The Importance Of Working Capital Management In Manufacturing Company (A Case Study Of Nestle Nigeria Plc)

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The Importance Of Working Capital Management In Manufacturing Company (A Case Study Of Nestle Nigeria Plc)


Abstract


This study is an attempt to critically examine the reliance of working capital in manufacturing organization and to highlight its various effects. The reason for embarking on this research is therefore to probe into the problem areas, objectives etc as well as making the necessary suggestions. However, the research work is divided into five chapters.

The first chapter deals with the general introduction of the subject maters.

The chapter two contain interaction related to the topic from which contains assumptions was made to formulate hypothesis.

The chapter three deals with the research methodology, research design, selection of the data collection method and conduct of field work.

The chapter four deals with the analysis and interpretation of hypothesis in all, some hypothesis were formulated duly tested and validated so as to draw a logical anachronism.

Finally, the chapter five deals with, the summary of findings together with conclusion and recommendation.


Chapter One


Introduction

1.1 Background of the Study

Working capital which is incremental value of current assets over current liabilities is a very essential factor in corporate operations and survival. Its importance lies in the fact that it is the blood of any organization without which an establishment will cease to be a going concern.

Therefore, its strategic importance to corporate survival necessitates that it should be prudently managed in order to ensure its continuous presence and adequacy.

As much as inefficiency in working capital can lead to corporate deficit, over investment in working capital can equally be disastrous, since money that could have been profitably invested elsewhere to yield returns is being tied up. It is very important for the management of an organisation that investment in working capital should be optimized

Appropriate sources must be found, corporate working capital requirement and viable investment areas must also be found in order to invest in excess funds, which can be immediately realized and used to supplement the working capital base, whenever the need arises. This research paper focused its attention on working capital after having carefully considered the nature of working capital, its importance to management and its undiminished vantage of place in the finance structure and component, as well as its importance to corporate survival.

This research takes Nestle Nigeria Plc as its case study and intends to corroborate findings by analysis of three similar companies namely, Foremost Diaries Ltd., Cadbury Nigeria Plc and Nigeria Bottling Company Plc belonging to the Foods, Beverages and tobacco industry of the company chosen as case study.


1.2 Statement of Problem

The inadequacies necessitating this investigation are highlighted below:

  1. Lack of awareness as regards the importance of working capital management.
  2. Inability of management to detect and normalize over or under investment in working capital.
  3. Appropriate appreciation of the affects of over or under investment in working capital on corporate survival.
  4. Inadequate knowledge of the rudiments of working capital management.
  5. Ineffective follow up on the factor militating against affective management and control of working capital

This research study attempts to provide solution to these probing questions after having carefully analysed the data collected.


1.3 Objective of the Study

The keeping of optimum investment in current assets is of great significance to management due to the cost of both over and under investment in working capital. It is the purpose of the research to

  1. Examine the effects of working capital over trading that is, operating with sufficient working capital on corporate operations.
  2. It will also critically appraise those factors and variables affecting working capital itself as a financial concept.
  3. To determine the relationship between working capital management and organizational performance

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: there is no relationship between working capital management and organizational performance
    H1: there is relationship between working capital management and organizational performance
  2. H02: there is no impact of cash management on organization performance.
    H2: there is impact of cash management on organization performance.

1.5 Significance of the Study

  1. The study shall provide a detail study on the concept of working capital.
  2. The study shall appraise the nature and significance of working capital management.
  3. It shall provide useful principles for managers in the management of working capital.
  4. The research shall be a source of information on issues on working capital management.

1.6 Scope and Limitation of the Study

This research studies focused its attention on the management of working capital in the foods and beverages industry taking Nestle Nigeria plc as a case study.

As a backup for the evaluation of the secondary case study, companies shall be made of three additional companies selected from food and beverages industry such as: Foremost dairies ltd, Cadbury Nigeria plc and Nestle Nigeria Plc plc.

The four companies in aggregate will be deemed to be representative of manufacturing companies especially in the area of analyzing working capital.

This research is limited on its scope on the premises that it took only four companies as being representative of the entire food and beverages industry. The reason for this decision is in the inadequacy of time and finance available to cover all the companies included in the industry.

The research is also limited due to the inability of management to provide needed statistics like cash budget which they considered to be too confidential. This confidentiality also affects other information regarded as “classified”.
The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


1.7 Historical Background of Nestle Nig.Plc

Nestle Nigeria Plc is associated with Nestle Group, renown worldwide for its qualityproducts like Maggi, Milo, Nutrend, Cereals, Nido, Nescafe, Nestogen, Lactogen etc.Nestle Nigeria Plc started simple trading operations in Nigeria in 1961 and has today grown into reputable manufacturing and marketing company.

It is a publicly quoted company listed since 1978 on the Nigerian Stock Exchange with over 9,000 Nigerian Shareholders participating in 60% of the company’s equity 40% of the company’s equity is owned by Nestle Ltd of Switzerland. Nestle Nigeria Plc identifies itself with the aspiration of Nigeria towards economic and social progress and has made on a continuous basis important investment in the various field of its activities.

Nestle Nigeria Plc is in the Food Industry and its operations span the agricultural, industrial and commercial sectors of the economy, bringing benefits to each sector. To achieve its goals, the company relies on a cadre of skilled human resources, applying modern management method and a progressive competitive personnel and social policy.

Nestle Nigeria Plc aim at optimizing its long term profitability and as a result ensure the continuity of the company, rather than attempting to maximize short term profit. In pursuing the above aims, the company has always insisted on high standard in the quality of its products and high standards of integrity and efficiency.

Nestle Nigeria Plc receives continues technical assistant from Nestle Ltd, Switzerland particularly in the field of new improved productions processes and equipment, research into raw materials and development of new product, constant quality assurance, latest management techniques and continuous training of staff.

The company trademark is a house hold name, which promotes the popularity and acceptability of the company products by the consumers and has contributed to the growth and success of the company.


1.8 Definition of Terms

Within the context of carrying out the research work, here are certain words that have connotative meaning with respect to working capital management in manufacturing organizations. These terms used are given their respective definition some of which are the Inventory, Economic order quantity (EOQ) etc.

Inventory:

This relates to the stock of goods in the store. It comes in form of raw material work in process and finished goods of Nestle Nigeria Plc.

Economic Order Quantity (EOQ):

This is the optimal quantity that is needed in an organization for effective production of goods and services. The EOQ involve the existence of required quantity to avoid delaying production.

Working Capital:

The word “Working Capital” consists the excess of current assets over current liabilities. It involves that amount by which current assets outstays current liabilities.

Mathematically it is described as CA – CL

Where CA = Current Assets

CL = Current Liabilities

Working Capital Turnover:

It involves number of times or rapidly of which the Current Assets exceed the current liabilities. This involves the ratio of sales to working capital.

Stock Turnover:

Stock turnover describes the number of times goods (Stock) change hands i.e rapidity of stock with relevance to its production and sales. It is the ratio of cost of goods sold to average stock.

Primary Data:

The word “Primary” denotes nearly existing or established data and information obtained from a direct source. Basically, primary data has to do with new data. This can be mainly from questionnaires.

Secondary Data:

The word “Secondary” data relates to already existing data that is used for the purpose of the study. It comes in form of textbooks, notes and past books.

Working capital

Working capital refers to a firm’s investment in short term assets e.g. cash, short term securities, trade debtors, and stock.

Net Working Capital Defined:

Net working capital is defined as current assets minus current liabilities.

Working Capital Management Defined:

Working capital management refers to all aspects of the administration of both current assets and current liabilities.

Current Asset Defined:

Current asset are those asset with a short live span and are easily convertible into cash e.g. debtors, stocks, cash etc.

Fixed Asset

These are asset that are permanent in nature and with a long live span e.g. land, building, plant and machinery etc.

Equity Capital

This is a part of the authorized capital that is provided by the owner of the business or firm.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the importance of working capital management in manufacturing company.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of working capital management on organizational performance


5.2 Summary

This study was on an appraisal of the role of working capital management on organizational performance. Three objectives were raised which included: Examine the effects of working capital over trading that is, operating with sufficient working capital on corporate operations, it will also critically appraise those factors and variables affecting working capital itself as a financial concept, to determine the relationship between working capital management and organizational performance. In line with these objectives, two null hypotheses were posited. The total population for the study is 200 staff of Nestle Nigeria Plc, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made plant managers, trade managers, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


5.3 Conclusion

Working capital plays a vital role in the company’s operations and requires the efficient management. The management of working capital concerns the management of cash, inventories, accounts receivable and accounts payable. It is necessary for a company to monitor its working capital properly and maintain its balance at the appropriate level. Shortage of working capital may lead to lack of liquidity as well as loss of production and sales; on the contrary, excess balance of working capital could be seen as loss of investment opportunities. One way to achieve the objective of having efficient working capital is to manage short term assets and liabilities such as implement policies on inventory, credit and collection as well as supplier’s payment term. However, the study has found that there are also other factors affect the management of working capital. Previous studies on working capital management have pointed out that financial performance measure, such as ROA, ROI, ROE and ROS, profitability, the number of accounts receivable, inventory conversion period and accounts payable days, affect working capital management of a company.


5.4 Recommendation

  1. There should be recruitment of professional and competent quality personnel into the account department.
  2. There should be proper organization of cash and stock to avoid the problem of half hazard transactions.
  3. There should be segregation of division of labour among staff in the department to avoid conspiracy by staff to defraud the firm.

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