ABSTRACT
This study examines the
Management of Working Capital with special reference to
Nigeria Bag Manufacturing Company.
This study employs survey research
design. Analytically, the research adopted descriptive statistics to examine
the impact of working capital in manufacturing organisations in Nigeria.
Data
were basically sourced from primary method through means of a well structured
questionnaire. Twenty Five (25) respondents were sampled from the population
based on simple random sampling technique.
Four
hypotheses were formulated and tested with the used of Chi-Square Statistical
Technique. The analysis resulted into rejecting the four null hypotheses and
concluding that; The working capital requirement of a business venture is
dependent on the level of the business that has been established; Excessive
working can increase production cost; The longer the working capitals cycle of
an organization, the greater the investment in working capital; and there is no
industry norm or minimum agreed level of investment in working capital.
The study proffered valuable
recommendations as business
organization should manager its working capital efficiently, in such a way as
to avoid the ills of over capitalization and under capitalization.
TABLE OF CONTENTS
Chapter one
1.0 General
background of the study
1.1 Background
of the company, Nigeria bag manufacturing
company (BAGCO).
1.1.1
Historical
background
1.1.2
Nature of business
activities
1.1.3
Organization
structure
1.2
Statement of
problem
1.3
Significance of
the study
1.4
Objectives of the
study
1.5
Statement of
research questions
1.6
Research
hypotheses
1.7
Scope and
Limitation of the study
1.8
Definitions of
technical terms
1.9
Research
methodology
CHAPTER TWO
2.0 Literature
review
2.1 Management
of inventories
2.2 Management
of cash
2.2.1 Cash planning
2.2.2 Managing the back flows
2.2.3 Optimal cash level
2.2.4 Investing surplus cash
2.2.5 Cash operating circle
2.3 Management of receivable
2.4 Management of current liabilities
2.5 Benefit of management of working capital
2.6 Working capital ratio
2.7 Working capital circle
2.8 Overtrading and working capital
2.9 Under trading and working capital
CHAPTER THREE
3.0 Research methodology
3.1 Restatement of research hypotheses
3.2 Population of study
3.3 Sampling design and procedure
3.4 Source of data
3.4.1 Primary sources of data
3.4.2 Secondary sources of data
3.5 Data collection instrument and administration
3.5.1 Questionnaire
3.6 Procedure for data analysis
3.6.1 Chi-square (X2) analysis
3.6.2 Percentage analysis
3.6.3 Level of significance
CHAPTER FOUR
4.0 Data presentation, analysis and interpretation
4.1 Test of hypothesis
4.2 Conclusion
Chapter Five: Summary of Finding,
Recommendation and Conclusion
5.0 Summary of findings
5.1 Recommendations
5.2 Conclusion
Bibliography
Appendix
Questionnaire
CHAPTER ONE
INTRODUCTION
1.0 GENERAL BACKGROUND OF THE STUDY
The enactment of
the Nigeria Enterprise, promotion Decree of 1972, otherwise known as
Indigenization Decree, made many businesses which were higher in the hands of
foreign business men to pass into the hands of Nigerians. Perhaps by more
co-incidences the economy became over liquid. The result at the excess
liquidity was inflation.
To succeed in this
new challenge passed by the said Indigenization Decree, Nigerian entrepreneurs
and business concerns need at least a fair comprehension of essential aspects of
financial management and more specifically, working capital management.
Generally, it is
believed that the presumed objective at financial management especially in
private organizations is the maximization of the value of the firm. Thus,
wealth maximization of the present value of the future streams of cash inflows
of the shareholders which are a derivative at the profitability of a firm.
(Brokington, 1983).
Although
profitability may be considered the objectives at a business, nevertheless, the
mismanagement of work capital can effectively bring to a half, or to its
ultimate downfall, what might otherwise be a successful and profitable
organization.
Therefore,
according to Howard (1982) working capital is defined as ''the asset held for
current use within a business less the amount due to those who await settlement
in the short-term in whatever form". In the same vein,
Olowe (1997) views
working capital as "the capital available for running the day to day
operation of and organization. It is defmed as current Assets less Current
liabilities".
Current Assets are
the circulating assets of the business; these are the assets that are not
permanent in nature. They include: Cash at hand and bank; Short-term
investments such as treasury bills; Stock of raw materials, work-in-progress
and finished goods; Debtors, Accrued income etc. Current liabilities on the
other hand are debts of the business that have to be settled within the
following twelve months. They include; Creditors; Current taxation, Bank
overdraft etc. A current liability for a sizeable part of the business sources
at finance and it is the cheapest form at business finance (Olowe, 1997).
Pandey (1986)
views working capital form two perspectives. These are gross working capital
and net working capital. Gross working capital means "firms investment in
current assets. Net working capital on the other hand is "current asset
less current liabilities".
The importance of
gross working capital is indicated by optimum investment in current assets.
Here, the investment neither is in excess; resulting into tying down the
capital of the business, nor investment inadequate; which will make the
business insolvent. On the other hand, net working capital implies, that the
current liabilities.
This is necessary
in order to protect the interest of creditors. For this to be effective,
current assets must be well above currents liabilities. Here, current ratio of
2.1 may be considered necessary (Pandey, 1986).
In view of the forgoing,
working capital management is that managerial effort or approach which seeks to
ensure that correct amount of investment are made by firms in working capital,
adequate enough to cope with the business level being operated by that firms.
Working capital
management therefore reverses to the management at all aspect of current assets
and current liabilities. Hence, the managing working capital, it is essential
to known the amount to be invested in current assets and the appropriate
sources from which the finance will come.
Evidently, two
extremes are easily notice at regards investment in working capital by firms,
that is
·
Having excessive working capital and;
·
Having in adequate working capital
However, the
objective of a finance manager as regards the management of working capital is
the strike a balance: between these two extremes because excessive working
capital is expensive and inadequate working capital very dangerous. These
extremes can be likened to liquidity and profitability on which compromise is
being achieved with managerial effort on working capital (Brokington, 1983).
In essence,
working capital management hopes to ensure the most efficient use to resources
open to the firms, and it also involves making sure that the commitment to
working capital is as low as possible. However, this is determined to a larger
extent by the type of industrial involved, but there may be other policy
considerations which may influence the level. (Pandey 1985).
1.1 BACKGROUND OF THE COMPANY NIGERIA BAG
MANUFACTURING COMP ANY-(BAGCO)
1.1.1 Historical
Background
The company,
Nigeria Bag manufacturing Company Limited
(Bagco) was
incorporated in 1964 as a wholly owned subsidiary of flour mills of Nigeria
plc. Almost immediate bagco’s pioneering spirit was established in 1972 new
polypropylene bag manufacturing equipment was installed in the premises at Eric
Moore Road, Surulere Lagos. As the first company in Nigeria to embrace this new
technology Bagco enjoyed rapid expansion such that by 1978 the complete
production range had been transferred to the new polypropylene technology.
Over the next
decade bagco grew steadily as the production base was increased to meet the
increasing demands of the market in terms of volume and product range. The next
step for Bagco was to incorporated Northern Bag manufacturing Company Limited
(Bagco North) in 1990 thereby enabling Bagco to become a truly pan Nigeria
manufacturer. Bagco North commenced operations at sharada phrase 3, Kano in
1991. The 1990 saw both Bagco and Bagco North developed a product range of
plain woven and laminated bags to meet the demands of Industrial, Agricultural
and Domestic customers. Bagco Group had now truly become a house hold name with
everybody knowing "Bagco Super Sack".
In 1999 Bagco
again showed its pioneering spirit with the introduction to Nigeria of the
Adstar polypropylene cement sack. The first of ten machines was installed and
the Adstar bags had recorded some level of success within the cement industry.
Today Bagco supplies major cement companies throughout Nigeria and have
virtually completely replaced the old paper package within the polypropylene.
Bagco's newest company, Bagco Morpack Nigeria Limited (Bagco Morpack) was
incorporated in 2006, based at Eric more Road, Surulere, Lagos. Bagco Morpack
has been established to produce printed flexible packaging of foods and
chemical industries. (Initial production which will commence in the first half
2008).
1.1.2 NATURE OF BUSINESS ACTIVITIES
Nigerian Bagco
Manufacturing Company (Bagco) and Northern Bag manufacturing company both
operate state of the art production units for woven polypropylene packing.
The main business
of the company is the manufacturing of woven polypropylene sack used by industrial
market like, cement, detergent, salt, fertilizer and flour with customize
packaging solutions that meet their volume and quality requirement.
It is also used
for agricultural markets, a wide variety of "super sack" and
"kakaki" bags to pack grains, fruit and vegetables. And it is also
used for packaging of nails and used as a shopping bag.
Bagco Group is one
of largest supplier to Nigeria Independent customers of woven polypropylene
bags. And Bagco Group is working hard to maintain this position as Nigeria
premier quality supplier through development projects with customers that are
focused on enhancing the supply chain of today and tomorrow.
1.1.3 ORGANISATION STRUCTURE
The board of BAGCO
is composed of eleven (11) members made up of five (5) Executive and seven
non-Executive Directors. The board members are professionals and entrepreneurs
with credible track records.
Responsibilities
at the top of the company are well defined and the Board is not dominated by
one individual. The position of the Chairman is separate from the Chef
Executive. The Chairman is not involved in the day-to-day operations of the
company.
The non-executive
Directors, seven (7) are of strong caliber and contribute activity to Board
deliberations and decision making. However, non-Executive Directors are not
appointed for a fixed period, but shall instead remain in office until the
company determines their tenure or by operation of law.
The Executive
Directors, the remuneration of the Chief Executive office is fixed by the
board.
The board
established committee is chaired by non - Executive Directors and composed of
other non - Executive Director. Full disclosure is provided for Director's
remunerator. I.e. the highest paid Director and remunerator of the Chairman.
1.2 STATEMENT OF PROBLEM
Decision in
relation to management of working capital could be seen as one of the strategic
decision of a firm because it affects the operation of efficiency and a
determinant of the future prospect of the firm. No matter how profitable a
venture or project may be a liberal or venture may reveal situations of
Under-Trading or Over-Trading. Over-trading, otherwise called under
capitalization is a situation where a
business tries to do too much too quick with too little working capital and
liquid resources.
It is usually and
ailment afflictions most firms where such firms expand beyond the capacity of
their capital structure of base (Wookf, 1984).
On the other-hand,
under-trading otherwise referred to as over capitalization, it is a situation
where too much investment is made in working capital asset for expedient that
investment in capital asset for expansion purposes are prevented. This problem
however depicts a situation where a fum capital
is represented by employed. (Olowe, 1997).
A company must
maintain a suitable working capital position as excess or shortage of it could
be detrimental to the company, despite this many companies are still lot aware
of the importance of working capital as an operational requirement.
The problem of
this study therefore is to determine ways by which management ensures current
investment in working capital, and also watch out for the signals of the
existence of these problems, with an attempt at remedying the situation through
the managerial effort on working capital.
1.3 SIGNIFICANCE OF THE STUDY
An important
consideration on working capital management is determines the amount of working
capital and how working capital should be financed.
This study will
help to know how this vital aspect at the company's resources is being managed.
This study will also highlight the benefits and problems associated with the
management will therefore give an understanding of the cause and consequence of
over-capitalization and under capitalization and the remedial actions necessary
to overcome these problems.
More so, the study
will give business organizations and ventures a revenge of understanding of how
to ensure adequate, optimal and correct investment on working capital for
different levels of business activities.
The effects of
risk and profitability of management of working capital will be evident from
the study.
In addition, this
study will be of benefit to finance managers in business organizations,
potential investors, student of corporate governance, other stake holders and
the general public.
1.4 OBJECTIVES OF THE STUDY
Working capital
management is an area that every organizations most pay serious attention to in
order to meet with the dynamic business environment. The objective of the study
shall specifically include the following:
1.
To identify the nature and relevance of working capital
to business operations.
2.
To give an insight and understanding of the damaging
effects on organization performance of lack of adequate working capital on the
other hand.
3.
To show that large holding of current assets especially
cash Strengthens a firm's liquidity position but reduces the overall
profitability.
4.
To find out the problems uncounted by the management in
the administration of working capital and to make suggestions on how to
overcome the problems.
5.
To ensure the most efficient use of resources open to the
firm and it’s also involves making sure that the commitment to working capital is
a low as possible.
6.
To ensure that current amounts of investment are made by
firms in working capital and adequate enough to cope with the business level
being operated by the firm.
7.
To know the amount to be invested in current assets and
the appropriate sources from which the finance will come from.
1.5 STATEMENT OF RESEARCH QUESTION
The research
questions to be used in this study are:
1.
What is the relevance of working capital for the
operations to the operations of a business?
2.
Is there any industry norm, as regards the level of
investment in working capital?
3.
What is the minimum required investment in working
capital by an organization?
4.
What are the working capital cycle and its implication on
the working capital requirement of an organization?
5.
Does the type of business being operated whether in the
manufacturing or service sector affect the level of investment in the various
components of working capital?
6.Can investment in
working capital be kept to its bearest minimum.
1.6 RESEARCH HYPOTHESIS
The validity of
the following hypothesis will be tested in this research study.
1.
That the working capital requirement of a business
venture is dependent on the level of business that has been established.
Ho: The working capital requirement of a business venture is
not dependent on the level of business that has been established.
Hi: The working
capital requirement of a business venture is dependent on the level of the
business that has been established,
2.
That excessive working capital can increase production
cost.
Ho: Excessive working capital cannot increase production
cost.
Hi: Excessive working
can increase production cost.
3.
That the longer the working capitals cycle of an
organization the greater the investment in working capital.
H0: The longer the
working capital cycle of an organization the loser the investment in working
capital.
Hi: The longer the
working capitals cycle of an organization, the greater the investment in
working capital.
4.
That there is no industry norm or minimum agreed level of
investment in working capital.
Ho: There is an
industries norm or minimum agreed level of investment in working capital.
Hi: There is no
industry norm or minimum agreed level of investment in working capital.
1.7 SCOPE AND
LIMITATION OF THE STUDY
This study covers
the concept of management of working capital of Nigerian Bag Manufacturing
Company Limited as a case study.
However, this
research study will be constrained by time cost and other inherent limitations
of research studies as regards the confidentially of some methods and method of
operations, which the firm used as case study. Things make them to be on the
competitive edge over its competitors and which are consequently guarded from
public knowledge.
1.8 DEFINITIONS OF TECHNICAL TERMS
The definitions of
terms serve as the dictionary of this research report: hence, the terms are
arranged alphabetically and the list will be continuously updated.
For the purpose of
this study, the following terms that will be encountered are as defined below:
1. Accrued charge:- These are the
expenses already incurred but were not invoiced by the accounts date.
2. Bank overdraft: This is a
short-term accommodation where by the band allows the customer to overdraft his
account to a certain amount.
3. Cash: This is the basic
input necessary to start and keep a business running. It is also the ultimate
output expected to be realized from the business e.g. cash sales, receipts from
debtor's.
4. Cash operating
cycle: This is the period that takes place between payment for raw material
purchased and the eventual payment for the goods made from the raw materials by
the company's customers
5. Current Assets: These are the
circulating assets of the business. They are the assets that are not permanent
in nature. They include; cash at hand and bank; short term investments; stock;
debts; accrued income etc.
6.
Current
liabilities: These are the debts of the business that have to be
settled within the following twelve months. They include; trade creditors,
current taxation; bank overdraft; loan that fall due for repayment within the
next financial year of the company; Accrued charges such as rent. e. t.c.
7.
Current Taxation: This is the
company's profit tax payable within the next financial year. Tax rate and
payment rates are subject to charging fiscal policies.
8.
Financial
statement: The financial statement contains summarized information of the firm’s
financial affairs organized systematically. Financial statement consists of
balance sheet, profit and loss account; the notes on account; source and
application of fund statement: value added statement and Historical financial
summary.
9. Over
-capitalization: This is an inefficient working capital management that
results in excessive stocks debtors, cash and very few creditors.
10.
Stock: This is defined
in the official terminology of the chartered institute of management
accountants (CIMA) as "any current asset held for conversion into cash in
the normal course of trading into cash in the normal course of trading e.g. raw
materials; work-in-progress; finished goods and goods in transit or on sale or
return"
11.
Trade creditors: these are
suppliers of the company to whom money is owned.
These settlements
are due writing the next twelve months.
12.
Trade Debtors: These are the
company's customers that are yet to settle their bills, i.e. debts due for
settlement within the next twelve months.
13.
Under-capitalization: This is a situation
where a business tries to do too much too quick with too little working capital
and liquid resources.
1.9 RESEARCH METHODOLOGY
Research
methodology involves the methods employed in data collection and techniques
used in analyzing the information gathered from reliable source form decision
making purposes.
The source data
utilized in the research can be categorized into primary and secondary data
respectively.
While the forms of
data analysis involve the use of quantitative techniques such as chi-square
analysis and percentage analysis, deductive reasoning and descriptive analysis
would be used to verbally summarize the mass of information generated in the
study as form of qualitative techniques so as to further discover relationships
among variables and to corroborate the results if the quantitative analysis.
Editing and validating exercise to check for errors and inconsistencies will
however precede data analysis.
REFERENCES
OLOWE (1997) FINANCIAL MANAGEMENT: CONCEPT INVESTMENTS.
PANDEY (1986) FINANCIAL MANAGEMENT: PRINCIPLES OF WORKING CAPITAL. 4TH EDITION.
PANDEY (1985) FINANCIAL MANAGEMENT: PRINCIPLES OF WORKING CAPITAL. 4TH EDITION.
WOOKF H.E (1984) CORPORATE FINANCE IN THE MANUFACRING INDUSTRY. 3RD
EDITION.
CORPORATE PROFIT (2007) OF NIGEIUAN BAG MANUFACTURING COMPANY (BAGCO).
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