The Effect Of Working Capital Management On Liquidity, Profitability And Overall Management Of The Manufacturing Companies

Project and Seminar Material for Business Administration and Management BAM

The Effect Of Working Capital Management On Liquidity, Profitability And Overall Management Of The Manufacturing Companies


Chapter One


1.0 Introduction

1.1 Background of the Study

It is surprising that most of the companies go bankrupt and collapse not because they are not profitable but because their inability to meet their mature obligations. This is usually due to the inefficient management of their working capital, particularly in manufacturing companies. Therefore, the survival of a company depends largely on the availability of adequate working capital as well as the proper management of each of its component to have optimality.

Working Capital management involves the relationship between a firms short term assets and its short term liabilities. The basic goal of the working capital is to ensure that a firm is able to continue its operation and has sufficient ability to satisfy both maturing short term debts and upcoming operational expenses. This is done so as to avoid two ugly situations of our capitalization and under capitalization.

Over capitalization according to olowe (2007) is an inefficient working capital management that results in excessive stocks, debtors and cash with very few creditors. The implication of this is that, it impairs te firm’s profitability as idle investment earns nothing. The idle investment could have been invested in other profitable investment like marketable securities.

Under capitalization on the other hand occurs if a firm is trying to support large volume of production with little long term capital at its disposal.

The implication is that it can threaten the solvency of a firm because of its inability to meet its current and manufacturing obligation.

Thus the ultimate aim of management of working capital is to maintain an optimum level of working . in maintaining an optimum level of working capital the company must avoid our capitalization and under capitalization.


1.2 Statement of the Problem

The survival of a business firm or company depends largely on its ability to properly manage its working capital components. The prevailing issue of management of resources in the country particularly the manufacturing companies has made it to be paramount importance to look into the management of working capital in this sector.
An efficient working capital management lead to over trading or under trading. The result of these two unfavorable condition lead to insolvency or lower return on capital employed. It adversely affects the profitability and liquidity of a company. This study intend to address the problem of inefficiency in the management of working capital in manufacturing companies by solving the problem, the manufacturing company in particular should be able to manage the components of its working capital in order to maintain an optimum level of working capital.


1.3 Research Question

This study provided answers to the following research questions

  1. How effective does the working capital management of LUBCON Nigeria LTD enhances its profitability?
  2. Has LUBCON Nigeria ltd been able to manage its trade debtors, stock and trade creditors efficiency?

1.4 Objective of the Study

The main objective of the study is to examine the effect of working capital management on liquidity, profitability and overall management of the manufacturing companies

Sequences to this, the following are specific objective of the study

  1. To assess the impact of working capital on the liquidity and profitability as well overall management of the company
  2. To examine the optimal level of working capital, which the company should maintain in order to avoid over trading and under trading.

1.5 Research Hypothesis

In order to achieve the stated objectives and to solve the problem earlier highlighted, the following hypothesis stated below would be tested empirically.

Hypothesis 1

HO: Efficient management of the working capital does not enhance liquidity and profitability of the business

Hypothesis 2

HO: Efficient working capital management enhances overall performance of the company.


1.6 Significance of the Study

The preparation of working capital cycle serves the following purpose

  1. It gives insight into the amount of cash investment required to finance working capital cycle, the higher the cash investment required and vice-versa
  2. It serves as an improvement in working capital ratio for control purpose.
  3. The comparison of a company’s present working capital companies in the same industry may reveal area where liquidity can be improved upon

1.7 Scope of the Study

The scope of the study covered the management of the working capital in manufacturing companies of LUBCON Nigeria limited in particular. It takes care of the management of working capital and its impact the liquidity, profitability as well as the overall management of LUBCON Nigeria limited. The case study is needed in order to keep us written the management of LUBCON Nig limited.


1.8 Definition of Term

This Is the Definition of Some Key Term that are basically used in the cause of discussion on the study

A. Liquidity:

It is the amount of cash asset that a company has or can obtain to transact business with or finance it operation

B. Current Assets:

These are asset which can be converted into cash within and accounting period usually a year.

C. Current Liabilities:

There are liabilities which fall due within a year. These include trade creditor banks overdraft and accrued expenses.

D. Over Trading:

This term is use to describe a situation where an organization operate than what its resource can cope with.

E. Under Trading:

This is an inefficient working capital management that results in excessive stocks, debtors, cash.


Chapter Five


5.0 Summary, Conclusion and Recommendation

5.1 Summary

From the summary, it is observed that management must ensure that business has sufficient working capital. Too little will result in cash flow problems by an organization exceeding its agreed overdraft limit, failing to pay supplier in time and being unable to chain for prompt payment.

In the long run, business with insufficient working capital will be unable to meet its current obligation and would be forced to cease trade ever, if it remains profitable on proper. On the other hand, if an organization tries to much of its resources in working capital, it will earn a lower expected rate of return on capital employed.

Finally, an effective and efficient working capital management can help to enhance or improve the overall performance of a company. This can only be achieved if more attention is gicen to each of the components that make up the working capital. Over or under capitalization must be prevented for each of the components.


5.2 Conclusion

The following conclusion are drawn from the verification analysis and justification drawn through the impact of working capital in manufacturing companied such as:

  1. Cash as a component of working capital in the life line of a company.
  2. Management of working capital of a company effectively and efficiently we definitely increase the level of liquidity and profitability of such company.
  3. Maximum management of working capital effectively also will increase turnover which will increase that level of working capital use to increase on level profit.
  4. Reduction in management of working capital could definitely lead to working up or ineffective operation of such company.

5.3 Recommendations

Based on the result of our findings, the following recommendations are also made

  1. Managing inventory is a jugging act excessive stock can place a heavy burden on the cash resources of a business.
  2. In view of this, LUBCON limited should manage its inventory properly and maintain an option stock level.
  3. Cash flows can be significantly enhance if the amount owing every business need to know who owes money is owed, how long its owing, for what it is owned. Late payment erodes profit and can lead to bad debt.

Therefore it is recommended that LUBCON Limited should compare the associated benefit of granting credit with the cost involves before granting it.


The Effect Of Working Capital Management On Liquidity, Profitability And Overall Management Of The Manufacturing Companies


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The Effect Of Working Capital Management On Liquidity, Profitability And Overall Management Of The Manufacturing Companies


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