and if these recommendations are implemented, the firm’s inventory management situation will attain a greater height and improve the firm financial position. It is recommended that cement manufacturing firm develop a policy framework to facilitate faster implementation of the best inventory management practices such as JIT, MRP and EOQ.


Chapter One


Introduction

1.1 Background to the Study

The effective management of stock is essential for the smooth running of an organization. This is because without enough stock, health services rendered to patients may be obstructed as a result of lack and insufficient drugs .According to (chopra and mendi 2007) many organization stock constitute one of the largest single investment in assets and to some extent some organizations have maintained high level of stock to enhance the continuous availability of stocks for the employees. Stock is also referred to as inventory which is defined as comprising of .raw materials, work-in-progress, finished goods and supplies used for the production of an organizations goods and services Coyle et al (2003). Stocks also consist of the number of units and value of stock of goods held by the organization. The holding of stock by organizations is to avoid the problem arising as a result of stock out. The Level of stock holding is determined by the organizations operational needs, availability of capital, cost of storage, the need for detailed records through the use of store records and the time required to obtain deliveries of stock. With each of this factors considered, stock level can be determined for each item of stock which should be recorded in the stock records and as a policy no stock item should be released without an approved materials requisition form. On the operational level of business it is pertinent to institute policies on stock to address issues of uncertainty and variations. This is because the uncertainty and variability of the timing and content of information flow and goods flow leads to uncertain planning, which leads to stock outs, and delays and increased costs,. Gudum (2002). Consequently it is necessary for strategies to be applied at both the tactical and strategic levels of organizations which will stimulate their supply chain strategy to attain competitive strategy and excellence in order for this to be effective.. Financial performance is the determination of the firms effective utilization of its assets from its primary mode of business to generate revenues .It is the firm’s overall financial health over a given period of time. Financial performance is expressed as revenue from operations, operating income or cash flow from operations and sales. Also the firm’s financial statement can be used to determine the margin growth rates or any declining debt. The research therefore seek to investigate the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria


1.2 Statement of the Problem

Financial performance is the determination of the firms effective utilization of its assets from its primary mode of business to generate revenues .It is the firm’s overall financial health over a given period of time. Financial performance is expressed as revenue from operations, operating income or cash flow from operations and sales. Keeping accurate records help firms reduce pilferages and theft as well as maintain ideal levels without distracting operations. Nyabwanga (2013) stated that both excessive and inadequate inventories are not desirable because excess inventories results in high stockholding costs and reduces the firm’s profitability while inadequate inventories disrupt firms operations (Atrill, 2006). According to Ashok (2013) the adequate and timely flow of inventory is imperative for the success and growth of any firm. Therefore the problem confronting the research is to appraise the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria


1.2 Objectives of the Study

To determine the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria

Financial performance is the determination of the firms effective utilization of its assets from its primary mode of business to generate revenues .It is the firm’s overall financial health over a given period of time. Financial performance is expressed as revenue from operations, operating income or cash flow from operations and sales.

Keeping accurate records help firms reduce pilferages and theft as well as maintain ideal levels without distracting operations


1.3 Research Questions

  1. What is the effect of inventory management on financial performance?
  2. What is the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria?

1.4 Significance of the Study

The study indicates the need for proper inventory management of the firm so as to facilitate in the attainment of financial objectives consequently it proffers an appraisal of The effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria


1.5 Research Hypothesis

  • Ho The effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria is negative
  • Hi The effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria is positive

1.6 Scope of the Study

The study focuses on the appraisal of the effect of inventory management on financial performance of quoted pharmaceutical companies in Nigeria


1.7 Limitations of the Study

The study was confronted with some constraints such as logistics and geographical factors.


1.8 Definition of Terms

Financial Statements of Firms

Include income statements, balance sheets, statements of retained earnings and cash flows.

Balance Sheet

Shows the record of the firm’s assets and liability for a given period of time.

Income Statement

Provides the gross profit margin, the cost of goods sold, operating profit margin and net profit margin.

Cash Flow Statement

The cash flow statement shows is the reconciliation between net income and cash flow. It also states the source and uses of cash flow from investment, financing, and operations.

Financial Performance

Is the determination of the firm effective utilization of its assets from its primary mode of business to generate revenues .It is the firm’s overall financial health over a given period of time.


Chapter Five


Conclusion and Recommendations

5.1 Conclusion

There are two bases of findings, this includes qualitative and quantitative findings. Qualitative findings were theoretical research on the study of stock management and its effect on growth and profitability of an organization. Inventory from the findings occupy the most strategic position in the structure of working capital of most cement manufacturing firms. It constitutes the largest component of current asset.

The value of carrying stock will vary from company to company. For instance, if a company has a large cash balance with no attractive investment options, has excess space storage, and its product have a low probability for deterioration or obsolescence, the company’s cost are very low. A company with enormous debt, little space, and products subject to deterioration will have high carrying value which will have positive effect on the cost of goods sold and affect the firm profitability.

From the analysis, a weighted value was represented in inventory policy employed. Inventory control techniques, fixation of norms of inventory, stock level sub system, perpetual inventory control system, and pricing of raw materials are the inventory policy to be managed in the understudy firm. From the findings growth and profitability can be maximized with much emphasis on inventory policy using different approaches in an attempt to solve the problem associated with inventory management. Quantitatively, coefficient of standardized beta value of 0.215 for cost of goods sold on value stock shows positive relationship between the two variables.

The present study on inventory management in manufacturing industry would certainly complement and supplement the existing knowledge on stock management. This strongly advocates the cost of sales, carrying cost, inventory policy, which made it to be growing from strength to strength increasing the productivity capacity in spite of the economic problem in Nigeria. This research work found out that there is a positive relationship between Inventory management and profitability of the firm. The more inventories converted into money; the more profitability ratios included in analysis. If the firms operating in this sector sustain their inventory management policies effectively, they increase their profits.

Prudent management of materials reduces depreciation, pilferage and wastages while ensuring availability of the materials as at when required, would lead to improved Financial Performance of Quoted Pharmaceutical Companies in Nigeria. Given the problem that arises as a result of the inefficiencies, breakdown and shut down of the plant and carrying cost of materials, it becomes very necessary to re-organize the materials management department, establish good relationship with suppliers of spare parts in order to minimize losses arising from frequent breakdown and improve profitability.

Inventory management has become highly developed to meet the rising challenges in most corporate entities and this is in response to the fact that inventory is an asset of distinct feature. The inventory management situation of Quoted Pharmaceutical Companies in Nigeria has been revealed using a well-built inventory policy to handle its idle stock without incurring unnecessary cost by also minimizing associated carrying cost.


5.2 Recommendations

This study thus suggests some recommendations to remedy certain defects in the company inventory policy and if these recommendations are implemented, the company’s inventory management situation will attain a greater height and improve the firm financial position.

Firstly, as analyzed of positive relationship between inventory and cost of goods sold and value of carrying stock. This does not imply that inventory automatically determines production costs or sales and viceversa. However, it does indicate that inventory levels can be of useful indication of what level of sales and profitability to expect. Thus, organization sales and marketing department of the company should pay attention to the growth pattern of inventory usage and incorporate it in sales forecasting technique. It is important to determine the incremental holding costs for a year.

Secondly, it is recommended that cement manufacturing firms develop a policy framework to facilitate faster implementation of the best inventory management practices such as JIT, MRP and EOQ.

Thirdly, the firm should also strengthen the supplier relation to the level of partnerships. This will facilitate implementation of programmes such as Vendor Managed Inventory (VMI).

Fourthly, the company should diversify their inventory system to suit specific needs of production Inventory management should maximize space and timely delivery to avoid staying off production. Management should closely monitor and manipulate their inventory system to maintain production consistency for organizational profitability and effectiveness.

Fifthly, the flow of information should be increased and should be circulated adequately in order to enhance adequate updates of inventory records.

Sixthly, the company should try by all means to adhere to inventory policies made. A situation whereby materials or items are allowed to leave the stores without proper requisition, this shows the internal control is weak. In order to ensure that the company adheres to inventory policies, under no circumstance should items of inventory be allowed to leave stores without proper requisition. To avoid duplication of records due to price variance, the FIFO (first in first out) and LIFO (last in first out) system of issues should be adopted. This will ensure the elimination of the need to open several cards for single items because of price variation. Sufficient stock should be held in order to avoid stock-out so that when the ordering level is high; there will be enough stock to be delivered.

Lastly, stock management unit should also pay attention to sales growth over the years and thus take into consideration, the apparent relevance of sales, production cost and profitability.


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