CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Working capital management of a firm has been recognized as an important area

in financial management. The main goal of working capital management is to teach
and keep an optimized balance between each component of working capital
(Gitmen, 2009). Traditional concept of working capital is the difference between
current assets and current liabilities, which does not provide an accurate concept of
corporate liquidity. Every organization whether profit oriented or not and
irrespective of size and nature of the business requires necessary amount of
working capital. Working capital is the most crucial factor for maintaining
liquidity, survival, solvency and profitability of business (Mukhopadhyay, 2004).
All individual components of working capital include cash, marketable securities,
account receivables and inventory management play a vital role in the performance
of any firm. In the management of working capital, the firm is faced with two key
questions. First, given the level of sales and the relevant cost considerations, what
are the optimal amounts of cash assets, account receivable, and inventories that a
firm should choose to maintain? Second, given these optimal amounts, what is the
most economical way to finance these working capital investments? To produce
the best possible returns, firms should keep no unproductive assets and should
finance with the cheapest available sources of funds. Corporate performance is a
composite assessment of how well an organization executes on its most important
parameters, typically financial, market and shareholder performance. It is a subset
of business analytics /business intelligence that is concerned with the health of the
organization, which is traditionally measured in terms of financial performance.

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However, in recent years, the concept of corporate health has become broader.
Liquidity and profitability are two important and major aspects of corporate
business life (Dr K.S.Vataliya, 2009). The problem is that increasing profits at the
cost of liquidity can bring serious problems to the firm. Therefore, there must be a
trade-off between the liquidity and profitability of firms. One of these should not
be at the cost of the other because both have their own importance. If firms do not
care about profit, they cannot survive for a longer period. Also, if firms do not care
about liquidity, they may face the problem of insolvency or bankruptcy. For these
reasons, managers of firms should give utmost consideration for working capital
management as it does ultimately affect the profitability of firms. As a result,
companies can achieve maximum profitability and can maintain adequate liquidity
with the help of efficient and effective management of working capital. In addition,
the effective working capital management is very important because it affects the
performance and liquidity of the firms (Taleb et al., 2010). The main objective of
working capital management is to reach optimal balance between working capital
management components (Gill, 2011).

1.2 STATEMENT OF THE PROBLEM

An ideal business requires sufficient resources to keep it going and ensures that
such resources are maximally utilized to enhance its profitability and overall
performance. Working capital and its effect on firms’ Performance has been
studied by different researchers (Padachi, K. (2006); F.Finau, (2011); Fathi and
Tavakkoli (2009). Existing researchers among whom are; Filbeck and
Kruger(2005), Nyabwanga, Ojera, Lumumba,Odondo, Otieno (2012) to mention a
few, have stated that most successful organisation do not have problem with
management of working capital components, but this is actually misleading,
because this research work has identified a gap in this findings, by establishing that

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successful organisation still have problems with management of working capital
components which is in agreement with the study of mathuva,(2010), Rahman et
al.,(2010). Most of these and other researchers identify significant association
between working capital and corporate performance. It has however been
discovered that some methods that managers use in practice to make working
capital decisions do not rely on the principles of finance, rather vague rules of
thumb or poorly constructed models are used (Emery, Finnerty and Stowe, 2004).
This, however, makes the managers not to effectively manage the various mix of
working capital component which is available to them, and as such, the
organization may either be overcapitalized or undercapitalized or worst still,
liquidate. Egbide (2009) finds out that a large number of business failures in the
past have been blamed on the inability of the financial manager to plan and control
the working capital of their respective firms. These reported inadequacies among
financial managers is still practiced today in many organizations in the form of
high bad debts, high inventory cost etc, which in turn adversely affect their
operating performance. Hence, lack of proper research study and utilization of the
working capital for the improvement of corporation in terms of performance in
Nigeria has constituted the problem of limited awareness in relation to working
capital to increase firms’ performances. Hence, there is the need to study the effect
of working capital to enhance the performance of corporations in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The main objective is to examine the impact of working capital management on the
corporate performance of quoted manufacturing firms in Nigeria using case studies
of Guinness, Dangote, Nestle, Cadbury, and Unilever. The specific objectives
include:

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1. To examine the impact of average collection period on corporate performance
of quoted manufacturing firms in Nigeria.

2. To examine the impact of inventory conversion period of corporate

performance of quoted manufacturing firms in Nigeria.

3. To examine the impact of average payment period on corporate performance of

quoted manufacturing firms in Nigeria.

4. To examine the impact of cash conversion cycle on corporate performance of

quoted manufacturing firms in Nigeria.

1.4 RESEARCH QUESTIONS

In order to address the major issues underlining the research, an attempt has been
made to provide answers to the following questions:

1. What is the impact of average collection period on corporate performance of

quoted manufacturing firms in Nigeria?

2. What is the inventory conversion period on corporate performance of quoted

manufacturing firms in Nigeria?

3. What is the impact of average payment period on corporate performance of

quoted manufacturing firms in Nigeria?

4. What is the impact of cash conversion cycle on corporate performance of quoted

manufacturing firms in Nigeria?

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1.5 RESEARCH HYPOTHESIS

The following research propositions will be formulated for the study:

H01 : Average collection period has no significant impact on corporate

performance of quoted manufacturing firms in Nigeria

H02 : Inventory conversion period has no significant impact on corporate

performance of quoted manufacturing firms in Nigeria

H03 : Average payment period has no significant impact on corporate performance

of quoted manufacturing firms in Nigeria

H04 : cash conversion cycle has no significant impact on corporate performance of

quoted manufacturing firms in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The need to have a sound economy and most especially enhancing the
development and sustainability of the Manufacturing industry in Nigeria informed
the researcher’s choice of the topic. It is hoped that this work will proffer solutions
to the problems associated with Working Capital Management in the
Manufacturing industry of Nigeria as a policy tool for sustainability. It will equally
be of great significance to those outside the Manufacturing industry, who are
ignorant on the factors that lead to the smooth running of any business. The study
will also be applicable in the following ways:

To provide reliable information on the importance of applying Working Capital

Management techniques in the running of an organization.

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 To enlighten people occupying management positions in an enterprise in the
Manufacturing industry on the variety of appraisal techniques of corporate
performance. Finally, the study will add to the existing literature on Working
Capital Management.

1.7 SCOPE OF THE STUDY

The research work will cover working capital management and how it affects the
corporate performance of theses selected quoted companies, which are Guinness
Plc, Dangote Plc, Nestle Plc, Cadbury Plc and Unilever Plc. These five (5)
companies were selected based on the availability of data, their performance in the
Nigerian Manufacturing sector, and the popularity of these companies in the
Nigerian Stock Exchange. The data obtained from the five (5) selected quoted
companies covers a period of seven (7) years from 2008 to 2015. The study used
Return on Equity (ROE), Return on Asset (ROA) and Net Profit Margin (NPM)

1.8 DEFINITIONS OF TERMS

Working capital: This is measure of both a company’s efficiency and its short
term financial health. If a company’s current assets do not exceed its current
liabilities, then it may run into trouble paying back creditors in the short term. The
worst case scenario is bankruptcy. Working capital is calculated as: Working
Capital= Current Assets- Current Liabilities

Current asset: these are balance sheet accounts that represent the value of all
assets that can reasonably expect to be converted into cash within one year.
Current assets include cash and cash equivalents, accounts receivable, inventory,
marketable securities, prepaid expenses and other liquid assets that can be readily
converted to cash.

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 Current liabilities: These are a company’s debts or obligations that are due
within one year, appearing on the company’s balance sheet and include short term
debt, accounts payable, accrued liabilities and other debts. Essentially, these are
bills that are due to creditors and suppliers within a short period of time.

Short term: this is concept that refers to holding an asset for a year or less, and
accountants use the term “current” to refer to an asset expected to be converted
into cash in the next year or a liability coming due in the next year.

Creditors: This is an entity (person or institution) that extends credit by giving

another entity permission to borrow money intended to be repaid in the future. A
business that provides supplies or services to a company or an individual and does
not demand payment immediately is also considered a creditor, based on the fact
that the client owes the business money for services already rendered.

Bankruptcy: This is a legal proceeding involving a person or business that is

unable to repay outstanding debts.

Financial health: this is a term used to describe the state of one’s personal
financial situation

RETURN ON ASSET (ROA): It is an indicator of how profitable a company is

relative to its total assets. ROA gives an idea as to how efficient management is at
using its assets to generate earnings. Calculated by dividing a company's annual
earnings by its total assets, ROA is displayed as a percentage.

RETURN ON EQUITY (ROE): It is a measure of profitability that calculates

how many dollars of profit a company generates with each dollar of shareholders'
equity. The formula for ROE is: ROE = Net Income/Shareholders' Equity. ROE is
sometimes called "return on net worth

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 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK`

2.1.1 WHAT IS MANAGEMENT WORKING CAPITAL

Management Working capital is the amount of funds which a company needs to

fund its day to day operations. (Nkwankwo & Osho, 2010). They include bank
balance, cash, marketable securities, inventories and accounts receivables. A
business must maintain an appropriate level of current assets. Current assets is not
a permanent investment, it is continually in use, being turned over many times in
year. It is used to finance production, to invest in stock and to provide credit for
customers. Current liabilities are organization’s commitments for which cash will
soon be required. They include bank overdraft, accounts payables and unpaid bills
(Pandey, 2008). Liquidity ratios are indications of how solvent a company is,
however a company will not become insolvent overnight rather deterioration in
these ratios are indications of insolvency.

A current ratio of 2:1 and a quick ratio of 1:1 are regarded to be indicative that a
company is reasonably well protected against the dangers of insolvency through
insufficient liquidity. A company can maintain a huge volume of working capital
in relation to its total assets or may maintain its working capital at a low level. No
matter the level of working capital held by a company, an opportunity cost is
incurred which may either be liquidity risk or lesser profit. The opportunity cost
hinges on whether the firm adopts a conservative or aggressive working capital
policy. Chowdhary and Amin (2007) refer to WCM as all the actions and decisions
of the management which affects the volume and effectiveness of working capital.
If an organisation is not effectual in handling its working capital, it will lower
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profitability and lead to financial crisis as well. Both too little and too much
working capital is detrimental for a business concern. They also stressed that
WCM involves the issues that spring up in trying to handle the current assets, the
current liabilities and the connection they have within them.

2.1.2 CORPORATE PERFORMANCE

Corporate performance generally examines the entire financial well-being of a

business over a given period of time. It is defined as a measure of the extent to
which a firm makes use of its assets to run business activities to earn revenues. The
main source of data for determining corporate performance especially financial
performance is the financial statements, which consists of the statement of
financial position which shows the assets, liabilities and equity of a business, the
income statement that records the revenues, expenses and profits in a particular
period, the cash flow statement which exhibits the sources and uses of cash in a
period, and the statement of changes in the owners’ equity that represents the
changes in owner’s wealth.

For the purpose of this study, profitability that is, profit after tax (PAT), was used
as a measure of corporate performance. Average Collection Period (ACP) and
Corporate Performance The average collection period is used as a measure of
accounts receivable management and represents the average number of days that
the company uses to collect payments from customers. Mandipa and Sibindi
(2022) examined the relationship between working capital management practices
and financial performance of South African retail firms listed on the Johannesburg
Stock Exchange and discovered that a negative relationship exist between average
collection period and financial performance. Ibrahim, et al (2021) also found ACP
to be negatively related to business performance of listed companies in Nigeria.

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Abdulazeez et. al (2018) examined the impact of working capital management on
the financial performance of listed conglomerate companies in Nigeria for a period
of ten (10) years (2005- 2014).

Abdullahi et. al (2021), Takon and Atseye (2015), Osundina (2014), Garcia
(2011). However, Micheal, et. al (2017) showed results that were inconsistent with
other findings as they revealed a positive relationship between ACP and
performance, although this relationship was not significant. Similar to this, is the
study by Wanguu and Kipkirui (2015), Muscettola (2014) and Duru (2014) that
showed a positive and significant relationship between average collections period
and performance. ACP can be better enhanced by optimizing the collection process
and methods in a company.

Inventory Conversion Period (ICP) and Corporate Performance Inventory is a

yardstick of production efficiency. Excess level of inventories decreases cash flow
while on the other side too small level of inventories may decrease sales. Inventory
Conversion Period (ICP)which is also referred to as Inventory Turnover in Days
(ITID)is the average length of time required for conversion of raw materials into
finished goods and in selling those goods. Studies have exhibited different
relationships between inventory conversion periods and corporate performance.
One of such is the study done by Mandipa and Sibindi(2022) who found that ICP
negatively impacts on performance, which is also similar to the findings of Garcia
(2011), Osundina (2014) and Zhang (2011). On the contrary, Wanguu and Kipkirui
(2015) in their work revealed a positive relationship between ICP and firm
performance while Abdullahi et.al (2021) found no relationship between ICP and
firm performance when measured by return on equity. ICP is one fundamental
variable that aids evaluating the efficiency in inventory management policy of the
organisation. This variable is supposed to exhibit a negative relationship with

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profitability but if companies consume extra time in selling inventory which means
inventories are not getting converted into sales, profitability will be reduced.

2.1.3 Average Payment Period (APP) and Corporate Performance

The efficiency of firm in meeting its accounts payables can be analysed by

accounts payable turnover in days or average payment period (APP) of the firm.
APP is the average length of time between the purchase of material and labour and
when the payment of cash is actually made for them. As the business takes more
time in making payments, it will impact positively on profitability because the
company takes time to utilize these funds for a longer period. Ibrahim, et. al (2021)
revealed in their study that APP positively impacts corporate performance.
Abdullahi et. al. (2021) had similar findings in Nigeria. Also, James (2015)
revealed in their study that APP positively impacts corporate performance. This
finding is supported by that of Abdulazeez et. al (2018), Micheal, et. al (2017) and
Mathuva (2010) who found that accounts payables are positively related to firm’s
profitability. However, several other studies found negative relationship between
net operating profitability and APP. Mandipa and Sibindi (2022) found negative
relationship between APP and profitability. Duru (2014) and Osundina (2014)
examined the impact of working capital management on the profitability of
Nigerian quoted manufacturing firms for the period 2000- 2011and found that
accounts payable ratio negatively impacts the industries’ profitability. A negative
relationship between APP and firm performance was similarly discovered
byWanguu and Kipkirui (2015) who carried out their investigation in
Kenya.Similarly an alternative explanation for the negative relationship between
APP and profitability could be explained by the fact that organisations delay so
much to pay their accounts payable. Several other studies found negative
relationship between net operating profitability and APP.

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Cash Conversion Cycle (CCC) and Corporate Performance Measuring liquidity
assesses the firm’s ability to cover obligations with cash flows, hence some studies
suggested that a dynamic view should be used to capture the on-going liquidity
from firms’ operations of which CCC is used as a measure of liquidity. The issue
of CCC has shown much disparity in the relationship it has with firm performance
in several studies. Falope and Ajilore (2009) investigated the impact of WCM on
firms profitability using data for 50 non-financial listed firms on the Nigerian
Stock Exchange from 1996 to 2005 and discovered that CCC negatively impacts
profitability. Mandipa and Sibindi (2022) found that CCC is negatively related to
corporate performance which was as well consistent with Ibrahim, et. al (2021),
Micheal, et. al (2017) and Garcia (2011) that showed CCC is significantly and
negatively related to corporate performance. Ogundipe, et. al (2012) results also
showed that CCC is negatively related to corporate performance. Other studies that
revealed negative relationships are those done by Jarworski and Czerwonka (2022)
who studied firms listed on Warsaw Stock Exchange, Zhang (2011), Baveld
(2012), and Rehn (2012). Contrarily, several studies also have displayed
inconsistency with the studies reviewed above. Abdulazeez et. al (2018) and
Osundina (2014) found that a positive relation exists between CCC and
profitability. The results of Duru (2014) also holds that firms’ CCC has positive
but nonsignificant relationship with performance and suggested that organisations
should make sure that accounts receivable is larger than the accounts payable
otherwise the firm will quickly become insolvent. Deloof (2003) similarly
discovered a positive relationship as he concluded that lengthier cash conversion
cycles increase profitability because it results to increased sales. It is envisaged that
CCC is negatively associated with firm’s profitability.

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2.1.4 Net Trade Cycle (NTC) and Corporate Performance

Net Trading Cycle, is another comprehensive measure of working capital

management and has been used in many studies to evaluate WCM such as Shin
and Soenen (1998) that found negative relation between NTC and corporate
performance. It is expected that NTC is negatively related with profitability. The
profitability of companies’ increases with decrease in the NTC hence, efforts must
be made to decrease this time period. Deloof (2003), who performed a study in
Belgium and Wang (2002) who examined firms in Japan and Taiwan both found
that NTC is negatively related to profitability. However, this relationship was
insignificant when the analysis was performed for specific industry (Soenen,
1993), and this negative relationship was similarly discovered by Rehn (2012) who
examined Finnish and Swedish corporations and concluded that firms can increase
their performance by reducing their NTC. All these studies demonstrated that
shorter net trading cycles are commonly associated with better performance while
the reverse was also true.

2.2 THEORETICAL FRAMEWORK

2.2.1 PECKING ORDER THEORY

The pecking order theory formulated by Myers and Majluf (1984) further refined
by Myers (1984) argue that firms should finance the investment opportunities with
internally generated funds, then with low risk debt and finally with equity. The
pecking order theory relies heavily on information cost to explain corporate
behavior. This information asymmetry affects the choice between internal and
external financing. According to this theory, internally generated fund is at the top
of the order, followed by external debt financing while equity financing is used
only as a last resort. This theory explains why companies choose to keep reserves

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in cash or other forms of financial slack to avoid both lack of resources and the
need for external sources of funds. According to this point of view, cash is similar
to negative debt, external resources are sought when there is cash shortage, and
debts are paid when there is an excess of cash. Therefore, the company chooses a
more passive cash management policy. Myers and Majluf (1984) suggested that
the pecking order theory explains why profitable companies are less likely to
borrow, not because they have low debt targets but because they do not need funds
from external sources. On the contrary, less profitable companies issue bonds
because they do not have enough internal funds to finance investment decisions.
These firms also prefer to issue debts before issuing new shares. According to this
theory, managers from less profitable and highly profitable companies would
choose a more aggressive working capital policy, pressuring for lower levels of
current assets and higher levels of current liabilities, utilizing more financing from
suppliers, resorting to internal sources for the necessary funds needed to finance
business operations and avoid using debts and equity for financing.

2.3 EMPIRICAL REVIEW

The popular opinion of researchers on is that efficient working capital

management strategies is apt for enhanced manufacturing firm performance
across the globe. These are the studies which showed a significant
relationship between working capital management strategies and firm
performance indicators. These studies include those of Wang et al., (2020) and
Kajola etal., (2014).

They posit that working capital management has negative effect on firm
performance. Others found a positive effect which suggests that working capital
management portends adverse effect on firm performance, as increasing working

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capital variables means excess use of short-term funds as against reduced usage.
Amongst these studies are Khalid et al., (2018) which averred working capital
management has positive effects on firm performance indicators.

However, a number of studies found a divergent and mixed views where those
variables of working capital management strategies tend to disagree on direction
and strength of effects on various measures of firm performance like Return on
Asset (ROA), Return on Equity (ROE), Profit After Tax (PAT), Firm value
(Tobin’s Q), or Earnings Per Share (EPS).These studies include Simon, etal.,
(2019),Vartak and Hot chandani (2019), Ling, etal(2019),Kasozi(2017)and Tariqet
al (2013). Ling, et al (2019) posit that such divergences in results can be attributed
to some factors such as variations in business environments and different
methodology for the various studies. These inconsistencies in extant empirical
literature portents a research gap.

Most of the previous studies done in Nigeria have used time frame below 2017
which suggests impending moribund of the existing studies. This is in spite of the
fact that some of them are very recent they still used a relatively old data frame
ending in 2014 (Abdulazeez, et al 2018;Uguru,etal2018),in2015,(Simon, etal
2018),in 2016 (Osuma& Ikpefan,2018), and in 2017(Akinleye&Adeboboye,
2019). The only very current studies in Nigeria like Etale and Oweibi (2020) used
only one firm (DangoteSugar) to x-ray WCM effects across quoted firms.It is also
note worthy that most of the studies in Nigeria, unlike their foreign counter parts,
could not disintegrate the working capital management strategies into separate
models that would enable managers and strategic policy corporate finance experts
to appreciate the role of each strategy on manufacturing firm performance. The
present study becomes apt to explain working capital management strategies and
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performance nexus across quoted firms in Nigeria with particular interest in
the manufacturing sector, as the largest and stronghold of Nigerian economy.
2.4 SUMMARY
Management of working capital involves overseeing the funds needed for a
company's day-to-day operations, including cash, marketable securities, inventory,
and accounts receivable. Maintaining an appropriate level of current assets is
crucial for financing production and providing credit. Liquidity ratios, such as the
current ratio and quick ratio, indicate a company's solvency. However, maintaining
too much or too little working capital incurs opportunity costs, influenced by the
firm's working capital policy—either conservative or aggressive. Effective working
capital management is vital for profitability and avoiding financial crises.

Corporate performance evaluates a firm's financial well-being over time, often

measured by profitability. Financial statements provide data for analysis, including
the statement of financial position, income statement, cash flow statement, and
statement of changes in owners' equity. Factors such as the average collection
period, inventory conversion period, average payment period, cash conversion
cycle, and net trade cycle influence corporate performance. Studies show varying
relationships between these factors and firm performance, highlighting the
complexity of working capital management's impact.

Theoretical frameworks like the pecking order theory suggest that firms prioritize
internal funds, then low-risk debt, and finally equity for financing investments,
based on information asymmetry and cost considerations. Empirical research on
working capital management's impact on firm performance yields mixed results,
with some studies indicating significant positive or negative relationships, while
others find divergent or inconclusive evidence. Research gaps exist, particularly in
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Nigeria, where studies often use outdated data and lack disaggregated models to
understand the specific impact of working capital management strategies on
manufacturing firm performance.

TABLE OF CONTENTS

TITLE PAGE______________________________________________________i
CERTIFICATION__________________________________________________ii
DEDICATION____________________________________________________iii
ACKNOWLEDGEMENT___________________________________________iv
ABSTRACT______________________________________________________vi
CHAPTER 1:INTRODUCTION
1.1 BACKGROUND OF THE STUDY__________________________________1
1.2 STATEMENT OF THE PROBLEM_________________________________2
1.3 OBJECTIVE OF THE STUDY_____________________________________3

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1.4 RESEARCH QUESTIONS.________________________________________4
1.5 RESEARCH HYPOTHESIS_______________________________________5
1.6 SIGNIFICANT OF THE STUDY___________________________________5
1.7 SCOPE OF THE STUDY__________________________________________6
1.8 DEFINITION OF THE TERMS___________________________________6
CHAPTER 2:LITERATURE REVIEW
2.1 CONCEPTUAL FRAMEWORK___________________________________8
2.2 THEORETICAL FRAMEWORK__________________________________13
2.3 EMPIRICAL FRAMEWORK_____________________________________14
2.4 SUMMARY __________________________________________________16
CHAPTER 3:RESEARCH MOTHODOLOGY
3.1 RESEARCH DESIGN ___________________________________________17
3.2 POPULATION OF THE STUDY__________________________________17
3.3 RESEARCH SAMPLE AND SAMPLE TECHNIQUE .________________17
3.4 SAMPLE TECHNIQUES________________________________________17
3.5 SOURCE OF DATA____________________________________________17
3.5.1 PRIMARY DATA_____________________________________________17
3.5.2 SECONDARY DATA _________________________________________18
3.6 INSTRUMENT FOR DATA COLLECTION________________________18
3.7 VALIDITY OF RESEARCH INSTRUMENT________________________18
3.8 RELIABILITY OF RESEARCH INSTRUMENT_____________________18
3.9 METHOD OF DATA ANALYSIS_________________________________18
CHAPTER 4 :DATA PRESENTATION AND ANALYSIS OF RESULT
4.1 DATA PRESENTATION AND ANALYSIS _________________________19
4.2 DISCUSSION OF FINDINGS ____________________________________22

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CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY ___________________________________________________24
5.2 CONCLUSION ________________________________________________24
5.3 RECOMMENDATIONS _________________________________________24
5.4 SUGGESTION FOR FURTHER STUDIES__________________________25
REFERENCE ____________________________________________________26
APPENDIXI _____________________________________________________29
APPENDIX II_____________________________________________________30

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