COLLEGE OF BUSINESS AND ECONOMICS

DEPARETEMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF THE ROLE OF WORKING CAPITAL MANAEGMENT

ON FINANCIAL PERFORMANCE

(CASE STUDY OF HAWASSA FLOUR SHARE FACTORY IN HAWASSA CITY)

By: Tsigereda Tena

Id no: 0208/10

Advisor: Desta.z (MS)

December/2020

Yeregalem Ethiopia
Acknowledgement

First and for most I would like to thanks for Almighty God that brings me to
this worlds and leads to me the right direction as well as that helps me in every
aspect of my activity. Next, I would like to thank for my families that helps me
in all activities and aspects of my life until now. My hurtful gratitude also goes
to instructor Desta.Z. For his valuable advice in constructing comment, and
correcting my research report by scarifying his precious time.
Abstract

This study is conducted to assess working capital management on financial

perfomance in case of Hawassa flour share company. all data are analyzed
through the information collected from the annual financial reports of
Hawassa flour share factory from 2008-2011. The data is analyzed by using
different ratios you show the performance of the company. The problem of
inefficient working capital management has negative impact on the financial
performance of a company, which must be improving by implementation of
relevant working capital policies and procedures. In this study efforts have
been exerted to realize the effect of working capital management on financial
performance of a company . The study mainly gives attention to over all impact
of current asset and current liabilities for the company. The research uses
both primarily and secondary data. As most of the information are financial it
dues emphasis on secondary data which mainly consists financial variables.
During the data analysis different financial ratios are employed. In order to
show relation between variables and financial performance are used. Negative
relationship between net profit margin and current ratio also indicated on the
analysis part. Finally conclusions and recommendation are make on the
findings of the study.
Acronomy

H.F.S.C, Hawassa flour share company

N.W.C.R, Networking Capital ratio

C.G.S, Cost of goods sold

C.A, current assset

C.L, current liability

D.S.I,Days of sales inventory

D.S.O, Days of sales outstanding

D.P.O, Days of payables outstanding

 Table of contents

Contents Page No

Chapter one………………………………………………………………8

1 Introduction.............................................................................................9

1.1 Background of the study.......................................................................9

1.2 statement of the problem .....................................................................9

1.3 objectives of the study..........................................................................9

1.3.1 General objective.......................................................................9

1.3.2 Specific objectives.....................................................................9

1.4 Research questions…………………………………………………...10

1.5 significance of the study......................................................................10

1.6 scope of the study................................................................................10

1.7 organization of the paper......................................................................11

Chapter Two ……………………………………………………………12

2 Review of literature.................................................................................12

2.1 Reviews of Theoretical Literature…………………………………....12

2.1.1Element of working capital management............................................12

2.1.2 Importance of working capital management......................................13

2.1.3 Factors influencing working capital management..............................13

2.1.4 Strategies of working capital management.........................................14

2.1.5 Cash management................................................................................16

2.1.6 Receivable management......................................................................17

2.1.7 Inventory management.........................................................................19

2.2 Review of Empirical literatures...............................................................20

Chapter Three…………………………………………………………..22

3 Research methodologies ............................................................................22

3.1 Description of the study area...................................................................22

3.2 Research design.......................................................................................22

3.3. Sources and types of data .......................................................................22

3.4 Sampling techinques................................................................................22

3.5 Method of data collection.........................................................................23

3.6 Method of data analysis.............................................................................23

Chapter four……………………………………………...…………………24

4 Data presentation, Analysis and Results………………...…………………24

4.1 Financial Performance analysis………………………..…………………24

4.1.1Liquidity ratio……………………………………………………………24

4.1.2 Current ratio………………………………………….…………………24

4.1.3 Quick ratio………………………………………………………………25

4.2 Activity ratio………………………………………………………………26

4.2.1 Inventory turnover…………………………………………………….…27

4.2.2 Average collection period……………………………………………….28

4.2.3 Operating cycle…………………………………………………………..29

4.2.4 Cash conversion cycle……………………………………………..…30

4.3 Return on Investment……………………………………………………31

4.4 Networking capital ratio………………………………………………….32

4.5 Profit margin ratio………………………………………………………..32

Chapter five………………………………………………………………….35

5 Conclusion and Recommendation………………………………………….35

5.1 Conclusion………………………………………………………………..35

5.2 Recommendation…………………………………………………………36
 Chapter one

1. Introduction

1.1 Background of the Study

Working capital refers to the current assets using in operation. It’s the firm’s investment in
current assets and their ways of financing (current liability). Working capital management is the
administration, controlling and utilization of current assets and the financing need to support
current assets (i.e. the current liabilities). It involves both setting working capital policy and
caring out that policy in day-to day operations. It refers to the management of investment on
current assets. Investments in current assets are largely determining by the nature of the firm’s
business (that is, whether it is manufacturing firm or a retail establishment). (Brigham, (2004)).

Working capital management is the process of managing activities and process relating to
working capital .This level of management services as a check and balance system to ensure that
the amount of cash flowing into business is enough to sustain that company’s operations. This is
an ongoing process that must be evaluating using the current level of asset and liabilities.
Working capital management may involves implementing short term decisions that may not
carry over from one earnings period of the next.(www.Business Dictionery.com).

Managing working capital can be thought of as managing the firm’s liquidity, which in turn
entails managing the firm’s investment in current assets and it use of current liabilities. Each of
these decisions involve risk return trade-offs. Investing in current assets reduces the risk
illiquidity but minimize the profitability so, the managements of working capital should set the
optimum level of working capital that resolve the problem of trade-off between risk and return.
(www.Investopedio.com).

Managing of working capital decision is vital component of financial management decision. The
activity relate of this managers are determine the optimal level of investment in current assets
and the appropriate mix of short term and long-term financing uses in support this investment in
current assets.(Hampton, J & Wagner,L(1989)
1.2. Statement of the Problem

The very existence of a firm depends up on ability of management on its working capital which
involves the process of converting investments in inventories and account receivables into cash,
paying its short term obligations and running its operation smoothly. Thus, working capital
management is very important of firm’s day-to-day operations. An important working capital
policy decision is concerning with the level of investment in current assets. Determining the
optimal level of current assets involves a trade-off between costs that rise with current assets and
costs that fall with current assets. The former are referring to as caring cost and the latter as
shortage costs. If there is excess investment in current assets, it assures liquidity but minimize
the profitability of the firm. Whereas, shortage of current asset reflects maximization of
profitability but lower liquidity or may end-up with insolvency (Gitman, (1997))

Implementation of different accounting policies will solve these and other relating problems in
order to help the organization to survive in the past business environment. The current study was
try to assess the role of working capital management on the financial performance of
manufacturing companies by referring Hawassa flour factory.

1.3. Objectives of the Study

1.3.1. The General objective of the Study

The main objective of the study is to assess the role of working capital management on financial
performance in Hawassa flour factory.

1.3.2. Specific objectives of the study

1. To evaluate the ability of the firm to meet its short term obligation

2. To identify and examine the impact of investment in current asset on financial performance of
the company.

3. To identify and evaluate the effectiveness and efficient utilization of resources in the
manufacturing
1.4 Research questions

The study seeks to answer for the following basic questions

1, what is the ability of the firm to meet its short term obligation?

2, what are the impacts of investment in current asset on the financial performance of the
company?

3, does the firm use its resource efficiently and effectively?

1.5. Significance of the Study

The study was contributed towards the importance of good working capital management system
for successful business operations. It’s the most important for the company management in order
to evaluate their performance concerning the liquidity position and profitability of the company.
It also this study was benefits the organization by making awareness of its problems and work
for improvement of those problems. This study was also be significant in mentioning the
purpose, target objective and other useful information about working capital management which
may help the organization in its goal achievements. Working capital measures a company’s
efficiency and represents the liquid assets that are available with a firm. It also indicates firm’s
short term financial health and its capacity to meet day to day operating expense. Thus working
capital management has significant impact on firm performance.

Finally, this study was also be used as a reface for further studies that are going to be conducted
in similar (relevant) subjects.

1.6. Scope of the study

The area of the study is delimited only to the importance of working capital management on
financial performance of Hawassa Flour Company. This study has only endure four years of data
set from the period 2008-2011 E.C.
1.7. Organization of the paper

The research paper has been organized in five chapters. The first chapter incorporate introduction
part which contains. Background of the study, statement of the problem, objective of the study
(general and specific of the study), significance of the study, scope of the study and paper of the
organization. The second chapter is contains review literature and review of Empirical
literatures. The third chapter deals with research methodology of the study. The fourth deals with
data presented and analysis. Finally the last chapter conclusion and recommendation (reference
were given of the paper).
 CHAPTER TWO

2. Review of Literature

2.1 Reviews of Theoretical Literature

2.1.1 Elements of Working Capital management

Working capital, sometimes called gross working capital, simply refers to current asset used in
operations. Net operating working capital is defined as current assets minus non-interest bearing
current liability. More specifically, net operating working capital is often expressed as cash and
marketable securities, account receivables and inventories, less account payable and accrued
liabilities. Working capital policy refers to the firm’s policies regarding (1) target levels for each
category of current assets and (2) How current assets will be financed. Working capital
management involves both setting working capital policy and caring out that policy in day-to day
operations. Financial analysis is the process of identifying the financial strengths and weaknesses
of the firm by properly establishing relationships between the items of the firm by the balance
sheet and the profit and loss account. A financial ratio is a relationship between two financial
variables. It helps to ascertain the financial condition of a firm. Ratio analysis is a process of
identifying strengths and weakness of the firm. This may be accomplished either through a trend
analysis of the firm’s ratios are a period of time or through a comparison of the firms ratios with
its nearest competitors and with the industry average. (Eugene F. brigham 2004).

Types of Ration

 Liquidity ratios measure the firm’s ability to meet current obligations, and are calculated
by establishing relationship between current assets and current liabilities.
 Profitability Ratios measure the overall performance of the firm by determine the
effectives of the firm in generating profit, and are calculated by establishing relationships
between profit figures on the one hand, and sales assets on the other hands.
 Leverage Ratios measure the proportion of outsiders’ capital in financing the firm’s
assets, and are calculated by establishing relationship between borrowed capital and
equity capital.
  Activity Ratios reflect the firm’s efficiency in utilizing its assets in generating sales, and
are calculated by establishing relationship between sales and assets (panda, 2012).

Note be: Ratio Analysis is very useful tool to raise relevant questions on a number of managerial
issues.

2. 1. 2 Importance of Working Capital Management

The growing importance of working capital management has led to its establishment as a
specialized area of financial management. In larger corporations it has produced executives who
devote their time and efforts exclusively to the management of the firm’s working capital. The
following reasons account for this importance.

The actual and desired levels of current assets change contently over time in response to changes
in actual and forecast sales. This situation requires that decisions to bring current assets to their
desired levels be made frequently, perhaps on a daily basis. Raheman, a (2007).

Previously made financing decision may have to be revised in response to changing current asset
levels. If, for example, substantial amounts of short-term debt are used to finance current assets,
then securing additional loans when needed and replacing or renewing maturing debt will require
additional management time and skills.

The extent to which a corporation’s sources and uses of funds are committed to working capital
must be determined. Current assets can represent as much as 75 percent of a corporation’s total
assets, and current liabilities can amount for up to 60 percent of its capital structure.

Improper management of a corporation’s working capital can result in loss sales and profits. It
can even result in the corporation being unable to pay its liabilities as they come due. (Raymond
P. Neveu, 1985).

2.1. 3 Factors influencing Working Capital Requirements

The working capital needs of a firm are influenced by numerous factors. The important ones are:

Nature of Business: - The working capital requirement of a firm is closely related to the nature of
its business. A service firm, which has short operating cycle and which sells predominantly on
cash basis, has a modest working capital requirement. On the other hand, a manufacturing
concern like a machine tools unit which has a long operating cycle and which sells largely on
credit has a very substantial working capital requirement.

Seasonality of operations: - firms which have marked seasonality in their operations usually have
highly fluctuating working capital requirements.

Production Policy: - A firm marked by pronounced seasonal fluctuation in its sales may pursue a
production policy which may reduce the sharp variations in working capital requirements.

Market Conditions: - The degree of competition prevailing in the market place has an important
bearing on working capital needs. When competition is keen, a larger inventory of finished
goods is required to promptly serve customers who may not be inclined to wait because other
manufactures are ready to meet their needs. Further, generous credit terms may have to be
offered to attract customers in a highly competitive market. Thus working capital needs tend to
be high because of greater investment in finished goods inventory and account receivable. If the
market is strong and competition weak, a firm can manage with smaller inventory of finished
goods because customers can served with some delay. Further, in such a situation the firm can
insist on cash payment and avoid lock-up of funds in accounts receivable-it can even ask for
advance payment, partial or total.

Conditions of Supply: - The inventory of raw material, spares and stores depends on the
condition of supply. If the supply is prompt and adequate, the firm can manage with small
inventory. However if the supply is unpredictable to and scant then firm, to ensure continuity of
production would have to acquire stocks as and when they are available and carry large
inventory on an average. A similar policy may have to be followed when the raw material is
available only seasonally and production operations are carried out round the year. (Prasanna
chan dra, 2004).

2.1.4 Strategies/Techniques/ of Working capital management

Providing corporate liquidity through the management of current assets and current liabilities can
be accomplished by using a number of different strategies. These strategies are identified by their
risk return characteristics and fall into two general classification: conservative and aggressive.
Conservative strategies provide liquidity in excess of expected needs. They minimize the risks
of not being able to finance spontaneous asset growth and of defaulting on maturing obligations.
However, excess liquidity results in the corporation holding assets that earn little or no return.
Hence, conservative strategies are called low-risk, low-return approaches to working capital
management.

Aggressive Strategies seek to minimize excess liquidity while meeting short-term requirements.
They accept the greater risk of illiquidity or even insolvency in order to earn a larger rate of
return for the corporation. Thus aggressive, strategies are called high risk high-return approaches
to working capital management.

Separate strategies can be used for managing current asset and current liabilities. Optimal
working capital policies are developed by combining separate strategies.

Current asset Strategies: - Current asset strategies with in working capital management involve
setting and pursing desired levels of individual current asset categories, as well as the level of
total current assets, while holding corporate financing policies constant.

Conservative current Asset Strategies: - Is one that seeks to maintain substantial amounts of
liquid assets in the form of cash and marketable securities. It is low risk because excess liquid
assets reduce the risk of lost sales by providing a financing source for unanticipated sales that
generate spontaneous increases in inventories and accounts receivable. Excess liquid assets also
reduce the risk of illiquidity by providing the source of funds to pay maturing liabilities.
(Deloof,M(2003))

A conservative strategy is low return because cash and marketable securities earn little or no
return for the corporation.

Aggressive Current Asset Strategy: - An aggressive current asset strategy seeks to minimize
the amount of cash and marketable securities. By minimizing the amount of cash and marketable
securities in the corporation’s current assets, the corporation increases the risk that it will be
unable to pay its liability as they mature. It also increases the risk of lost sales because of its
inability to finance unanticipated demand with higher assets.
Current Liability Strategies: - Current liability strategies with in working capital management
set and pursue desired levels of financing sources while holding asset management policies
constant.

Conservative Current liability strategies: - A conservative current liability strategy seeks to

minimize the amount of short term debt in the corporation’s capital structure. This can be
accomplished by floating long-term debt and using these funds to finance current assets.
Maintaining a minimum amount of short- term loan on the capital structure reduces the
probability or risk that the corporation will be unable to repay or replace its short- term debt as it
matures. Using long-term debt and/or equity capital in place of short-term debt means choosing
higher cost- funds and thus reducing the rate of return earned by the corporation.

Aggressive Current liability Strategy: - An aggressive current liability strategy is designed to

maximize the amount of short- term debt that is used to finance current assets. This strategy does
not preclude the existence of long-term debt in the corporation’s capital structure. The purpose of
long-term debt in this strategy is to finance fixed assets, however. By maximizing the amount of
short-term debt in the corporate capital structure, the corporation increases the risk that if will be
unable to service the debt as it matures. (Raymand P.Neve 1985).

2.1.5 Cash Management

Cash is the important current asset for the operations of the business. It is the basic input needed
to keep the business running on continuous basis it also the ultimate output expected to be
realized by selling the service or product manufactured by the firm. The firm should keep
sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s manufacturing
operations while excessive cash will simply remain idle without contributing anything towards
the firms’ profitability. Thus, a major function of the financial manager is to maintain a sound
cash position. The term cash include coins, currency and cheques held by the firm, and balances
in its bank accounts. Cash management is concerned with managing of :(i) cash flows into and
out of the firm, (ii) cash flows in the firm, and (iii) cash balances held by the firm at a point of
time by financing deficit or investing surplus cash . Cash management assumes more importance
than other current assets because cash it the most significant and the least productive asset that a
firm holds. It is significant because it is used to pay the firm’s obligations. Therefore, the aim of
cash management is to maintain adequate control over cash position to keep the firm sufficiently
liquid and to use excess cash in some profitable way. Cash management is also important
because it is difficult to predict Cash flows accurately, particularly the inflows, and there is no
perfect coincidence between the inflows and out flows cash.

Further, cash management is significant because cash constitutes the smallest portion of the total
current asset, yet management’s considerable time is devoted in managing it. An obvious aim of
the firm these days is to manage it cash affairs in such a way as to keep cash balance at a
minimum level and to invest the surplus cash in profitable investment opportunities.

In order to resolve the uncertainty about cash flow prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies regarding the
following four-facts of cash managements.

1. Cash Planning: - Cash inflows and out floes should be planned to project cash surplus or
deficit for each period of the planning period. Cash budget should be prepared for this purpose.

2. Managing the cash flows: - The flow of cash should be properly managed. The cash out
flows should be accelerated while, as far as possible, the cash out flows should be decelerated.

3. Optimum cash level: - The firm should decide about the appropriate level of cash balances.
The cost of excess cash and danger of cash deficiency should be matched to determine the
optimum level of cash balance.

4. Investing Surplus Cash: - The surplus cash balance should be properly invested to earn
profits. The firm should decide the division of the cash balance between alternative short-term
investment opportunities such as bank deposits, marketable securities, or inter corporate lending.
(pandey, 2010).

2.1.6 Receivables Management

Trade credit happens when a firm should sell its products or survives on credit and does not
receive cash immediately. A firm grants trade credit to protect its sales from the competitors and
to attract the potential customers to buy its products at favorable terms. Trade credit creates
accounts receivable or trade debtors that the firm is expected to collect in the near future.

A credit sale has three characteristics: first, it involves an element of risk that should be carefully
analyzed. Second, it is based on economic value to the buyer, the economic value in goods or
services passes immediately at the time of sale, while the seller expects an equivalent value to be
received later on. Third, it implies futurity. The buyer will make cash payment for goods or
services received by him, in a future period.

Credit policy: Nature and Goals

A firm’s investment in account receivable depends on the volume of credit sales, and (b) the
collection period. The firm’s average investment in account receivable is:

Daily Credit sales X Average Collection Period

The volume of credit sales is a function of the firm’s total sales and the percentage of credit sales
to total sales.

There is one way in which the financial manager can affect the volume of credit sales and
collection period and consequently, investment in accounts receivable. The term credit policy is
used to refer to the combination of three decision variables: (ii) credit standards, (ii) credit terms,
and (iii) collection efforts, on which the financial manager has influence.

Credit standards are the criteria to decide the type of customers to whom goods could be sold on
credit. If a firm has more slow-paying customers, its investment in accounts receivable will
increase. The firm will also be exposed to higher risk of default.

Credit terms specify duration of credit and terms of payment by customers. Investment in
accounts receivable will be high if customers are allowed extended time period for making
payments.

Collection efforts determine the actual collection period. The lower the collection period, the
lower will be the investment in accounts receivable and vice versa.
Goals of credit Policy

A firm’s credit policy aims at maximizing shareholder’s wealth through increase in sales leading
to net improvement in profitability. Increased sales will not only increase operating profits, but
will also require additional investment and cost. Hence, a tradeoff between incremental return
and cost of incremental investment is involved. (Eugene. Brigham, 2004).

2.1.7 Inventory Management

Nature of Inventories

Inventories are stock of the product a company is manufacturing for sale and components that
makeup the product. The various forms in which inventories exist in a manufacturing company
are raw materials work-in- process and finished goods.

Raw materials are those basic inputs that are converted into finished product through the
manufacturing process. Raw material inventories are those units which have been purchased and
stored for future production.

Work- in-Process inventories are semi-manufactured products. They represent products that
need more work before they become finished products for sale.

Finished goods inventories are those completely manufactured products which are ready for
sale. Stocks of raw materials and work-in-process facilitate production, while stock finished
goods required for smooth marketing operations. Thus, inventories serve as a link between the
production and consumption of goods.

The level of three kinds of inventories for a firm depends on the nature of its business. A
manufacture firm will have substantially high levels a very high level of finished goods in
ventures and no raw material and work-in-process inventories.

Firms also maintain a fourth kind of inventory supplies or stores and spares. These materials do
not directly enter production, but are necessary for production process. Usually, these supplies
are small part of the total inventory and do not involve significant investment. Therefore, a
sophisticated system of inventory control may not be maintained for them.
Objective of Inventory Management

In the context of inventory management, the firm is faced with the problem of meeting the
conflicting needs

 To maintain a large size of inventories of raw material and work-in-process for efficient
and smooth production and of finished goods
 To maintain a minimum investment in inventories to maximize profitability. Both
excessive and inadequate are not desirable. The firm should always avoid a situation of
over investment or under investment in inventories. The objective of inventory
management should be to determine and maintain optimum level of inventory
investment.

The major dangers of over investment are

A. Unnecessary tie-up of the firm’s funds and loss of profit

B. Excessive caring costs, and

C. Risk of liquidity.

Maintaining an in adequate level of inventories is also dangerous. The consequences of under-

investment in inventories are:

A. Production holdups.

B. Failure to meet delivery commitments. (pandey, 2010).

2.2 Review of Empirical literatures

Under here, the study tries to review related empirical literatures on particular research
conducted in certain organization in relation to this study. This helps to provide the study with
necessary empirical basis and to show the gap that will fill by the efforts of this study.

The first reviewed empirical study conducted by hagberg and Johansson(2014) on the title
“working Capital management of the Swedish companies” The study conducted as partial
fulfillment of their study and submitted to Uppsala university in Sweden. There are certain
similarities and difference found by the study of joint researchers of Hagberg and Johansson and
this study starting from its main objectives one of the commonalities of these studies is that both
of them focus on working capital management of companies in their respective study areas.

The methodological approaches selected for operating of both studies share similarities since
both of the studies never associate the nature of the study to be handled by purely quantitative
and qualitative study rather than claimed mixed method that jointly treat different variables
based on their nature to achieve its objectives. Since both studies aimed to explain existed
phenomena in relation to their capital management, they claimed descriptive research design,
which combine both qualitative and quantitative approaches in their respective study area.
However the specific target of the study of Swedish researchers focused on the relation between
different financial information on working capital management and revenue growth by
examining Swedish company with in the IT, wholesale, and manufacturing industries. Besides
the scope of the study of Hgberg and Johansson is in Swedish company with particular emphasis
on their revenue growth in relation to the financial information.

The study mainly gives attention to overall impact of current asset and current liability for the
company. While this study will focus only on Hawassa flour share company to serious
constraints of time, money, manpower and others in the study area.
 CHAPTER THREE

3. Research methodology

3.1. Description of the study area

The current study has been conduct in Hawassa flour factory which is locate in Hawassa city.
Hawassa city is established in 1952E.C during the period of Emperor Hailesilase. The city got
both its name and beauty from Lake Hawassa .Hawassa means “wide” in sidama language. The
city bounded by Lake Hawassa in the west, oromia region in the North, wendogenet woreda in
the East, and shebedino woreda in the South. The city administration has an area of 157.2
(sq.km). On the other hand, Hawassa flour factory was established in May 1979 it was
Government Company but after 25 years in 2004 e.c it was Purchase by private company. It
establish with the objective of producing good quality of flour for customers. Out of one
production process almost 70 percent are flour and remaining are other by product like
frishka.The company mainly purchase its raw materials and other trading items like wheat and
packing materials form government, wholesaler and farmers.

3.2. Research design

This research is designed to describe accurately the working capital management on financial
performance in Hawassa flour factory. It helps for analyzing data that is collected by using
various methods. Based on the data which are relevant for the study, the researcher was use
descriptive types of research design. The reason of selecting these descriptive types of research is
to clearly define the data available in the company.

3.3. Sources and types of data

The necessary data for the study has been obtained from both primary and secondary sources to
make the study reliable and relevance. The primary data has been collected through unstructured
interview with the officer of the company and the secondary data was collected from the
different sources of financial and non-financial information document of the organization and
gathered from balance sheet, income statement, books of the company and other reports.

3.4. Sampling techniques

The study deals with analysis and interpretation of Hawassa flour factory the financial
performance for four years from 2008-2011E.C in order to acquire necessary information about
the performance of flour factory and to make clear investigation for the study. Therefore thus the
four years are taken as a sample for the study. The researcher was used both primary and
secondary source of data. The primary data source of this study include the employees, officials
and related department such as purchase department, production department, store department,
financial department and also the management. Purposive sampling used to select officials who
were working in financial departments and administrative bodies of the factory based on their
proximity for the issue in order to obtained data on that are more reliable.

3.5. Method of data collection

The primary data was collected through the unstructured interview with the officer of the
company and the secondary data has been collected from the balance sheet, income statement
and other reports.

3.6. Method of data analysis

After gathering all required qualitative and quantitative data the analysis has been performed
with the help of financial tools. The financial analysis such as liquidity ratio, activity ratios and
operating cycles has been employed. The reason for choosing this method of data analysis is that
it allowed to studies the joint variation of two or more variables for determining the amount of
correlation between two or more variables. In addition to this in the analysis part has been
applied simple correlation analysis. Because, it helps to understand linear relationship between
two variables and that the variables have a relationship one of the variables is dependent and the
other is independent. Therefore, in order measure performance the time series analysis was used,
the purpose of time series analysis is to evaluate corporate financial performance over a specified
interval of time. This type of analysis looks for three factors: (1) important trends in the
corporate data, (2) shifts in trends and (3) data outliers, or values that deviate substantially from
the other data points.
 CHAPTDER FOUR

4. Data presentation, Analysis and Results

Introduction

In this chapter the researcher discusses about the collected data that relates to this topic. This
paper is used unstructured Interview with officer of the company for the purpose of collecting
data. On the other hand secondary data were collected from published balance sheet and income
statement.

4.1. Financial performance analysis

The term analysis refers to the firms of certain measures along with searching for patters of
relationship that exist among data-groups.

4.1.1 Liquidity Ratios

It measures a firm’s ability to pay its current liabilities as they mature using current assets. The
two most widely used liquidity ratios are the current ratio and quick ratio.

4.1.2 Current ratio

It indicates a firm’s liquidity, as measured by its liquid assets (current assets) relative to its liquid
debt (short-term or current liabilities).

Current ration =Current assets

Current liabilities
Table1. Current ratio for Year 2008 up to 2011

Fiscal Year Current asset Current liability Current ratio

2008 18,076,213.13 12,825,848.40 1.409
2009 16,316,765.46 14,959,322.19 1.09
2010 22,053,312.64 18,025,609.84 1.223
2011 24,712,513.8 21,085,467.09 1.172
Source-: (own computation, 2012)

The higher the current ratio, the more liquid the company appears to be. When we see in the
above table1 the current ratio in 2008(1.409%) and 2009(1.09%), 2010(1.223%) and
2011(1.172%), so the company has good performance current ratio at the first year (2008). As
standard the company should have a current ratio of 2 to 1 or higher to qualify as a good credit
risk. Therefore, Hawassa flour factory’s current ratio is less than 2 as specified in the above table
and the ratio shows continuously decreasing since suggest that it would not expect to be able to
pay its current liabilities by using its current assets.

4.1.3 Quick ratio

The quick ratio, sometimes called the acid-test ratio serves the same general purpose as the
current ratio but excludes inventory from current assets. This is done because inventories are
typically a firm’s least liquid current assets. Thus, the quick ration measures a firm’s ability to
pay its current liabilities by converting its most liquid assets in to cash

Quick Ratio = Current asset – Inventory

Current Liabilities

Table 2 Quick ratio for the year 2008-2011

Fiscal Current asset Inventory Current asset Current Quick
year ration
Inventory Liabilities
2008 18,076,213.13 8,094,091.20 9,982,121.93 12,825,848.4 0.778

2009 16,316,765.46 9,909,641.09 6,407,124.37 14,959,322.19 0.428

2010 22,053,312.64 10,774,412.26 11,278,900.38 18,025,609.84 0.625
2011 24,712,513.8 12,016,152.62 12,696,361.18 21,085,467.09 0.602

Source: - (own computation, 2012)

If a company seeks to pay its current liabilities by using its quick assets, then its quick assets
must be equal or exceed its current liabilities. Thus, its quick ratio must be 1.0 or more. This is
the reasoning behind the quick ratio standard of 1.0 that many analysis use as the dividing line
between sufficient and insufficient liquidity. Because when we see in the above table at the first
year in 2008 the quick ratio is (0.78), 2009(0.428), 2010(0.625) and in 2011(0.602). Therefore,
Hawassa flour factory quick ratio is continuously fluctuating and insufficient liquidity to meet
mature obligations using liquid asset only. Thus, the continuous of this result enhance the risk of
illiquidity and affect negatively the financial performance of the company.

4.2 Activity ratio

It measures the degree of efficiency the firm’s using its resource. The activity ratios discussed
here measure inventory turnover and the average lengthen of the accounts receivable collection
periods.

4.2.1 Inventory turnover

It indicates the efficiency of the firm in producing and selling its products. It also measures the
number of times per year that a firm’s sell or turnover, its inventory.
 Inventory turnover = Cost of goods sold

Inventory

Table 3 Inventory turnover for year 2008 up to 2011

Fiscal Year Cost of goods sold Inventory Inventory turnover

2008 14,437,311.23 8,094,091.2 1.783
2009 19,190,192.6 9,909,641.09 1.936
2010 20,046,440 10,774,412.26 1.860
2011 20,721,855.15 12,016,152.62 1.724
Source: - (own computation, 2012)
In general, high turnover ratios are taken as a sign of efficient management other things being
equal, a high inventory turnover ratio is seen as being more desirable than a low one. Then when
we see in the above table3 the company produced to sell the inventory turnover in 2008 is
(1.783), in 2009(1.936), in 2010(1.860) and in 2011(1.724).Hawassa flour share Company’s the
inventory turnover is continuously fluctuating. The company’s utilization of inventories in
generating sales is poor; because as standard of the company should have the inventory turnover
ratio is above 2; the yearly holding of all types of inventories is increasing except finished goods.
Because, as the information gathered from the interview indicates the corporation’s has a very
high demand for its products in the market which results in customer’s competition by prompt
payment in advance. As can be seen in the inventory turnover table, the firm has a low turnover
inventory for raw materials and goods in process these excessive holding of inventories results in
incurring of caring costs.

4.2.2 Average collection period

It seeks to measure the average number of days if takes for a firm to collect its accounts
receivable. It also measures the quality of debtors since it indicates the speed of their collection.
The shorter the average collection period, the better the quality of debtors, since a short
collection periods implies the prompt payments by debtors. The average collection period should
be compared against the firm’s credit terms and policy to judge its credit and collection
efficiency.

Average collection = Account receivable

Sales credit/365

Table 4 Average collection periods for year 2008 up to 2011

Fiscal Year Accounts Sale credit/ 365 Average collection

receivable periods
2008 2,130,464.85 110,504.16 19
2009 2,591,516.85 71,465.56 36
2010 3,340,623.96 88,383.25 37
2011 3,143,925.16 105,288.49 29
Source: - (own computation, 2012)

The company has been collected the account receivable at the first year which in 2008
has( 19days), 2009( 36days), 2010(37days) and 2011(29days) so company was collected at a few
days in 2008 year which is a good average collection period but when we see in 2010 (37days) is
low average collection period.
Hawassa flour factory's average collection period has been decreasing especially in current years;
it has decreased from 37 days in 2010 up to 29 days 2011.but in generally the company’s has
fluctuate average collection periods. This may be fluctuating due to change in the economic
conditions and/or laxity in managing receivables. Because, as the information gathered from the
interview company’s does not have a constant credit term that is followed in making credit
agreement which mean the customers are delay for payment. So, the above table indicates the
average collection periods of company have well in year (2008). And it implies that efficiency of
manager’s to collect their receivables.

4.2.3 Operating cycle

It is the length of time from the commitment of cash for purchases until the collection of
receivable resulting from the sales of goods or services.

Operating =days of sale + days of sale where, DSI =Inventory

 Cycle In inventory outstanding Sales/365

(DSI) (DSO)

Table 5 Operating cycle for year 2008 up to 2011

Fiscal Year Inventory Sales/ 365 DSI DSO Operating cycle

2008 8,094,091.2 110,504.16 73 19 92
2009 9,909,641.09 71,465.56 138 36 174
2010 10,774,412.26 88,383.25 121 37 158
2011 12,016,152.62 105,288.49 114 29 143
Sources: - (own computation, 2012)

As above table indicates the operating cycle takes a short periods only in 2008(92) days of time,
but, 2009(174), 2010(158) and 2011(143) are long period. Although this periods show increasing
the first two Consecutive years but the next years from 2009-2011 continuously decrease time to
time since this result is fluctuate. Because, it shows in 2009 it reflect inefficient manager’s which
holds excessive receivables and inventory for a long periods of time specially in 2008 to 2009
increase holding of receivables as well as inventory by itself does not generate any profit.
Therefore this increasing operating cycle period to period affect adversely the profitability of the
company’s so that it needs due attentions of the managers’. But in general from 2009 up to 2011
the manager has good performance which means decreasing their inventory level in time to time.
This helps to short their operating cycle.

4.2.4 Cash conversion cycle

It measures the time materials are purchased for its production until payment are collected from
its sales.

Cash conversion = days of sales + days of sales - day of payables

Cycle in inventory outstanding outstanding

 (DSI) (DSO) (DPO)

Where, days of sales + Accounts payable = Operating

In inventory outstanding Cycle

(DPC) (DSO)

Days of payables =Account payable

Outstanding sales/ 365

Table 6 cash conversion cycle for year 2008 up to 2011

Fiscal year Operating cycle Days of payable outstanding Cash cycle

2008 92 79 13
2009 174 113 61
2010 158 11 147
2011 143 79 64
Sources: - (own computation, 2012)

As standard the cash cycle became goods when the result shows it takes few days for cash
conversion cycle. This can be done through either decreasing operating cycle or increasing days
of payable outstanding. Since, in the above table the company has poor performance cash cycle
at year 2008 and also 2009 because decrease days of payable outstanding and increases operating
cycle continuously fluctuating, and increasing cash cycle especially from2008 (13) to 2009 (147)
takes long periods thus it is not desirable. Because, the extent of fluctuates the ability of paying
mature obligation and return generation. But in year 2008 the company has a good performance
of cash cycle. Because decreases operating cycle and increasing the days of payable outstanding.
Therefore, the company should give attention for the cash cycle.

4.3 Return on investment

It uses accounting information, as revealed by financial statement to measures corporate
profitability per birr of invested funds.

Return =Earnings after tax’s

Total asset

Table of Return on Investment for the year 2008 up to 2011.

Fiscal year Earnings’ after tax Total assets Return on investment

2008 413,830.00 37,575,598.96 0.011
2009 5,119,426 34,027,137.49 0.15
2010 66,937.68 37,026,487.46 0.018
2011 2,472,718.20 39,920,954.45 0.062
Sources: - (own computation, 2012)

In general, high returns on investment are taking as a sign of efficient asset management. Hence,
as can be seen in the above table, the company has good return at 2008(0.011) but 2009(0.15),
2010(0.018), and 2011(0.062) are less return on investment. The company’s inefficiency of
generating profits per birr of invested is continuously fluctuating through time to time year from
2008 up to 2011.but in year 2011 the manager’s some point performs from 0.018 up to 0.062. So
that, in general this result taken as poor performance of asset manager’s that cannot improve the
ability of generating return on one-birr investment that held in total assets. So the managers
should give due attention in the above return on investment.

4.4 Networking capital ratio (NWC)

It measures the ability of a firms to pay current liabilities by using net working capital.
The larger this ratio, the larger the amount of current liabilities that can paid with net
working capital.
 Networking = Current assets-current liabilities

Current liabilities

Table 8 net working capital ratio for the year 2008 up to 2011.

Fiscal year Current asset /CA/ Current liability /CL/ CA – CL NWCK

CA
2008 18,076,213.13 12,825,848.44 5,250,364.69 0.41
2009 16,316,765.46 14,959,322.19 1,357,443.27 0.09
2010 22,053,312.64 18,025,609.84 4,027,702.8 0.223
2011 24,712,513.8 21,085,467.09 3,627,046.71 0.172
Sources: - (own computation, 2012)

If a company seeks to pay its current liabilities by using its net working capital, and then its net
working capital ratio must be 1 or more. In the above table the NWC we can see in each year in
2008(0.41), 2009(0.09),2010(0.223) and 2011(0.172) Hence, as can observe from the above table
the net working capital ratio is continuously decreases and fluctuate and the ratio indicates poor
performance of asset manager’s as compare with accounting standards. Thus, the manager’s
expected to be enhancing the net working capital in order to improve liquidity but still solvency
is in question because by increasing net working capital without considering technically may
arise the problems of insolvent. So the managers should give due attention and improve those
above issues to improve the liquidity as well as solvency.

4.7 Profit margin ratio/net profit margin

It measures the profitability of a firm’s that can generate profit on a per birr-of-sales.
Net profit margin = Earnings’ after tax

Net sales

Table 9 Net profit margin for the year 2008 up to 2011

Fiscal year Earnings’ after tax Net sales Net profit margin
2008 413,830.0 18,563,943.49 0.022
2009 5,119,426 18,850,665.85 0.275
2010 66,937.68 25,240,184.47 0.0027

2011 2,472,718.2 21,327,874.6 0.116

Sources: - (own computation, 2012)

.

As can been seen in the above table, the net profit margin shows fluctuating continuously as we
can see in above table it is decrease from 0.275 to 0.0027.the company has more gets the net
profit margin of 0.275 at 2009 year. So, the ratio of profit margin can be taken as good
performance on the second year only. But the manager’s expected to be keep consistently the
performance that score above 20% in net profit margins. Generally, the net profit margin ratio is
fluctuated time to time, so the managers should be to improve or enhance this ratio.
 CHAPTER FIVE
5. Conclusion and Recommendation
5.1 Conclusion
Generally, the manager of working capital management in financial performance of the company
is so great. Hence, in the research study the performance of working capital managers can take as
insufficient because liquidity and solvency of the companies are in question. Since the liquidity
ratio is less than the standard of accounting and the company is not technically solvent due to
low amount of proportion share of cash in current assets. Based on the data collected from the
annual report of Hawassa flour factory from year 2008 to 2011. The study concludes that: -

 Hawassa flour factory’s current ratio is less than 2 as specified in the ratio shows
continuously decreasing since suggest that it would not expect to be able to pay its
current liabilities by using its current assets. The higher the current ratio, the more liquid
the company appears to be. If the current liability pays by using current asset. Therefore,
the current ratio is less than two not as the manager’s expected.
  Hawassa flour factory quick ratio is continuously fluctuating and insufficient liquidity to
meet mature obligations using liquid asset only. Thus, the continuous of this result
enhance the risk of illiquidity and affect negatively the financial performance of the
company. If a company seeks to pay its current liability by using its quick assets, then its
quick assets must be equal or exceed its current liabilities. Therefore, the company’s
quick ratio is continuously fluctuating and insufficient liquidity to meet mature
obligations using liquid asset only.
 The company’s utilization of inventories in generating sales is poor; because as standard
of the company should have the inventory turnover ratio is above 2; the yearly holding of
all types of inventories is increasing except finished goods. Because, as the information
gathered from the interview indicates the corporation’s has a very high demand for its
products in the market which results in customer’s competition by prompt payment in
advance. As can be seen in the inventory turnover table, the firm has a low turnover
inventory for raw materials and goods in process these excessive holding of inventories
results in incurring of caring costs High turnover ratios are taken as a high of efficient
management other things being equal, a high inventory turnover ratio is seen as being
more desirable than a low one, but the inventory turnover in the company’s is
continuously fluctuating. Because as the standard of the company should have the
inventory turnover ratio is above 2 is expected.
 The company average collection period has been fluctuated. This may be fluctuating due
to change in the economic conditions because as the information gathered from the
interview, a company’s does not have a constant credit term that is followed in making
credit agreement which mean the customer are delay for payment
 As can been seen in the net profit margin ratio in the company is continuously fluctuating
as we can see in the table it is decreasing from 27.5% to 0.26%. The ratio of profit
margin can be taken as a good performance on the second year in 2009 only. But the
manager’s expected to be keep consistently the performance that score above 20% in net
profit margin. Generally, the net profit margin ratio is fluctuated time to time.

5.2 Recommendation
Survival of the firms in the market depends on the ability managing working capital. The failure
of this manager may leads to bankrupt the firm. The company may face the problem due to
change the economic condition. A researcher recommends the following points.

 Hawassa flour share factory should enhance the cash balance and other related current
asset in order to improve solvency and liquidity.

 Hawassa flour share factory need to innovate new approaches and technology based
financial system and digitalized capital management system to ensure effectives in the
study area.

 The company have been poor performance on the return on investment.so, the manager
should give due attention in the return on investment.

 The company should make a constant credit term

 The managers should be expected to be enhance the networking capital in order to

improve liquidity, but still solvency is in question because by increasing net working
capital without considering technically may arise the problem of insolvent. So, the
managers should give due attention those above issue to improve the liquidity as well as
solvency.

 The ability of generating profit per one-birr investment in total asset can be taken as
good. So that, the manager should keep performance in consistence manner. Therefore,
the managers should give due attention on the profit margin ratio by improve the liquidity
as well as solvency.

 Finally, by implementing different accounting policy and techniques can improve the
problem that face in managing of working capital.
 Reference

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